UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20182021
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¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-55605
Griffin Capital Essential Asset REIT II, Inc.
(Exact name of Registrant as specified in its charter)
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| Griffin Realty Trust, Inc. |
| (Exact name of Registrant as specified in its charter) |
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| Maryland | | 46-4654479 |
(State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification No.) |
Griffin Capital Plaza
1520 E. Grand Ave
El Segundo, California 90245
(Address of principal executive offices)
(310) 469-6100606-3200
(Registrant’s telephone number)
N/A
(Former name, former address and former fiscal year, if changed from last report.)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Classeach class | Trading Symbol(s) | Name of Each Exchangeeach exchange on Which Registeredwhich registered |
| None | None | None |
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| Securities registered pursuant to Section 12(g) of the Act: |
Class T Shares of Common Stock, $0.001 par value |
Class S Shares of Common Stock, $0.001 par value |
Class D Shares of Common Stock, $0.001 par value |
Class I Shares of Common Stock, $0.001 par value |
Class A Shares of Common Stock, $0.001 par value |
Class AA Shares of Common Stock, $0.001 par value |
Class AAA Shares of Common Stock, $0.001 par value per share |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No xý
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 xý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes xý No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment of this Form 10-K. x
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:
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| Large accelerated filer | ☐ | ¨ | | Accelerated filer | | ¨☐ |
| Non-accelerated filer | ☒ | x (Do not check if a smaller reporting company)
| | Smaller reporting company | | ¨☐ |
| Emerging growth company | ☐ | x | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒
There is currently no established public market for the Company's shares of common stock. Based on the Company's published net asset value (“NAV”) as of June 30, 2018, the last business day of the Company’s most recently completed second fiscal quarter, the
Aggregate market value of the 84,128 shares of Class T common stock, 274 shares of Class S common stock,16,409 shares of Class D common stock, 405,081 shares of Class I common stock, 26,110,338 shares of Class A common stock, 50,231,926 shares of Class AA common stock and 987,251 shares of Class AAA common stock held by non-affiliates of the Registrant was $812,674, $2,643, $158,180, $3,904,983, $250,920,347, $482,728,811 and $9,487,478Company: No established market exists for the Company’s common stock. As of February 25, 2022 there were 565,265 shares of Class T common stock, 1,801 shares of Class S common stock, 42,013 shares of Class D common stock, 1,911,819 shares of Class I common stock, 24,509,573 shares of Class A common stock, 47,592,118 shares of Class AA andcommon stock, 926,936 shares of Class AAA common stock, and 249,088,662 shares respectively, based upon the NAV of $9.66, $9.65, $9.64 and $9.61 per share for Class T, Class S, Classes D & I and Classes A-AAA, respectively.
CommonE common stock outstanding as of March 11, 2019:
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| | | Class T | | Class S | | Class D | | Class I | | Class A | | Class AA | | Class AAA |
| Outstanding shares | | 227,686 | | 280 | | 19,319 | | 807,373 | | 25,785,133 | | 49,874,287 | | 977,245 |
Griffin Realty Trust, Inc. outstanding.
Documents Incorporated by Reference:
None.The Registrant incorporates by reference in Part III (Items 10, 11, 12, 13 and 14) of this Form 10-K portions of its Definitive Proxy Statement for the 2022 Annual Meeting of Stockholders.
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II,REALTY TRUST, INC.
TABLE OF CONTENTS
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K of Griffin Capital Essential Asset REIT II,Realty Trust, 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. SuchForward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.
The forward-looking statements contained in this Annual Report reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may discuss,cause our actual results to differ significantly from those expressed in any forward-looking statement. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: the continued severity, duration, transmission rate and geographic spread of COVID-19 ("COVID-19") in the United States, the speed of the vaccine roll-out, effectiveness and willingness of people to take COVID-19 vaccines, the duration of associated immunity and their efficacy against emerging variants and mutations of COVID-19, the extent and effectiveness of other things,containment measures taken, and the response of the overall economy, the financial markets and the population, particularly in areas in which we operate and with respect to occupancy rates, rent deferrals and the financial condition of GRT’s tenants; general financial and economic conditions; statements about the benefits of the CCIT II Merger (as defined below) and statements that address operating performance, events or developments that GRT expects or anticipates will occur in the future, including but not limited to statements regarding anticipated synergies and G&A savings in the CCIT II Merger, future financial and operating results, plans, objectives, expectations and intentions, expected sources of financing, anticipated asset dispositions, anticipated leadership and governance, creation of value for stockholders, benefits of the CCIT II Merger to customers, employees, stockholders and other constituents of the combined company, the integration of GRT and CCIT II (as defined below), cost savings related to the CCIT II Merger and other non-historical statements; risks related to the disruption of management’s attention from ongoing business operations due to the CCIT II Merger; our net asset value ("NAV") per share and whether and on what timing our Board will determine to recommence the publishing of it; whether and by how much our NAV per share upon such recommencement will be materially different than our most recent published NAV per share; the availability of suitable investment, redevelopment, or disposition opportunities; our use of leverage; changes in interest rates; the availability and terms of financing; market conditions; legislative and regulatory changes that could adversely affect the business of GRT; 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.industry, and other factors discussed in Part I, Item 1A. “Risk Factors” and Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report. Such statements are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, allincluding without limitation changes in the political and economic climate, economic conditions and fiscal imbalances in the United States, and other major developments, including wars, natural disasters, military actions, and terrorist attacks, epidemics and pandemics, including the outbreak of COVID-19 and its impact on the operations and financial condition of us and the real estate industries in which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet suchwe operate.
While forward-looking statements includingreflect our ability to generate positive cash flow from operationsgood faith beliefs, assumptions 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 statementsexpectations, they are not intended to be a guaranteeguarantees of our performance in future periods. Suchperformance. The forward-looking statements can generally be identified by our usespeak only as of the date of this Annual Report on Form 10-K. Furthermore, we disclaim any obligation to publicly update or revise any forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,”statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other similar words. Readerschanges. Moreover, because we operate in a very competitive and rapidly changing environment, new risk factors are cautionedlikely to emerge from time to time. We caution investors not to place undue reliance on these forward-looking statements which speak only asand urge you to carefully review the disclosures we make concerning risks in Part I, Item 1A. “Risk Factors” and Part II, Item 7. “Management’s Discussion and Analysis of the dateFinancial Condition and Results of Operations” in this report is filedAnnual Report. Readers of this Annual Report should also read our other periodic filings made with the Securities and Exchange Commission (the "SEC"). We cannot guaranteeand other publicly filed documents for further discussion regarding such factors.
Summary of Risk Factors
•The COVID-19 pandemic, and the accuracyfuture outbreak of any such forward-looking statements containedother highly infectious or contagious diseases, could have a material adverse effect on us (as defined below).
•There is currently no public trading market for shares of our common stock and there may never be one; therefore, it will be difficult for our stockholders to sell their shares. Our stockholders may be unable to sell their shares of our common stock because our share redemption program (“SRP”) is suspended and is subject to significant restrictions and limitations and even if our stockholders are able to sell their shares under our SRP, they may not be able to recover the amount of their investment in this Form 10-K,shares of our common stock. Furthermore, the ownership limits imposed by our charter on us as a REIT could impose further impediments to a stockholder’s ability to sell shares of our common stock.
•Our published NAV amounts may change materially if the appraised values of our properties materially change from prior appraisals or actual operating results differ from our historical and/or anticipated results. Additionally, the NAV per share that we publish will not reflect changes in our NAV, including potentially material changes, that are not immediately quantifiable.
•Our calculation of NAV is not a measure based on generally accepted accounting principles in the United States ("GAAP") and may be different from the NAV calculations used by other public real estate investment trusts, which could mean that our NAV is not comparable to NAV reported by other public REITs, and no rule or regulation requires that we do not intendcalculate our NAV in a certain way, and our Board may adopt changes to publicly updateour valuation procedures.
•Our stockholders are subject to the risk that our business and operating plans may change, including that we may pursue a Strategic Transaction (defined below).
•If we engage in a Strategic Transaction, the value ascribed to our shares of common stock in connection with the Strategic Transaction may be lower than our most recent published NAV and our stockholders could suffer a loss in the event that they seek liquidity at a Strategic Transaction price per share that is lower than the then-most recent published NAV per share. Furthermore, significant pent-up demand to sell shares of our common stock may cause the market price of our common stock to decline significantly.
•Conflicts of interest may exist or revise any forward-looking statements, whethercould arise in the future between the interests of our stockholders and the interest of holders of GRT OP Units, which may impede business decisions that could benefit our stockholders as a result of new information,the relationships between us and our affiliates, on the one hand, and the GRT OP or any partner thereof, on other hand.Additionally, the chairman of our Board is a controlling person of entities that have received GRT OP Units, and therefore may face conflicts with regard to his fiduciary duties to the Company and those entities.
•We have issued convertible preferred shares (the "Series A Preferred Shares") that we may be required to redeem for cash in the future events,under certain circumstances, which could require us to allocate cash to such redemption on limited notice, or otherwise, exceptwhich may be converted into common shares in the future at the option of the holder of the Series A Preferred Shares, which would dilute the interests of our other shareholders. If any of the foregoing risks were to materialize, it could have a material adverse effect on us.
•Most of our properties are occupied by a single tenant; therefore, income generated by nearly all of our properties is dependent on the financial stability of these tenants. The bankruptcy, insolvency or downturn in the business of, or a lease termination or election not to renew by one of these tenants could have a material adverse effect on us.
•Our operating results will be affected by economic and regulatory changes, such as requiredinflation and rising interest rates that have an adverse impact on the real estate market and could have a material adverse effect on us.
•If we breach covenants under our unsecured credit agreement with KeyBank and other syndication partners, we could be held in default under such agreement, which could accelerate our repayment date and could have a material adverse effect on us.
•We have broad authority to incur debt, and high debt levels could have a material adverse effect on us.
•We have incurred, and intend to continue to incur, indebtedness secured by applicable securities lawsour properties, which may result in foreclosure, which could have a material adverse effect on us.
•Failure to continue to qualify as a REIT would adversely affect our operations and regulations.our ability to make distributions because we would incur additional tax liabilities, which could have a material adverse effect on us.
As used
PART I
ITEM 1. BUSINESS
The use herein of the "Company,"words “GRT,” “the Company,” “we,” “us,” and “our” refer to Griffin Capital Essential Asset REIT II, Inc.Realty Trust, Inc, a Maryland corporation, and its consolidated subsidiaries, including GRT OP L.P., our operating partnership (the “GRT OP”), except where otherwise indicated or the context otherwise requires. All forward-looking statements should be read in light of the risks identified in, "Item 1A. Risk Factors "of this Form 10-K.
PART I
ITEM 1. BUSINESS
Overview
Griffin Capital Essential Asset REIT II, Inc., a Maryland corporation was formed on November 20, 2013 under the Maryland General Corporation Law ("MGCL") and qualified as aWe are an internally managed, publicly-registered, non-traded real estate investment trust ("REIT"(“REIT”) commencing with. We are a multi-billion-dollar enterprise committed to creating exceptional value for all of our stakeholders through the year ended December 31, 2015. We were organized primarily with the purposeownership and operation of acquiring single tenant net leasea diversified portfolio of strategically-located, high-quality, business-essential office and industrial properties that are considered essentialprimarily leased to the occupying tenant,nationally-recognized single tenants we have determined to be creditworthy.
The GRT platform was founded in 2009 and have used a substantial amounthas since grown to become one of the net proceeds fromlargest office and industrial-focused, net-lease REITs in the United States. Since our initial public offering ("IPO") andfounding, our follow-on offeringmission has been consistent – to invest in these properties. We operate as a daily net asset value ("NAV") REIT, posting a NAVgenerate long-term returns for eachour stockholders by combining the durability of high-quality corporate tenants, the stability of our share classes on every business day. Werevenue and the power of proactive management. To achieve this mission, we leverage the skills and expertise of our employees who have no employeesexpertise across a range of disciplines including acquisitions, dispositions, asset management, property management, development, finance, law and accounting. They are externally advised and managedled by an experienced senior management team with commercial real estate experience averaging approximately 30 years.
On July 1, 2021, we changed our advisor, Griffin Capital Essential Asset Advisor II, LLC (the "Advisor"), which is indirectly owned by our sponsor, Griffin Capital Real Estate Company, LLC ("GRECO" or our "Sponsor"). Prior to the execution of the Merger Agreement (as defined below), on December 14, 2018,name from Griffin Capital Essential Asset REIT, Inc. ("GCEAR"), a non-traded REIT sponsored by our former sponsor,to Griffin Capital Company, LLC ("GCC"), entered into a series of transactions and became self-managed (the “Self Administration Transaction”) and succeeded to the advisory, asset management and property management arrangements formerly in place for us. Accordingly, our Sponsor has changed from GCC to GRECO until the Company Merger (defined below) is consummated. Our year end is December 31.
On September 20, 2017, we commenced a follow-on offering of up to $2.2 billion of shares, consisting of up to $2.0 billion of shares (the "Follow-On Offering") in our primary offering and $0.2 billion of shares pursuant to our distribution reinvestment plan ("DRP"). We reclassified all Class T and Class I shares sold in the IPO as "Class AA" and "Class AAA" shares, respectively, and offered to the public four new classes of shares of common stock: Class T shares, Class S shares, Class D shares and Class I shares (the "New Shares") with NAV based pricing in the primary portion of the Follow-On Offering. The DRP offering included all seven of our share classes. The share classes have different selling commissions, dealer manager fees and ongoing distribution fees. Our board of directors (the "Board"), including a majority of the independent directors, has adopted valuation procedures that contain a comprehensive set of methodologies to be used in connection with the calculation of the NAV. On August 16, 2018, our Board approved the temporary suspension of the primary portion of our Follow-On Offering, effective August 17, 2018. On December 12, 2018, we also temporarily suspended our DRP offeringRealty Trust, Inc. and our share redemption program ("SRP"). Beginning in January 2019, all distributions by us were paid in cash. The SRP was officially suspended as of January 19, 2019. On February 15, 2019, our Board determined it was in our best interests to reinstate the DRP effective with the February distribution to be paid on or around March 1, 2019. We intend to recommence our SRP once the Mergers (defined below) are completed. At this time, we intend to recommence our Follow-On Offering, if appropriate and at the appropriate time, once the Mergers are completed.
Our charter authorizes up to 1,000,000,000 shares of stock, of which 800,000,000 shares are designated as common stock at $0.001 par value per share and 200,000,000 shares are designated as preferred stock at $0.001 par value per share. Our 800,000,000 shares of common stock are classified as follows: 150,000,000 shares are classified as Class T shares, 150,000,000 shares are classified as Class S shares, 150,000,000 shares are classified as Class D shares, 150,000,000 shares are classified as Class I shares, 70,000,000 shares are classified as Class A shares, 120,000,000 shares are classified as Class AA shares and 10,000,000 shares are classified as Class AAA shares.
As of March 11, 2019, we had 77,691,323 shares of our common stock outstanding, including shares issued pursuant to our DRP, less shares redeemed pursuant to our SRP.
Pending Merger of Griffin Capital Essential Asset REIT, Inc. into our Company
On December 14, 2018, we, Griffin Capital Essential Asset Operating Partnership II, L.P. (our "Operating Partnership"), our wholly owned subsidiary Globe Merger Sub, LLC ("Merger Sub"), Griffin Capital Essential Asset REIT, Inc. (“GCEAR”), and theoperating partnership changed its name from Griffin Capital Essential Asset Operating Partnership L.P. ( the "GCEAR Operating Partnership"to GRT OP, L.P.
On March 1, 2021, we completed our acquisition of Cole Office & Industrial REIT (CCIT II), Inc. (“CCIT II”) entered into an Agreement and Plan of Mergerfor approximately $1.3 billion, including transaction costs, in a stock-for-stock transaction (the “Merger Agreement”“CCIT II Merger”).
Subject to the terms and conditions of the Merger Agreement, (i) GCEAR will merge with and into Merger Sub, with Merger Sub surviving as our direct, wholly owned subsidiary (the “Company Merger”) and (ii) our Operating Partnership will merge with and into the GCEAR Operating Partnership (the “Partnership Merger” and, together with the Company Merger, the “Mergers”), with the GCEAR Operating Partnership surviving the Partnership Merger. At such time, (x) in accordance with the applicable provisions of the MGCL, the separate existence of GCEAR shall cease and (y) in accordance with the Delaware
Revised Uniform Limited Partnership Act, the separate existence of our Operating Partnership shall cease. We refer to our Company after the consummation of the Mergers as the "Combined Company."
At the effective time of the CompanyCCIT II Merger, each issued and outstanding share of GCEAR’sCCIT II Class A common stock (or fraction thereof), $0.001 par value per share (the “GCEAR Common Stock”), will be converted into the right to receive 1.04807 shares of our newly created Class E common stock, $0.001 par value per share (the “Class E Common Stock”), and each issued and outstanding share of GCEAR’s Series A cumulative perpetual convertible preferredCCIT II Class T common stock will bewas converted into the right to receive one share1.392 shares of our newly created Series A cumulative perpetual convertible preferredClass E common stock.
At the effective timeAs of the Partnership Merger, each GCEAR Operating Partnership unitDecember 31, 2021, we owned 121 properties (including one land parcel held for future development) in 26 states. Our contractual base rent before abatements and deducting base year operating expenses for gross modified leases (“OP Units”Annualized Base Rent”) outstanding immediately prior to the effective timeas of the Partnership Merger will convert into the right to receive 1.04807 Class E OP Units in the surviving partnership and each Operating Partnership unit outstanding immediately prior to the effective timeDecember 31, 2021 is approximately $361.9 million. As of the Partnership Merger will convert into the right to receive one OP Unit of like class in the surviving partnership. The special limited partnership interest in the Operating Partnership will be automatically redeemed, canceled and retired as described in the Merger Agreement.
GCEAR’s outstanding debt ofDecember 31, 2021, our portfolio was approximately $1.4 billion is expected to be refinanced or assumed by us at closing under the terms of the Merger Agreement.
The Combined Company will have a total capitalization of approximately $4.72 billion, and will own 101 properties in 25 states, consisting of approximately 27.2 million94.5% leased (based on square feet. On a pro forma basis, the Combined Company portfolio will be 96.8% occupied,footage), with a remaining weighted average remaining lease term of 7.3 years.6.25 years and weighted average annual rent increases of approximately 2.0%. Approximately 65.3%67.0% of the Combined Company portfolio net rent on a pro forma basis, will come fromour Annualized Base Rent as of December 31, 2021 is generated by properties leased to tenants and/or guarantors who have,guaranteed, directly or whose non-guarantor parentindirectly, by companies that have investment grade credit ratings or what management believes are generally equivalent ratings. In addition,Management can provide no tenant will represent more than 4.0%assurance as to the comparability of these ratings methodologies or that any particular rating for a company is indicative of the net rentsrating that a single Nationally Recognized Statistical Rating Organization (“NRSRO”) would provide in the event that it rated all companies for which the Company provides credit ratings; to the extent such companies are rated only by non-NRSRO ratings providers, such ratings providers may use methodologies that are different and less rigorous than those applied by NRSROs; moreover, because GRT provides credit ratings for some companies that are non-guarantor parents of Company's tenants, such credit ratings may not be indicative of the Combined Company, on a pro forma basis,creditworthiness of the relevant tenants.
History and Structure
The GRT platform was founded in 2009 with the top ten tenants comprisinglaunch of Griffin Capital Essential Asset REIT, Inc. (“EA-1”), a collective 27.8%publicly-registered, non-traded REIT that acquired a geographically diversified portfolio of strategically-located, high-quality corporate office and industrial properties primarily leased to single tenants. By the end of 2014, EA-1 had reached its maximum primary offering amount in its follow-on offering, having raised approximately $1.3 billion in gross equity proceeds in its public and private offerings. By the end of 2018, the EA-1 portfolio had grown to 74 properties encompassing 19.9 million square feet with an acquisition value of approximately $3.0 billion. This growth was supported by significant strategic transactions, including a $521.5 million portfolio acquisition of 18 office properties from Columbia Property Trust, Inc. and an
approximately $624.8 million stock-for-stock merger pursuant to which EA-1 acquired all of the net rentsownership interests in Signature Office REIT, Inc.
As EA-1 completed its primary offering, Griffin Capital Essential Asset REIT II, Inc. (“EA-2”) was launched with the same focus and strategy as EA-1. By the end of 2018, EA-2 had raised approximately $734.0 million in gross equity proceeds and had a portfolio of 27 properties with an acquisition value of approximately $1.1 billion.
On December 14, 2018, EA-1 further aligned management with investors by internalizing management in a transaction whereby the former sponsor of EA-1 and EA-2, Griffin Capital Company, LLC (“GCC”), and Griffin Capital, LLC sold the advisory, asset management and property management business of Griffin Capital Real Estate Company, LLC to EA-1 for common limited partnership units of the Combined Company.GRT OP ("GRT OP Units"). Also, on December 14, 2018, EA-1, EA-2 and certain other related entities entered into a merger agreement pursuant to which, on April 30, 2019, EA-1 and EA-2 combined operations (the “EA Merger”). Following the EA Merger, the surviving company was renamed Griffin Capital Essential Asset, REIT, Inc.
The Merger Agreement provides certain termination rights for us and GCEAR. In connectionWe utilize a structure known as an “UPREIT” structure, pursuant to which we conduct all of our business through the GRT OP, with the terminationGRT OP, directly or indirectly through subsidiaries, owning all of our assets and liabilities. As of December 31, 2021, GRT, as the sole general partner, controlled the GRT OP and owned approximately 91.0% of the Merger Agreement, under certain specified circumstances, GCEAR may be required to pay us a termination feeGRT OP Units. The remaining 9.0% of $52.2 millionGRT OP Units are owned by GCC and we may be required to pay GCEAR a termination fee of $52.2 million.
Upon completionother affiliates of the Company, Merger, we estimate thatas well as unaffiliated, third-party limited partners.
Our Competitive Strengths
We believe the following competitive strengths distinguish us from other owners and operators of office and industrial properties:
•Diverse, High-Quality Property Portfolio: As of December 31, 2021, our continuing stockholders will ownportfolio was comprised of 121 properties (including one land parcel) located in 26 states with 131 tenants throughout the United States. As of December 31, 2021, our portfolio was approximately 31%94.5% leased (based on square footage). Our properties offer strong geographic distribution, with no state accounting for more than approximately 11.4% of our portfolio, measured by percentage of our Annualized Base Rent as of December 31, 2021.
•Diverse Portfolio of Creditworthy Tenants: We have a diverse tenant base, with no single tenant accounting for more than approximately 4.5% of our Annualized Base Rent as of December 31, 2021 and our ten largest tenants accounting for approximately 27.3% of our Annualized Base Rent as of December 31, 2021. Further, no single industry represents more than approximately 12.5% of our Annualized Base Rent as of December 31, 2021. As of December 31, 2021, our portfolio had a weighted average remaining lease term of 6.25 years, with weighted average annual rent increases of approximately 2.0% through the remainder of the issuedlease terms. Our Annualized Base Rent as of December 31, 2021 is expected to be approximately $361.9 million, with approximately 67.0% to be generated by properties leased and/or guaranteed, directly or indirectly, by companies we have determined to be creditworthy.
•Proactive, Hands-On Portfolio and outstanding common stock of the Combined Company onAsset Management: We employ a fully diluted basis,proactive and former GCEAR stockholders will own approximately 69% of the issueddiligent approach to managing our assets in order to mitigate risks and outstanding common stock of the Combined Company on a fully diluted basis.
The foregoing descriptions of the Merger Agreement and the Mergers are not complete and are subjectidentify opportunities to and qualified in their entirety by referencemaintain and/or add value to our portfolio. We believe this focus allows us to generate superior risk-adjusted returns from our assets when compared to the Merger Agreement, a copytypical passive net-lease strategy.
•Proven and Experienced Management Team: Our senior management team has an average of which was filed as an exhibit to our Current Report on Form 8-K filed with the SEC on December 20, 2018. There is no guarantee that the Mergers will be consummated.
Investment Objectives
Overview
We invest in a portfolio consisting primarilyapproximately 30 years of single tenant business essential properties. Our investment objectives and policies may be amended or changed at any time by our Board. Although we have no plans at this time to change any of our investment objectives, our Board may change any and all such investment objectives, including our focus on single tenant business essential properties, if they believe such changes are in the best interests of our stockholders. We intend to notify our stockholders of any change to our investment policies by disclosing such changes in a public filing such as a prospectus supplement, or through a filing under the Exchange Act, as appropriate. In addition, we may invest incommercial real estate experience and a proven ability to acquire and proactively manage properties other than single tenant business essential properties if our Board deems such investmentsin order to be in the best interests of our stockholders. We cannot assure our stockholders that our policies or investment objectives will be attained or that the value of our common stock will not decrease.maximize their value.
Primary Investment and Portfolio Management Objectives
Our Business Strategy
Our primary investment and portfolio managementbusiness objectives are to:
invest in income-producing real property in a manner that allows us to qualify as a REIT for federal income tax purposes;
•provide regular cash distributions to achieve an attractive distribution yield;
•preserve and protect invested capital;
•realize appreciation in NAV from proactive portfolio and asset management; and
provide an investment alternative for stockholders seeking to allocate a portion of their long-term investment portfolios to commercial real estate with lower volatility than public real estate companies.
We cannot assure our stockholders that we will attain these primary investment and portfolio management objectives.
Investment Strategy
maximize stockholder value. We seek to acquire a portfolio consisting primarily of single tenantachieve these objectives by pursuing the following business strategies:
•Own and Operate Well-Located, Business-Essential, Single-Tenant Assets Leased to High-Quality Tenants: We seek to own properties that are essential properties throughout the United States diversified by corporate credit, physical geography, product typeto our tenants’ business operations and lease duration. Althoughare leased to tenants that we have no current intentiondetermined to do so,be creditworthy, as we may also invest a portion of the net investment proceeds in single tenant business essentialbelieve such assets offer greater relative default protection. Our properties outside the United States. We acquire assets consistent with our single tenant acquisition philosophy by focusing primarily on properties:
•essential to the business operations of the tenant;
•are generally new or recent Class A construction quality and condition and are located in primary, secondary and certain select tertiary metropolitan statistical areas, or MSAs;
•leased to tenants with stable and/or improving credit quality; and
areas. They are typically subject to long-term leases with defined rental rate increases, or with short-term leases with high-probability renewal and potential for increasing rent.
Our management team has been acquiring single tenant business essential properties for over a decade. Our management team’s positive acquisition and ownership experience with single tenant business essential properties of the type we intend to acquire stems from the following:
the credit quality of the lease payment is determinable and equivalent to the senior unsecured credit rating of the tenant;
the essential nature of the asset to the tenant's business provides greater default protection relative to the tenant's balance sheet debt;
the percentage recovery in the event of a tenant default is empirically greater than an unsecured lender; and
long-term leases provideoffering a consistent and predictable income stream across market cycles, whileor short-term leases offerthat we have determined have a high probability of renewal and potential for increasing rent, offering income appreciation upon renewalrenewal.
•Achieve Stable and reset.
Predictable Cash Flows: We focus on generating durable cash flows for our investors. We seek to provide investorsachieve this by focusing on high-quality properties and tenants that are subject to “net” leases with primarily annual contractual rental rate increases. We generally seek “net” leases, which mitigate cash flow volatility arising from fluctuations in property operating expenses and capital expenditure requirements. Under a “net” lease, the following benefits:
a cohesive management team experiencedtenant pays certain operating expenses of the property in all aspects ofaddition to “base rent,” which may include real estate investmenttaxes, special assessments, sales and use taxes, utilities, insurance, common area maintenance charges and building repairs. Additionally, in many of our leases, tenants are responsible for all or a portion of the costs of capital repairs and replacements. However, in some instances, we are responsible for some or all of these costs, which may include replacement and repair of the roof, structure, parking lots, and certain other major repairs and replacements with a track record of acquiring primarily single tenant business essential assets;
stable cash flow backed by a portfolio of primarily single tenant business essential real estate assets;
minimal exposurerespect to operating and maintenance expensethe property. Our leases typically provide contractual rent increases, as we attempt to structure or acquire leases where the tenant assumes responsibility for these costs;
contractual lease rate increases enabling potential distribution growth andproviding a potential hedge against inflation;
inflation, insulation from short-term economic cycles resulting from the long-term nature of the underlying asset leases;
leases, enhanced stability resulting from diversified credit characteristics of corporate credits;credits and
portfolio stability promoted through geographic and product type investment diversification.
•Provide Proactive Portfolio and Asset Management Services: Our management team believes that a proactive approach to portfolio and asset management is essential for maximizing risk-adjusted returns for our stockholders. This focus often allows us to pre-identify risks in our portfolio and take appropriate steps to mitigate them. Examples of ways in which we proactively manage risks include engaging in stringent property and lease compliance oversight, making regular on-site visits, developing deep tenant relationships and continuously monitoring tenant credit. We cannot assure you that any of the properties we acquire will result in the benefits discussed above.also proactively seek to add value to our portfolio through strategic property improvements, dynamic re-leasing strategies and other value-add strategies.
General•Utilize Highly Selective Acquisition and Investment Policies
Criteria for Income-Producing Properties with Potential for Future Appreciation: We seek to make investments that satisfy the primary investment objective of providing regular cash distributions to our stockholders. However, because a significant factor in the valuation of income-producing real property is its potential for future appreciation, some properties we acquire may have the potential both for growth in value and for providing regular cash distributions to our stockholders.
Our Advisor has substantial discretion with respect to the selection
•Prudent Use of specific properties. However, each acquisition will be approved by our Board. In selecting a potential property for acquisition, we consider a number of factors, including, but not limited to, the following:
•tenant creditworthiness;
•whether a property is essential to the business operations of the tenant;
lease terms, including length of lease term, scope of landlord responsibilities, presence and frequency of contractual rental increases, renewal option provisions, exclusive and permitted use provisions, co-tenancy requirements and termination options;
•projected demand in the area;
•a property’s geographic location and type;
•proposed purchase price, terms and conditions;
•historical financial performance;
•projected net cash flow yield and internal rates of return;
•a property’s physical location, visibility, curb appeal and access;
•construction quality and condition;
•potential for capital appreciation;
demographics of the area, neighborhood growth patterns, economic conditions, and local market conditions;
•potential capital and tenant improvements and reserves required to maintain the property;
•prospects for liquidity through sale, financing or refinancing of the property;
•the potential for the construction of new properties in the area;
•treatment under applicable federal, state and local tax and other laws and regulations;
•evaluation of title and obtaining of satisfactory title insurance; and
•evaluation of any reasonable ascertainable risks such as environmental contamination.
There is no limitation on the number, size or type of properties that we may acquire or on the percentage of net offering proceeds that may be invested in any particular property type or single property. The number and mix of properties will depend upon real estate market conditions and other circumstances existing at the time of acquisition. In determining whether to purchase a particular property, we may obtain an option on such property. The amount paid for an option, if any, is normally surrendered if the property is not purchased and may or may not be credited against the purchase price if the property is ultimately purchased.
Description of Leases
We primarily acquire single tenant properties with existing net leases. When spaces in a property become vacant, existing leases expire, or we acquire properties under development or requiring substantial refurbishment or renovation, we anticipate entering into "net" leases. "Net" leases means leases that typically require tenants to pay all or a majority of the operating expenses, including real estate taxes, special assessments and sales and use taxes, utilities, insurance, common area maintenance charges and building repairs related to the property, in addition to the lease payments. There are various forms of net leases, typically classified as triple-net or double-net. Under most commercial leases, tenants are obligated to pay a predetermined annual base rent. Some of the leases also will contain provisions that increase the amount of base rent payable at points during the lease term and/or that require the tenant to pay rent based upon a number of factors. Triple-net leases typically require the tenant to pay common area maintenance, insurance, and taxes associated with a property in addition to the base rent and percentage rent, if any. Double-net leases typically require the tenant to pay two of those three expenses. In either instance, these leases will typically hold the landlord responsible for the roof and structure, or other major repairs and replacements with respect to the property, while the tenant is responsible for only those operating expenses specified in the lease.
Most of our acquisitions have lease terms of five to 15 years at the time of the property acquisition. We may acquire properties under which the lease term has partially expired. We also may acquire properties with shorter lease terms if the property is located in a desirable location, is difficult to replace, or has other significant favorable real estate attributes. Generally, the leases require each tenant to procure, at its own expense, commercial general liability insurance, as well as property insurance covering the building for the full replacement value and naming the ownership entity and the lender, if applicable, as the additional insured on the policy. As a precautionary measure, we obtain, to the extent available, contingent liability and property insurance and flood insurance, as well as loss of rents insurance that covers one or more years of annual rent in the event of a rental loss. In addition, we maintain a pollution insurance policy for all of our properties to insure against the risk of environmental contaminants; however, the coverage and amounts of our environmental and flood insurance policies may not be sufficient to cover our entire risk.
Tenants are required to provide proof of insurance by furnishing a certificate of insurance to our Advisor on an annual basis. The insurance certificates are tracked and reviewed for compliance by our property manager.
Our Borrowing Strategy and Policies
Leverage: We may incur our indebtedness in the form of bank borrowings, purchase money obligations to the sellers of properties and publicly-or privately-placedpublicly or privately placed debt instruments or financing from institutional investors or other lenders. We may obtain ahave an existing credit facility (the “Credit Facility”), which we may amend, modify, or replace from time to time. We may borrow using our Credit Facility or other financings or obtain separate loans for each acquisition. Our indebtedness may be unsecured or may be secured by mortgages, or other interests in our properties, and by guarantees and/or pledges of membership interests.interests and may involve securitization vehicles. We may use borrowing proceeds to finance acquisitions of new properties, to pay for capital improvements, repairs or buildouts, to repay or refinance existing indebtedness, to pay distributions, to fund redemptions of our shares or to provide working capital. To the extent we borrow on a short-term basis, we may refinance such short-term debt into long-term, amortizing mortgages once a critical mass of properties has been acquired and to the extent such debt is available at terms that are favorable to the then in-place debt.
There is no limitation on the amount we can borrow for the purchase of any property. Our aggregate borrowings, secured and unsecured, must be reasonable in relation to our net assets and must be reviewed by our Board at least quarterly. We anticipate that we will utilize approximately 50% leverage in connection with our acquisition strategy. However, our current charter limits our borrowing to 300% of our net assets (equivalent to 75% of the cost of our assets) unless any excess borrowing is approved by a majority of our independent directors and is disclosed to our stockholders in our next quarterly report, along with the justification for such excess.
We may borrow amounts from our Sponsor and its affiliates only if such loan is approved by a majority of our directors, including a majority of our independent directors, not otherwise interested in the transaction, as fair, competitive, commercially reasonable and no less favorable to us than comparable loans between unaffiliated parties under the circumstances.
Except as set forth in our charter regarding debt limits, we may re-evaluate and change our debt strategy and policies in the future without a stockholder vote.future. Factors that we couldmay consider when re-evaluating or changing our debt strategy and policies include then-current economic and market conditions, the relative cost of debt and equity capital, any acquisition opportunities, the ability of our properties to generate sufficient cash flow to cover debt service requirements and other similar factors. Further, we may increase or decrease our ratio of debt to equity in connection with any change of our borrowing policies.
•Use of Joint Ventures: We have acquired and may continue to acquire some of our properties through joint ventures, including general partnerships, co-tenancies and other participations with real estate developers, owners and others. We may enter into joint ventures for a variety of reasons, including to own and lease real properties that would not otherwise be available to us, to diversify our sources of equity, to create income streams that would not otherwise be available to us, to facilitate strategic transactions with unaffiliated third parties, and/or to further diversify our portfolio by geographic region or property type. These joint ventures may be programmatic relationships with domestic or international institutional sources of capital. In determining whether to invest in a particular joint venture, we will
evaluate the interests in real property that such joint venture owns or is being formed to own under the same criteria that we use to evaluate other real estate investments.
•Value Creation Through Strategic Capital Recycling: We pursue an efficient capital allocation strategy that seeks to maximize the value of our portfolio. We may also seek to make improvements to our properties if we believe such investments will generate an attractive return on our capital. For example, from time to time we will have tenants that elect to vacate our properties. While we will typically seek to immediately re-lease the property to a new tenant, there may be times where physical investment is necessary to maximize potential tenant demand. In such instances, we may elect to make such investments, but only if we believe both market demand and the increase in prospective rental rates justifies our investment on a risk-adjusted basis. If they do not, then we may elect to sell the asset and redeploy the proceeds in a manner that is consistent with our qualification as a REIT. We determine whether a particular property should be sold or otherwise disposed of based on factors including prevailing economic conditions, other investment opportunities and considerations specific to the condition, value and financial performance of the property and our portfolio. As of December 31, 2018,2021, we had sold 17 properties and one land parcel since our leverage ratio (definedinception, including three properties during the year ended December 31, 2021.
Investment Policies and our Organizational Documents
Our charter currently requires that we invest our funds in the manner required by various provisions of the Statement of Policy Regarding Real Estate Investment Trusts published by the North American Securities Administrators Association. The following is a summary of certain provisions of our charter and does not purport to be a complete description of each of the provisions and limitations contained therein. A complete copy of our charter can be found in the exhibit list to this Annual Report on Form 10-K.
Our charter requires that our independent directors review our investment policies at least annually to determine that our policies are in the best interests of our stockholders. Each determination and the basis therefor is required to be set forth in the applicable meeting minutes. The methods of implementing our investment policies may also vary as new investment techniques are developed.
A majority of the directors on our Board of Directors (the “Board”), including a majority of our independent directors, may alter the methods of implementing our investment objectives and policies, except as otherwise provided in our credit agreementcharter, without the approval of our stockholders. Certain investment policies and limitations specifically set forth in our charter, however, may only be amended by a vote of the stockholders holding a majority of our outstanding shares.
Our Board may change any and all such investment objectives or policies, including our focus on single-tenant, business-essential office and industrial properties, if it believes such changes are in the best interests of our stockholders. We intend to notify our stockholders of any change to our investment policies by disclosing such changes in a public filing.
Our organizational documents do not impose limitations on the number, size or type of properties that we may acquire or on the amount that may be invested in any particular property type or single property, though each acquisition is required to be approved by our Board.
Our organizational documents also do not impose limitations on the amount we can borrow for the purchase of any property. These documents provide that our aggregate borrowings, secured and unsecured, must be reasonable in relation to our net assets and must be reviewed by our Board at least quarterly. Our charter currently limits our borrowing to 300% of our net assets (equivalent to approximately 75% of the cost of our assets) unless any excess borrowing is approved by a majority of our independent directors and is disclosed to our stockholders in our next quarterly report, along with the justification for such excess.
We do not expect to engage in any significant lending and have not engaged in significant lending over the past three years. Certain of our corporate governance policies limit our ability to make loans to directors, executive officers and certain other related persons. However, we do not otherwise have a policy limiting our ability to make loans to other persons, although our ability to do so may be limited by applicable law, such as debtthe Sarbanes-Oxley Act.
Our charter restricts us from engaging in various types of transactions with affiliates. A majority of our directors (including the independent directors) must generally approve any such transactions, as detailed further in our charter.
Exchange Listing and Other Strategic Transactions
While we are currently operating as a perpetual-life REIT, we may consider from time to total acquisition price) was approximately 43.7%time potential liquidity events (each, a “Strategic Transaction”).
Acquisition Structure
Although We are not prohibited by our charter or otherwise from engaging in such Strategic Transactions at any time. Subject to certain significant transactions that require stockholder approval, such as dissolution, merger into another entity in which we are not limited asthe surviving entity, consolidation or the sale or other disposition of all or substantially all of our assets, our Board maintains sole discretion to change our current strategy to pursue Strategic Transactions or otherwise if it believes such a pursuit is in the formbest interest of our investments may take, our investments instockholders.
Competition
The commercial real estate will generally constitute acquiring fee title or interestsmarkets in joint ventures or similar entities that own andwhich we operate real estate. We may also acquire ground leases.
We will make acquisitions of our real estate investments directly through our Operating Partnership or indirectly through limited liability companies or limited partnerships, or through investments in joint ventures, partnerships, co-tenancies or other co-ownership arrangements with other owners of properties, affiliates of our Advisor or other persons.
Competition
As we purchase properties for our portfolio, we are in competition with other potential buyers for the same properties, and may have to pay more to purchase the property than if there were no other potential acquirers or we may have to locate another property that meets our investment criteria. Although we intend to acquire properties subject to existing leases, thehighly competitive. The leasing of real estate is also often highly competitive, in the current market, and we may experience competition for tenants from owners and managers of competing projects. As a result, we may have to provide free rent, incur charges for tenant improvements, or offer other inducements, or we might not be able to timely lease the space, all of which may have material adverse effect on us. Competition may also lead to an adverse impactincrease in tenants electing to not renew their lease, seeking to reduce the amount of space they lease with us and/or seeking shorter lease terms, which may also have a material effect on our results of operations.us. At the time we elect to dispose of our properties, we will also be in competition with sellers of similar properties to locate suitable purchasers for our properties.
Conditions to Closing Acquisitions
We obtain at least a Phase I environmental assessment and history for each property we acquire. In addition, we generally condition our obligation to close the purchase of any investment on the delivery and verification of certain documents from the seller or other independent professionals, including, but not limited to, where appropriate:
•property surveys and site audits;
•building plans and specifications, if available;
•soil reports, seismic studies, flood zone studies, if available;
•licenses, permits, maps and governmental approvals;
•tenant estoppel certificates;
•tenant financial statements and information, as permitted;
•historical financial statements and tax statement summaries of the properties;
•proof of marketable title, subject to such liens and encumbrances as are acceptable to us; and
•liability and title insurance policies.
Joint Venture Investments
We may acquire some of our properties in joint ventures, some of which may be entered into with affiliates of our Advisor. We may also enter into joint ventures, general partnerships, co-tenancies and other participations with real estate developers, owners and others for the purpose of owning and leasing real properties. Among other reasons, we may want to acquire properties through a joint venture with third parties or affiliates in order to diversify our portfolio of properties in terms of geographic region or property type. Joint ventures may also allow us to acquire an interest in a property without requiring that we fund the entire purchase price. In addition, certain properties may be available to us only through joint ventures. In determining whether to recommend a particular joint venture, our Advisor will evaluate the real property which such joint venture owns or is being formed to own under the same criteria that the Advisor uses to evaluate other real estate investments.
We may enter into joint ventures with affiliates of our Sponsor for the acquisition of properties, but only provided that:
a majority of our directors, including a majority of our independent directors, not otherwise interested in the transaction, approve the transaction as being fair and reasonable to us; and
the investment by us and such affiliate are on substantially the same terms and conditions otherwise dictated by the market.
To the extent possible and if approved by our Board, including a majority of our independent directors, we will attempt to obtain a right of first refusal or option to buy the property held by the joint venture and allow such venture partners to exchange their interest for our operating partnership’s units or to sell their interest to us in its entirety. In the event that the venture partner were to elect to sell property held in any such joint venture, however, we may not have sufficient funds to exercise our right of first refusal to buy the venture partner’s interest in the property held by the joint venture. Entering into joint ventures with affiliates of our Sponsor may result in certain conflicts of interest.
Construction and Development Activities
From time to time, we may construct and develop real estate assets or render services in connection with these activities. We may be able to reduce overall purchase costs by constructing and developing a property versus purchasing a completed property. Developing and constructing properties would, however, expose us to risks such as cost overruns, carrying costs of projects under construction or development, completion guarantees, availability and costs of materials and labor, weather conditions and government regulation. To comply with the applicable requirements under federal income tax law, we intend to limit our construction and development activities to performing oversight and review functions, including reviewing the construction design proposals, negotiating and contracting for feasibility studies and supervising compliance with local, state or
federal laws and regulations, negotiating contracts, overseeing construction, and obtaining financing. In addition, we may use taxable REIT subsidiaries or certain independent contractors to carry out these oversight and review functions. We will retain independent contractors to perform the actual construction work.
Government RegulationsOverview
Our business is subject to many laws and governmental regulations. Changes in these laws and regulations, or their interpretation by agencies and courts, occur frequently.
We and any of our operating subsidiaries that we may form may be subject to state and local tax in states and localities in which they or we do business or own property. The tax treatment of us, the GRT OP, any of our Operating Partnership, any operating subsidiaries we may form and the holders of our shares in local jurisdictions may differ from our U.S. federal income tax treatment.
Americans with Disabilities ActExchange Listing and Other Strategic Transactions
While we are currently operating as a perpetual-life REIT, we may consider from time to time potential liquidity events (each, a “Strategic Transaction”). We are not prohibited by our charter or otherwise from engaging in such Strategic Transactions at any time. Subject to certain significant transactions that require stockholder approval, such as dissolution, merger into another entity in which we are not the Americans with Disabilities Actsurviving entity, consolidation or the sale or other disposition of 1990,all or ADA,substantially all public accommodations and commercial facilities are requiredof our assets, our Board maintains sole discretion to meet certain federal requirements relatedchange our current strategy to access and use by disabled persons. These requirements became effective in 1992. Complying with the ADA requirements could require us to remove access barriers. Failing to comply could resultpursue Strategic Transactions or otherwise if it believes such a pursuit is in the impositionbest interest of fines by the federal government or an awardour stockholders.
Competition
The commercial real estate markets in which we operate are highly competitive. The leasing of damages to private litigants. Although we acquire properties that substantially comply with these requirements,real estate is also often highly competitive, and we may experience competition for tenants from owners and managers of competing projects. As a result, we may have to provide free rent, incur additional costscharges for tenant improvements, or offer other inducements, or we might not be able to comply withtimely lease the ADA. In addition, a numberspace, all of additional federal, state and local lawswhich may require us to modify any properties we purchase, or may restrict further renovations thereof, with respect to access by disabled persons. Additional legislation could impose financial obligations or restrictions with respect to access by disabled persons. Although we believe that these costs will not have a material adverse effect on us, if required changes involve a greaterus. Competition may also lead to an increase in tenants electing to not renew their lease, seeking to reduce the amount of expenditures thanspace they lease with us and/or seeking shorter lease terms, which may also have a material effect on us. At the time we currently anticipate,elect to dispose of our abilityproperties, we will also be in competition with sellers of similar properties to make expected distributions could be adversely affected.locate suitable purchasers for our properties.
Environmental MattersOverview
Under various federal, stateOur business is subject to many laws and localgovernmental regulations. Changes in these laws ordinances and regulations, a current or previous owner or operatortheir interpretation by agencies and courts, occur frequently. We and any of real property may be held liable for the costs of removing or remediating hazardous or toxic substances. These laws often impose clean-up responsibility and liability without regard to whether the owner or operator was responsible for, or even knew of, the presence of the hazardous or toxic substances. The costs of investigating, removing or remediating these substances may be substantial, and the presence of these substances may adversely affect our ability to rent properties or sell the property or to borrow using the property as collateral and may expose us to liability resulting from any release of or exposure to these substances. If we arrange for the disposal or treatment of hazardous or toxic substances at another location,operating subsidiaries that we may be liable for the costs of removing or remediating these substances at the disposal or treatment facility, whether or not the facility is owned or operated by us. Weform may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site that we own or operate. Certain environmental laws also impose liability in connection with the handling of or exposure to asbestos-containing materials, pursuant to which third parties may seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials and other hazardous or toxic substances. We maintain a pollution insurance policy for all of our properties to insure against the potential liability of remediation and exposure risk.
Other Regulations
The properties we acquire likely will be subject to various federal, state and local regulatory requirements, such as zoningtax in states and state and local fire and life safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. We acquire properties that are in material compliance with all such regulatory requirements. However, we cannot assure you that these requirements will not be changed or that new requirements will not be imposed which would require significant unanticipated expenditures by us and could have an adverse effect on our financial condition and results of operations.
Disposition Policies
We generally intend to hold each property we acquire for an extended period. However, we may sell a property at any time if, in our judgment, the sale of the property is in the best interests of our stockholders.
The determination of whether a particular property should be sold or otherwise disposed of will generally be made after consideration of relevant factors, including prevailing economic conditions, other investment opportunities and considerations
specific to the condition, value and financial performance of the property. In connection with our sales of properties, we may lend the purchaser all or a portion of the purchase price. In these instances, our taxable income may exceed the cash received in the sale.
We may sell assets to third parties or to affiliates of our Sponsor. Our nominating and corporate governance committee of our Board, which is comprised solely of independent directors, must review and approve all transactions between us and our Sponsor and its affiliates.
Investment Limitations in Our Charter
Our charter places numerous limitations on us with respect to the mannerlocalities in which we may invest our funds, most of which are those typically required by various provisions of the Statement of Policy Regarding Real Estate Investment Trusts published by the North American Securities Administrators Association ("NASAA REIT Guidelines").
Changes in Investment Policies and Limitations
Our charter requires that our independent directors review our investment policies at least annually to determine that the policies we are following are in the best interests of our stockholders. Each determination and the basis therefor is required to be set forth in the applicable meeting minutes. The methods of implementing our investment policies may also vary as new investment techniques are developed. The methods of implementing our investment objectives and policies, except as otherwise provided in our charter, may be altered by a majority of our directors, including a majority of our independent directors, without the approval of our stockholders. The determination by our Board that it is no longer in our best interests to continue to be qualified as a REIT shall require the concurrence of two-thirds of the Board. Investment policies and limitations specifically set forth in our charter, however, may only be amended by a vote of the stockholders holding a majority of our outstanding shares.
Investments in Mortgages
While we intend to emphasize equity real estate investments and, hence, operate as what is generally referred to as an "equity REIT," as opposed to a "mortgage REIT," we may invest in firstthey or second mortgage loans, mezzanine loans secured by an interest in the entity owning the real estate or other similar real estate loans consistent with our REIT status. We may make such loans to developers in connection with construction and redevelopment of real estate properties. Such mortgages may or may not be insured or guaranteed by the Federal Housing Administration, the Veterans Benefits Administration or another third party. We may also invest in participating or convertible mortgages if our directors conclude that we and our stockholders may benefit from the cash flow or any appreciation in the value of the subject property. Such mortgages are similar to equity participation.
Affiliate Transaction Policy
Our Board has established a nominating and corporate governance committee, which reviews and approves all matters the Board believes may involve a conflict of interest. This committee is composed solely of independent directors. This committee of our Board approves all transactions between us and our Sponsor and its affiliates. We will not acquire any properties in which GCC, our former Sponsor, or its affiliates, owns an economic interest.
Investment Company Act and Certain Other Policies
We intend to operate in such a manner that we will not be subject to regulation under the Investment Company Act of 1940, as amended (the "1940 Act"). We will continually review our investment activity to attempt to ensure that we do not come withinbusiness or own property. The tax treatment of us, the application of the 1940 Act. Among other things, our Advisor will attempt to monitor the proportion of our portfolio that is placed in various investments so that we do not come within the definition of an "investment company" under the 1940 Act. If at any time the character of our investments could cause us to be deemed as an investment company for purposes of the 1940 Act, we will take all necessary actions to attempt to ensure that we are not deemed to be an "investment company." In addition, we do not intend to underwrite securities of other issuers or actively trade in loans or other investments.
Subject to the restrictions we must follow in order to qualify to be taxed as a REIT, we may make investments other than as previously described in this report, although we do not currently intend to do so. We have authority to purchase or otherwise reacquire our shares of common stock orGRT OP, any of our other securities. We have no present intention of repurchasing anyoperating subsidiaries we may form and the holders of our shares of common stock except (1) pursuant toin local jurisdictions may differ from our SRP and (2) if the Mergers are consummated, pursuant to a tender offer as provided for in the Merger Agreement, and we would only take such action in conformity with applicableU.S. federal and state laws and the requirements for qualifying as a REIT under the Internal Revenue Code of 1986, as amended (the "Code").income tax treatment.
Exchange Listing and Other Strategic Transactions
While we are currently operating as a perpetual-life REIT, with an ongoing offering and SRP (both of which are temporarily suspended during the pending Mergers), we may consider from time to time potential liquidity events (each, a liquidity event at any time in the future (such as a merger, listing, or sale of assets) (a "Strategic Transaction"“Strategic Transaction”). We are not prohibited by our charter or otherwise from engaging in such a Strategic TransactionTransactions at any time. We believe this perpetual-life REIT structure allows us to weather real estate cycles and provides for maximum flexibility to execute an exit strategy when it is in the best interests of our stockholders. Subject to certain significant transactions that require stockholder approval, such as dissolution, merger into another entity in which we are not the surviving entity, consolidation or the sale or other disposition of all or substantially all of our assets, our Board maintains sole discretion to change our current strategy as circumstances changeto pursue Strategic Transactions or otherwise if it believes such a changepursuit is in the best interest of our stockholders. If
Competition
The commercial real estate markets in which we operate are highly competitive. The leasing of real estate is also often highly competitive, and we may experience competition for tenants from owners and managers of competing projects. As a result, we may have to provide free rent, incur charges for tenant improvements, or offer other inducements, or we might not be able to timely lease the space, all of which may have material adverse effect on us. Competition may also lead to an increase in tenants electing to not renew their lease, seeking to reduce the amount of space they lease with us and/or seeking shorter lease terms, which may also have a material effect on us. At the time we elect to dispose of our Board determinesproperties, we will also be in competition with sellers of similar properties to locate suitable purchasers for our properties.
Overview
Our business is subject to many laws and governmental regulations. Changes in these laws and regulations, or their interpretation by agencies and courts, occur frequently. We and any of our operating subsidiaries that a Strategic Transaction iswe may form may be subject to state and local tax in states and localities in which they or we do business or own property. The tax treatment of us, the GRT OP, any of our operating subsidiaries we may form and the holders of our shares in local jurisdictions may differ from our U.S. federal income tax treatment.
Americans with Disabilities Act
Under the Americans with Disabilities Act of 1990 (the “ADA”), all public accommodations and commercial facilities are required to meet certain federal requirements related to access and use by disabled persons. Failing to comply could result in the best interestsimposition of fines by the federal government or an award of damages to private litigants. Although we diligence compliance with laws, including the ADA, when we acquire properties, we may incur additional costs to comply with the ADA or other regulations related to access by disabled persons. Although we believe that these costs will not have a material adverse effect on us, if required changes involve a greater amount of expenditures than we currently anticipate, our ability to make expected distributions could be adversely affected.
Environmental Matters
Under various federal, state and our stockholders, we expect thatlocal laws, ordinances and regulations, a current or previous owner or operator of real property may be held liable for the Board will take all relevant factors at that time into consideration when making a Strategic Transaction decision, including prevailing market conditions.
Employees
We currently have no employees. The employeescosts of our Sponsorremoving or remediating hazardous or toxic substances. These laws often impose clean-up responsibility and its affiliates currently provide and have provided inliability without regard to whether the past, management, acquisition, advisory and certain administrative servicesowner or operator was responsible for, us. Upon completionor even knew of, the Mergers, allpresence of the hazardous or toxic substances. The costs of investigating, removing or remediating these substances may be substantial, and the presence of these substances may adversely affect our Sponsor’s acquisitions, asset management, investor relations, legal, compliance, financial reporting,ability to lease or sell the property or to borrow using the property as collateral and accounting personnel currently providing servicesmay expose us to us will become our employees.
Industry Segments
liability resulting from any release of or exposure to these substances. If we arrange for the disposal or treatment of hazardous or toxic substances at another location, we may be liable for the costs of removing or remediating these substances at the disposal or treatment facility, whether or not the facility is owned or operated by us. We internally evaluatemay be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site that we own or operate. Certain environmental laws also impose liability in connection with the handling of or exposure to asbestos-containing materials, pursuant to which third parties may seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials and other hazardous or toxic substances. We maintain a pollution insurance policy for all of our properties to insure against the potential liability of remediation and interests thereinexposure risk.
Other Regulations
The properties we own and operate generally are subject to various federal, state and local regulatory requirements, such as one reportable segment.zoning and state and local fire and life safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. Through our due diligence process and protections in our leases, we aim to own and operate properties that are in material compliance with all such regulatory requirements. However, we cannot assure our stockholders that these requirements will not be changed or that new
requirements will not be imposed which would require significant unanticipated expenditures by us and could have an adverse effect on our financial condition and results of operations.
We conduct our operations so that we and our subsidiaries are not required to register as an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”) and monitor the structure and nature of our assets so that we do not come within the definition of an "investment company" under the 1940 Act. If we or our subsidiaries fail to maintain an exception or exemption from the 1940 Act, we may be required to, among other things, substantially change the manner in which we conduct our operations to avoid being required to register as an investment company under the 1940 Act or register as an investment company under the 1940 Act.
Human Capital Management
GRT is internally managed by an experienced and proven team that specializes in office and industrial properties. As of December 31, 2021, we employed 41 people. We believe our employees are our greatest asset.Because of this perspective, we have implemented a number of programs to foster their professional growth andtheir growth as global citizens.
We offer all of our employees a comprehensive benefits and wellness package, which includes paid time off and parental leave, high-quality medical, dental and vision insurance, disability, pet and life insurance, fitness programs, 401(k) and long-term incentive plans. We also encourage internal mobility in our organization and provide career enhancement and education opportunities, as well as educational grants.
We believe that a wide range of opinions and experiences are key to our continued success, and we therefore value racial, gender, and generational diversity throughout our organization. As of December 31, 2021, approximately 51% of our employees were people of color/minorities and approximately 46% were women. In addition, as of December 31, 2021, half of our eight-member Board was composed of women and/or minorities.
Our social policy extends beyond the individuals within our organization and encourages our employees to have a positive impact on the community around us. Throughout our organization, we have a shared passion and dedication to giving back to the communities in which we live and work.
Available Information
We make available on the “SEC Filings” subpage of the investor section of our website (www.grtreit.com) free of charge our annual reports on Form 10-K, including this Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, ownership reports on Forms 3, 4 and 5 and any amendments to those reports as soon as practicable after we electronically file such reports with the SEC. Our electronically filed reports can also be obtained on the SEC’s internet site at http://www.sec.gov. Further, copies of our Code of Ethics and the charters for the Audit, Compensation, and Nominating and Corporate Governance Committees of our Board are also available on the “Governance Documents” subpage of our website.
ITEM 1A. RISK FACTORS
Below areStockholders should carefully consider the following risks in evaluating our company and uncertainties thatour common shares. If any of the following risks were to occur, our business, prospects, financial condition, liquidity, NAV per share, results of operations, cash flow, ability to satisfy our debt obligations, returns to our stockholders, the value of our stockholders’ investment in us and/or our ability to make distributions to our stockholders could be materially and adversely affect our operations thataffected, which we believe are materialrefer herein collectively as a “material adverse effect on us.” Some statements in this Annual Report on Form 10-K, including statements in the following risk factors, constitute forward-looking statements. Refer to stockholders. Other risks and uncertainties may exist that we do not consider material based on the section entitled “Cautionary Note Regarding Forward-Looking Statements" for additional information currently available to us at this time.regarding these forward-looking statements.
Risks Related to COVID-19
The COVID-19 pandemic, and the future outbreak of other highly infectious or contagious diseases, could have a material adverse effect on us.
The COVID-19 pandemic has had, and another outbreak in the future could have, repercussions across regional and global economies and financial markets. We cannot predict when pandemic-related restrictions currently in place will be lifted to some extent or entirely and whether and when any new restrictions could be imposed. The COVID-19 pandemic is negatively impacting many industries in the United States, directly or indirectly, including industries in which the Company and our
tenants operate, which could result in a general decline in rents, an Investmentincreased incidence of defaults under existing leases and negatively impact our ability to achieve new leases as existing leases expire. The extent to which federal, state or local governmental authorities grant rent relief or other relief or enact amnesty programs applicable to our tenants in Griffin Capital Essential Asset REIT II, Inc.response to the COVID-19 pandemic may exacerbate the negative impacts that a slow down or recession could have on us.
Demand for office space nationwide has declined and is likely to continue to decline due to the current economic downturn, bankruptcies, downsizing, layoffs, government regulations and restrictions on travel and permitted businesses operations that may be extended in duration and become recurring, increased usage of remote working arrangements and cost cutting resulting from the COVID-19 pandemic, which could lead to our office tenants electing to not renew their leases, or to renew their leases for less space than they currently occupy, which could increase vacancy rates and decrease rental income. The increase in remote work practices is likely to continue in a post-pandemic environment. Changes to tenants’ space requirements and configurations may require us to spend increased amounts for property improvements. Additionally, if substantial office space reconfiguration is required, tenants may pursue relocating to other office space more attractive than renewing their leases and renovating the existing space, which could have a material adverse effect on us.
The significance, extent, and duration of the overall operational and financial impact of the COVID-19 pandemic on our business is highly uncertain and cannot be predicted with confidence, including the continued severity, duration, transmission rate and geographic spread of COVID-19 in the United States, the speed of the vaccine distribution, effectiveness and willingness of people to take COVID-19 vaccines, the duration of associated immunity and efficacy against emerging variants of COVID-19, the extent and effectiveness of other containment measures taken, and the response of the overall economy, the financial markets and the population, particularly in areas in which we operate. If we cannot operate our properties so as to meet our financial expectations, because of these or other risks, we may be prevented from growing the values of our properties and it may have a material adverse effect on us.
Furthermore, we cannot predict the impact that the COVID-19 pandemic will have on our tenants and other business partners; however, any material effect on these parties could have a material adverse effect on us.
Risks Related to Our Common Stock
There is currently no public trading market for shares of our sharescommon stock and there may never be one; therefore, it will be difficult for our stockholders to sell their shares.
There is currently no public market for our shares and there may never be one. Stockholders may not sell their shares unless the buyer meets applicable suitability and minimum purchase standards. Our charter also prohibits the ownership by any one individual of more than 9.8% in value of the aggregate of our outstanding stock or more than 9.8% in value or number of shares, whichever is more restrictive, of the aggregate of our outstanding common stock, unless waived by our Board, which may inhibit large investors from desiring to purchase a stockholder's shares. Moreover, our share redemption programs include numerous restrictions that would limit a stockholder's ability to sell their shares to us. Our Board could choose to amend, suspend or terminate our share redemption programs upon 30 days' notice. Therefore, it may be difficult for stockholders to sell their shares promptly or at all. If stockholders are able to sell their shares, they will likely have to sell them at a substantial discount to the price they paid for the shares. It also is likely that a stockholder's shares would not be accepted as the primary collateral for a loan. Stockholders should purchase the shares only as a long-term investment because of the illiquid nature of the shares.
Stockholders may be unable to sell their shares because their ability to have their shares redeemed pursuant toof our common stock under our SRP, is subject to significant restrictions and limitations andeven if our stockholders are able to sell their shares under theour SRP, they may not be able to recover the amount of their investment in shares of our shares.common stock.
Even though
There is currently no public market for shares of our common stock and there may never be one.
Our SRP is temporarily suspended, if and when it is reinstated, it may provide stockholders withincludes numerous restrictions on a limited opportunitystockholder’s ability to sell their shares to us after they have held them forus. These restrictions include a prohibition on the sale of shares to use until the conclusion of a holding period of one year, and stockholders should be fully aware thatyear. Further, our SRP contains significant restrictions and limitations. Further,generally imposes a quarterly cap on aggregate redemptions of shares of our common stock. Our Board may limit, suspend, terminate or amend any provision of our SRP at any time upon 30 days’ notice. Our Board has previously suspended our SRP, including most recently on October 1, 2021. Even if the SRP upon 30 days' notice. Generally,is active and in effect, we may not have sufficient cash to satisfy the permitted quarterly value of redemption requests.
Furthermore, to ensure that we do not fail to qualify as a REIT, our SRP imposes a quarterly cap on aggregate redemptionscharter also prohibits the ownership by any Person (as defined in our charter) of more than 9.8% (in value or in number, whichever is more restrictive, as determined in good faith by our shares equal to the amount of shares with a value (based on the applicable redemption price per share on the day the redemption is effected) of up to 5%Board) of the aggregate NAV of the outstanding shares as of the last business day of the previous calendar quarter.
Valuations and appraisals of our properties, real estate-related assets and real estate-related liabilities are estimates of value and may not necessarily correspond to realizable value.
The valuation methodologies used to value our properties and certain real estate-related assets involve subjective judgments regarding such factors as comparable sales, rental revenue and operating expense data, the capitalization or discount rate, and projections of future rent and expenses based on appropriate analysis. As a result, valuations and appraisals of our properties, real estate-related assets and real estate-related liabilities are only estimates of current market value. Ultimate realization of the value of an asset or liability depends to a great extent on economic and other conditions beyond our control and the control of the independent valuation firm and other parties involved in the valuation of our assets and liabilities. Further, these valuations may not necessarily represent the price at which an asset or liability would sell, because market prices of assets and liabilities can only be determined by negotiation between a willing buyer and seller. Valuations used for determining our NAV also may be made without consideration of the expenses that would be incurred in connection with disposing of assets and liabilities. Therefore, the valuations of our properties, our investments in real estate-related assets and our liabilities may not correspond to the timely realizable value upon a sale of those assets and liabilities. Our NAV does not reflect fees that may become payable after the date of determination of the NAV, which fees may not ultimately be paid in certain circumstances, including if we are liquidated or if there is a listing of our common stock. Our NAV does not currently represent enterprise value and may not accurately reflect the actual prices at which our assets could be liquidated on any given day, the value a third party would pay for all or substantially all of our shares, or the price that our shares would trade at on a national stock exchange. There will be no retroactive adjustment in the valuation of such assets or liabilities, the price of our shares of common stock, the price we paid to redeem shares of our common stock or NAV-based fees we paidmore than 9.8% of the value (as determined in good faith by our Board) of the aggregate of outstanding Shares (as defined in our charter), unless waived by our Board. Such restriction may inhibit large investors from desiring to purchase a stockholder’s shares, including in connection with a takeover that could otherwise result in a premium price for our Advisorstockholders, and could impose further impediments to a stockholder’s ability to sell shares of our dealer manager to the extent such valuations prove to not accurately reflect the true estimate of value and are not a precise measure of realizable value.common stock.
Our published NAV per share amounts may change materially if the appraised values of our properties materially change from prior appraisals or theif actual operating results differ from whatour historical and/or anticipated results. Additionally, no NAV per share that we originally budgeted.publish will reflect changes in our NAV that are immediately quantifiable, including potentially material changes.
We anticipate daily updatesupdate our NAV per share on a yearly basis based on property andthird-party appraisals of our properties, which are impacted by real estate market events that are known to be material to our NAV. Notification of property and real estate market events may lag the actual event and events may be missed, unknown or difficult to value. The valuations will reflect information provided to the appraisers subject towith a reasonable time to analyze the event and document the new market value. Third-partysuch information. Annual third-party appraisals of our properties using an appraisal report format will beare conducted on a rolling basis, such that properties will be appraised at different times butthroughout any given year with each property will begenerally appraised at least once per calendar year. When theseThese appraisals involve subjective judgments and
are reflected in our NAV calculations, there may be a material change in our NAV per share amounts for each classnot necessarily representative of our common stock from those previously reported. In addition, actual operating results may differ from what we originally budgeted,the price at which may cause a material increasean asset or decrease in the NAV per share amounts.liability would sell pursuant to negotiation between an arms’ length buyer and seller. We will not retroactively adjust the NAV per share of eachany class reported. Therefore, because a new annual appraisal may differ materially from the prior appraisal or the actual results from operations may be better or worse than what we previously budgeted,assumed, the adjustment to reflect the new appraisal or actual operating results may cause the NAV per share for eachany class of our common stock to increase or decrease,decrease. Additionally, notification of property and such increasereal estate market events may lag the actual event and events may be missed, unknown or decrease will occur on the day the adjustment is made.
The NAV per share that we publish may not necessarily reflect changes in our NAV that are not immediately quantifiable.
From timedifficult to time, we may experience events with respect to our investments that may have a material impact on our NAV. For example, and not by way of limitation, changes in governmental rules, regulations and fiscal policies, environmental legislation, acts of God, terrorism, social unrest, civil disturbances and major disturbances in financial markets may cause the value of a property to change materially. The NAV per share of each class of our common stock as published on any given day may not reflect such extraordinary events to the extent that their financial impact is not immediately quantifiable. As a result,value.Furthermore, the NAV per share that we publish maywill not necessarily reflect changes in our NAV that are not immediately quantifiable, including potentially material changes, and the NAV per share of each class published after the announcement of a material event may differ significantly from our actual NAV per share for such class until such time as the financial impact is quantified and our NAV is appropriately adjusted in accordance with our valuation procedures. The resulting potential disparity
On October 1, 2021, we reported that we had temporarily suspended our quarterly publishing of net asset value per share of common stock. Our Board authorized the suspension in our NAV may inurelight of the pursuit of certain strategic initiatives. We intend to the benefitresume publishing a net asset value per share of redeeming stockholders or non-redeeming stockholders and new purchasers of our common stock depending on whetherat such time as our Board determines is appropriate and no later than one year from the most recent net asset value publication, which was as of June 30, 2021. As a result, our net asset value may be materially different than our most recent published NAV per share for such class is overstated or understated.net asset value.
Our NAV is not subject to Generally Accepted Accounting Principles ("GAAP"), will not be independently auditeda GAAP measure and will involveinvolves certain subjective judgments by the Company, the independent valuation firmmanagement firms and other parties involved in valuing our assets and liabilities.
Our valuation procedures and our NAV are not subject to GAAP and willour NAV is not be subject to independent audit.a GAAP measure. Our NAV may differ from equity (net assets) reflected on our audited financial statements,prior appraisals and/or actual operating results, even if we arewere required to adopt a fair value basis of accounting for GAAP financial statement purposes. Additionally, we are dependent on our Advisor to be reasonably aware of material events specific to our properties (such as tenant disputes, damage, litigation and environmental issues) that may cause the value of a property to change materially and to promptly notify the independent valuation firm so that the information may be reflected in our real estate portfolio valuation. In addition, the implementation and coordination of our valuation procedures include certain subjective judgments of our Advisor,the Company, such as whether the independent valuation firmmanagement firms should be notified of events specific to our properties that could affect theirthe valuations as well asof such properties. Such valuation procedures also include subjective judgements on the part of the independent valuation firmmanagement firms and other parties we engage, as to whether adjustments to asset and liability valuations are appropriate. Accordingly, our stockholders must rely entirely on our Board to adopt appropriate valuation procedures and on the independent valuation management firm and other parties we engage in order to arrive at our NAV, which may not correspond to realizable value upon a sale of our assets. Our NAV is not audited or reviewed by our independent registered public accounting firm.
No
Our NAV may not be comparable to NAV reported by other public REITs and no rule or regulation requires that we calculate our NAV in a certain way, and our Board, including a majority of our independent directors, may adopt changes to theour valuation procedures.
There
Our NAV may not be comparable to NAV reported by other public REITs because our calculation of NAV may be different from the NAV calculations used by other public REITs. While the Institute for Portfolio Alternatives sets forth certain “best practices” guidelines for non-traded REITs to use in calculating NAV, there are no existing rules or regulatory bodies that specifically govern the manner in which we calculate our NAV. As a result, it is important that stockholders pay particular attention to the specific methodologies and assumptions we use to calculate our NAV. Other public REITs may use different methodologies or assumptions to determine their NAV. In addition, each year our Board, including a majority of our independent directors, will reviewreviews the appropriateness of ourits valuation procedures and may, at any time, adopt changes to the valuation procedures. For example, we do not currently include any enterprise value or real estate acquisition costs inDuring such review, our assets calculated for purposes of our NAV. If we acquire real property assets as a portfolio, we may pay a premium over the amount that we would pay for the assets individually. Our Board may change this or other aspects of our valuation procedures, which changes may have ana material adverse effect on our NAV and the price at which stockholders may sell shares to us under our share redemption programs.us.
We have paid, and may continue to pay, distributions from sources other than cash flow from operations, including out of net proceeds from our offerings; therefore, we will have fewer funds available for the acquisition of properties, and our stockholders' overall return may be reduced.
In the event we do not have enough cash from operations to fund our distributions, we may borrow, issue additional securities, or sell assets in order to fund the distributions or make the distributions out of net proceeds from our Follow-On Offering. We are not prohibited from undertaking such activities by our charter, bylaws, or investment policies, and we may use an unlimited amount from any source to pay our distributions. Through December 31, 2018, we funded 4% of our cash distributions using offering proceeds and 96% of our cash distributions using cash flows from operations as shown on the statement of cash flows. If we continue to pay distributions from sources other than cash flow from operations, we will have fewer funds available for acquiring properties and investing in the existing portfolio, which may reduce our stockholders' overall returns. Additionally, to the extent distributions exceed cash flow from operations, a stockholder's basis in our stock may be reduced and, to the extent distributions exceed a stockholder's basis, the stockholder may recognize a capital gain.
We may be unable to maintain cash distributions or increase distributions over time.
There are many factors that can affect the availability and timing of
We may be unable to maintain cash distributions to stockholders. Distributions will be based principally on distribution expectations of our potential investors and cash available from our operations.or increase distributions over time. The amount of cash available for distribution will be affected by many factors, such as our ability to buy properties as offering proceeds become available and our operating expense levels, as well asand many other variables. Actual cash available for distribution may vary substantially from estimates. We cannot assure our stockholders that we will be able to pay or maintain distributions or that distributions will increase over time, nor can we give any assurance that rents from the properties will increase, or that future acquisitions of real properties will increase our cash available for distribution to stockholders.increase. Our actual results may differ significantly from the assumptions used by our Board in establishing the distribution rate to our stockholders.
If weOur stockholders are unablesubject to find suitable investments, thenthe risk that our business and operating plans may change, including that we may not be able to achieve our investment objectives or continue to pay distributions.pursue a Strategic Transaction.
Our ability to achieve our investment objectives and continue to pay distributions is dependent upon our performance in selecting our investments and arranging financing. As of December 31, 2018, we owned 35 buildings located on 27 properties in 17 states. We cannot be sure that we will be successful in obtaining suitable investments on financially attractive terms or
that, if such investments are made, our objectives will be achieved. If we are unable to find suitable investments, we will hold the proceeds of our public offering in an interest-bearing account or invest the proceeds in short-term, investment-grade investments. In such an event, our ability to continue to pay distributions at our current level to our stockholders would be adversely affected.
If the Mergers are consummated, we will issue Series A Preferred Shares, which will rank senior to our common stock and therefore, any cash we have to pay distributions will be used to pay distributions to the holders of Series A Preferred Shares first, which could have a negative impact on our ability to pay distributions to our common stockholders.
If the Mergers are consummated, the Series A Preferred Shares that we will issue will rank senior to all common stock, and therefore, the rights of holders of Series A Preferred Shares to distributions will be senior to distributions to our common stockholders. Furthermore, distributions on the Series A Preferred Shares will be cumulative and will be declared and payable quarterly. We will be obligated to pay the holders of the Series A Preferred Shares their current distributions and any accumulated and unpaid distributions prior to any distributions being paid to our common stockholders and, therefore, any cash available for distribution will be used first to pay distributions to the holders of the Series A Preferred Shares. The Series A Preferred Shares will also have a liquidation preference in the event of our involuntary liquidation, dissolution or winding up of our affairs (a “liquidation”) which could negatively affect any payments to the common stockholders in the event of a liquidation. In addition, our right to redeem the Series A Preferred Shares could have a negative effect on our ability to operate profitably and our ability to pay distributions to our common stockholders.
There is no guarantee that we will resume our Follow-On Offering. Even if we resume our Follow-On Offering, there is no guarantee that we will raise substantial funds.
There is no guarantee that we will resume our Follow-On Offering. Even if we resume our offering, there is no guarantee that we will raise substantial funds in such offering. If we are unable to raise a substantial amount of funds, we will make fewer investments resulting in less diversification in terms of the number of investments owned, the types of investments that we make, and the geographic regions in which our investments are located. In such event, the likelihood of our profitability being affected by the performance of any one of our investments will increase. Additionally, we are not limited in the number or size of our investments or the percentage of net investment proceeds we may dedicate to a single investment. A stockholder’s investment in our shares will be subject to greater risk to the extent that we lack a diversified portfolio of investments. Further, we will have certain fixed operating expenses, regardless of whether we are able to raise substantial funds in the future. Our inability to raise substantial funds could increase our fixed operating expenses as a percentage of gross income, potentially reducing our net income and cash flow and potentially limiting our ability to make distributions.
We may sufferconsider Strategic Transactions from delays in locating suitable investments, which could adversely affect our abilitytime to make distributions at our current level and the value of a stockholder's investment.
We could suffer from delays in locating suitable investments. Delays we encounter in the selection, acquisition and development of income-producing properties likely would adversely affect our ability to make distributions at our current level and the value of a stockholder's investment. In particular, if we acquire properties prior to the start of construction or during the early stages of construction, it will typically take several months to complete construction and rent available space. Therefore, stockholders could suffer delays in the receipt of cash distributions attributable to those particular properties. In such event, we may pay all or a substantial portion of our distributions from the proceeds of our public offering or from borrowings in anticipation of future cash flow, which may constitute a return of a stockholder's capital. time.We are not prohibited from undertaking such activities by our charter bylaws or investment policies, and there are nootherwise from engaging in Strategic Transactions at any time. Subject to certain significant transactions that require stockholder approval, our Board maintains sole discretion to change our current limits onstrategy to pursue Strategic Transactions or otherwise if it believes such a change is in the amount of distributions to be paid from such funds. Distributions from the proceedsbest interest of our public offeringstockholders. There can be no assurance, however that any Strategic Transaction will occur.
Our Board may also change our investment objectives, targeted investments, borrowing policies or from borrowings also could reduce the amountother corporate policies without stockholder approval.
The value ascribed to our shares of capital we ultimately investcommon stock in properties. This, in turn, would reduceconnection with any Strategic Transaction may be lower than our published NAV, any given stockholder’s initial investment cost and/or the value of a stockholder's investment. In particular, if we acquire properties prior toour assets under the startfair value basis of construction or during the early stages of construction, it will typically take up to one year or more to complete constructionaccounting for GAAP financial statements and rent available space. Therefore,our stockholders could suffer delaysa loss in the receipt of cash distributions attributable to those particular properties.
If our Sponsor loses or is unable to obtain key personnel, our ability to implement our investment objectives could be delayed or hindered, which could adversely affect our ability to make distributionsevent that they seek liquidity at our current level and the value of a stockholder's investment.
Our success depends to a significant degree upon the contributions of our executive officers and other key personnel of our Advisor and Sponsor, including Kevin A. Shields, Michael J. Escalante, Javier F. Bitar, Howard S. Hirsch, Louis K. Sohn and Scott Tausk, each of whom would be difficult to replace. Our Sponsor has employment agreements with Messrs. Escalante, Bitar, Hirsch, Sohn and Tausk, but not with Mr. Shields; however we cannot guarantee that all, or any particular one, will
remain affiliated with us and/or our Advisor or Sponsor. If any of our key personnel were to cease their affiliation with our Advisor or Sponsor, our operating results could suffer. We believe that our future success depends, in large part, upon our Advisor's ability to hire and retain highly skilled managerial and operational personnel. Competition for such personnel is intense, and we cannot assure stockholders that our Advisor or Sponsor will be successful in attracting and retaining such skilled personnel. If our Advisor or Sponsor loses or is unable to obtain the services of key personnel or does not establish or maintain appropriate strategic relationships, our ability to implement our investment strategies could be delayed or hindered, and the value of a stockholder's investment may decline.
Our ability to operate profitably depends upon the ability of our Advisor to efficiently manage our day-to-day operations.
We rely on our Advisor to manage our business and assets. Our Advisor makes all decisions with respect to our day-to-day operations. Thus, the success of our business depends in large part on the ability of our Advisor to manage our operations. Any adversity experienced by our Advisor or problems in our relationship with our Advisor could adversely impact the operation of our properties and, consequently, our cash flow and ability to make distributions to our stockholders at our current level.
We have incurred net losses in the past and may incur net losses in the future, andStrategic Transaction price per share. Furthermore, because we have an accumulated deficit anda large amount of outstanding shares of stock which are readily tradable, access to liquidity may continuetrigger significant pent-up demand to have an accumulated deficit in the future.
For the year ended December 31, 2018, we had a net loss of approximately $3.3 million. We incurred net income attributable to common stockholders of approximately $11.1 million and a net loss attributed to common stockholders of approximately $6.1 million for the fiscal years ended December 31, 2017 and 2016, respectively. Our accumulated deficit was approximately $16.0 million, $12.7 million and $23.8 million as of December 31, 2018, 2017 and 2016, respectively. We may incur net losses in the future, and may continue to have an accumulated deficit.
We are an “emerging growth company” under the federal securities laws and are subject to reduced public company reporting requirements.
In April 2012, President Obama signed into law the Jumpstart Our Business Startups Act, or the JOBS Act. We are an "emerging growth company," as defined in the JOBS Act, and are eligible to take advantage of certain exemptions from, or reduced disclosure obligations relating to, various reporting requirements that are normally applicable to public companies.
We may retain our status as an "emerging growth company" for a maximum of five years, or until the earliest of (1) the last day of the first fiscal year in which we have total annual gross revenue of $1.07 billion or more, (2) December 31 of the fiscal year that we become a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act (which would occur if the market valuesell shares of our common stock held by non-affiliates exceeds $700 million, measured as of the last business day of our most recently completed second fiscal quarter, and we have been publicly reporting for at least 12 months) or (3) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period. Under the JOBS Act, emerging growth companies are not required to (1) provide an auditor's attestation report on management's assessment of the effectiveness of internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act, (2) comply with new audit rules adopted by the Public Company Accounting Oversight Board ("PCAOB") after April 5, 2012 (unless the SEC determines otherwise), (3) provide certain disclosures relating to executive compensation generally required for larger public companies or (4) hold shareholder advisory votes on executive compensation. If we take advantage of any of these exemptions, we do not know if some investors will find our common stock less attractive as a result.
Additionally, the JOBS Act provides that an "emerging growth company" may take advantage of an extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies. This means an "emerging growth company" can delay adopting certain accounting standards until such standards are otherwise applicable to private companies. However, we have elected to "opt out" of such extended transition period, and will therefore comply with new or revised accounting standards on the applicable dates on which the adoption of such standards are required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of such extended transition period for compliance with new or revised accounting standards is irrevocable.
Increases in interest rates may adversely affect the demand for our shares.
One of the factors that influences the demand for purchase of our shares is the annual rate of distributions that we pay on our shares, as compared with interest rates. An increase in interest rates may lead potential purchasers of our shares to demand higher annual distribution rates, which could adversely affect our ability to sell our shares and raise proceeds in our offerings, which could result in higher leverage or a less diversified portfolio of real estate.
Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, financial loss,liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation and damage to our tenant and investor relationships. As our reliance on technology increases, so will the risks posed to our information systems, both internal and those we outsource. There is no guarantee that any processes, procedures and internal controls we have implemented or will implement will prevent cyber intrusions, which could have a negative impact on our financial results, operations, business relationships or confidential information.
We disclose funds from operations ("FFO") and adjusted funds from operations ("AFFO"), each a non-GAAP financial measure, in communications with investors, including documents filed with the SEC; however, FFO and AFFO are not equivalent to our net income or loss or cash flow from operations as determined under GAAP, and stockholders may consider GAAP measures to be more relevant to our operating performance.
We use and we disclose to investors, FFO, and AFFO, which are non-GAAP financial measures. FFO and AFFO are not equivalent to our net income or loss or cash flow from operations as determined in accordance with GAAP, and investors may consider GAAP measures to be more relevant in evaluating our operating performance and ability to pay distributions. FFO and AFFO and GAAP net income differ because FFO and AFFO exclude gains or losses fromstock. Significant sales of property and asset impairment write-downs, and add back depreciation and amortization and adjustments for unconsolidated partnerships and joint ventures. AFFO further adjusts for revenues in excess of cash received, amortization of in-place lease valuation, acquisition-related costs, unrealized gains or losses on derivative instruments, gain or loss from extinguishment of debt and performance participation allocation not paid in cash.
Because of these differences, FFO and AFFO may not be accurate indicators of our operating performance. In addition, FFO and AFFO are not indicative of cash flow available to fund cash needs and investors should not consider FFO and AFFO as alternatives to cash flows from operations or an indication of our liquidity, or indicative of funds available to fund our cash needs, including our ability to pay distributions to our stockholders.
Neither the SEC nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO and AFFO. Also, because not all companies calculate FFO and AFFO the same way, comparisons with other companies may not be meaningful.
Risks Related to Conflicts of Interest
Our Sponsor, Advisor, property manager and their officers and certain of their key personnel will face competing demands relating to their time, which may cause our operating results to suffer.
Our Sponsor, Advisor, property manager and their officers and certain of their key personnel and their respective affiliates serve as key personnel, advisors and managers to GCEAR. Certain of our officers are also officers to some or all of 12 other programs affiliated with our former sponsor, including Griffin-American Healthcare REIT III, Inc. ("GAHR III"), Griffin-American Healthcare REIT IV, Inc. ("GAHR IV") and Phillips Edison Grocery Center REIT III, Inc. ("PECO III"), each of which are publicly-registered, non-traded real estate investment trusts, 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. It is difficult to estimate the amount of time that our Sponsor, Advisor, property manager and their officers and certain of their key personnel and their respective affiliates will devote to our business. Because these persons have competing demands on their time and resources, they may have conflicts of interest in allocating their time between our business and these other activities. During times of intense activity with GCEAR, they may devote less time and fewer resources to our business than is necessary or appropriate. If this occurs, the returns on a stockholder's investment may suffer.
In addition, our dealer manager serves as dealer manager for GAHR IV and PECO III, and is the exclusive wholesale marketing agent for GIA Real Estate Fund and GIA Credit Fund, and may potentially enter into dealer manager agreements to serve as dealer manager for other issuers affiliated with our former sponsor. As a result, our dealer manager will have contractual duties to these issuers, which contractual duties may conflict with the duties owed to us. The duties owed to these issuers could result in actions or inactions that are detrimental to our business, which could harm the implementation of our
investment objectives. Conflicts with our business and interests are most likely to arise from involvement in activities related to allocation of management time and services between us and these issuers. If our dealer manager is unable to devote sufficient time and effort to the distribution of shares of our common stock, weor the perception that significant sales of such shares could occur, may not be able to raise significant additional proceeds for investment in real estate. Accordingly, competing demandscause any market price of our dealer manager's personnel may cause uscommon stock to be unable to successfully implement our investment objectives, or generate cash needed to make distributions to stockholders at our current level, and to maintain or increasedecline significantly.
In the event that we complete a Strategic Transaction, the value of our assets.
Our officers and two of our directors face conflicts of interest related to the positions they holdshares in connection with affiliated entities, which could hinder our ability to successfully implement our investment objectives and to generate returns to our stockholders.
Currently, certain of our executive officers and two of our directors are officers of our Sponsor, Advisor, our property manager, and other affiliated entities, and one of our executive officers and directors holds ownership interests in our former sponsor. As a result, these individuals owe fiduciary duties to these other entities and their owners, which fiduciary duties may conflict with the duties that they owe to our stockholders and us. Their loyalties to these other entities could result in actions or inactions that are detrimental to our business, which could harm the implementation of our investment objectives. Conflicts with our business and interests are most likely to arise from involvement in activities related to: (1) allocation of new investments and management time and services between us and the other entities; (2) our purchase of properties from, or sale of properties to, affiliated entities; (3) the timing and terms of the investment in or sale of an asset; (4) development of our properties by affiliates; (5) investments with affiliates of our Advisor; (6) compensation to our Advisor; and (7) our relationship with our property manager. If we do not successfully implement our investment objectives, wesuch Strategic Transaction may be unable to generate cash needed to make distributions tolower than our stockholders at our current level and to maintain published NAV, any given stockholder’s initial investment cost and/or increase the value of our assets.assets under the fair value basis of accounting for GAAP financial statement. For example, if our shares are listed on a national securities exchange, the price at which the shares are listed may be lower than the most recent published NAV per share of our common stock.
Furthermore, because our common stock is not listed on any national securities exchange, the ability of our stockholders to liquidate their investments is limited. As a result, there may be significant pent-up demand to sell shares of our common stock. A large volume of sales of shares of our common stock could decrease the prevailing market price of our common stock significantly. Regardless of whether a substantial number of sales of our shares of common stock actually occurs, the mere perception of the possibility of these sales could depress the market price of our common stock, and have a material adverse effect on us.
Risks Related to Our Advisor will face conflictsConflicts of Interest
Conflicts of interest relating to the purchase of properties, including conflicts with GCEAR, and such conflicts may not be resolved in our favor, whichexist or could adversely affect our investment opportunities.
We may be buying properties at the same time as GCEAR, a public non-traded REIT with a real estate portfolio of approximately $3.0 billion as of December 31, 2018. GCEAR may have access to significantly greater capital than us. Our Sponsor, Advisor and our property manager will have conflicts of interest in allocating potential properties, acquisition expenses, management time, services and other functions between GCEAR or future enterprises with which they may be or become involved. There is a risk that our Advisor will choose a property that provides lower returns to us than a property purchased by another program sponsored by our Sponsor. We cannot be sure that officers and key personnel acting on behalf of our Advisor and on behalf of these other programs will act in our best interests when deciding whether to allocate any particular property to us. Such conflicts that are not resolved in our favor could result in a reduced level of distributions we may be able to pay to stockholders and a reductionarise in the valuefuture between the interests of our stockholders' investments. If our Advisor or its affiliates breach their legal or other obligations or duties to us, or do not resolve conflicts of interest in the manner described in our prospectus, we may not meet our investment objectives, which could reduce our expected cash available for distribution to stockholders and the value of our stockholders' investments.
Our Advisor will face conflicts of interest relating to the fee and distribution structure under our advisory agreement and operating partnership agreement, which could result in actions that are not necessarily in the long-term best interests of our stockholders.
Pursuant to our advisory agreement and operating partnership agreement, our Advisor and its affiliates will be entitled to certain fees and distributions that are structured in a mannerholders of GRT OP Units, which may provide incentives to our Advisor to perform in a manner which may not be in our best interests and in the best interests ofimpede business decisions that could benefit our stockholders. The amount of such compensation has not been determined as a result of arm's-length negotiations, and such amounts may be greater than otherwise would be payable to independent third parties. However, because our Advisor does not maintain a significant equity interest in us and is entitled to receive substantial minimum compensation regardless of performance, our Advisor's interests will not be wholly aligned with those of our stockholders. In that regard, our Advisor could be motivated to recommend riskier or more speculative investments in order for us to generateAdditionally, the specified levels of performance or sales proceeds that would entitle our Advisor to fees or distributions.
Our Advisor will face conflicts of interest relating to joint ventures that we may form with affiliates of our Advisor, which conflicts could result in a disproportionate benefit to other joint venture partners at our expense.
We may enter into joint ventures with other programs sponsored by our Sponsor, including other REITs, for the acquisition, development or improvement of properties. Our Advisor may have conflicts of interest in determining which program sponsored by our Sponsor should enter into any particular joint venture agreement. The co-venturer may have economic or business interests or goals that are or may become inconsistent with our business interests or goals. In addition, our Advisor may face a conflict in structuring the terms of the relationship between our interests and the interest of the affiliated co-venturer and in managing the joint venture. Since our Advisor and its affiliates will control both the affiliated co-venturer and, to a certain extent, us, agreements and transactions between the co-venturers with respect to any such joint venture will not have the benefit of arm's-length negotiation of the type normally conducted between unrelated co-venturers, which may result in the coventurer receiving benefits greater than the benefits that we receive. In addition, we may assume liabilities related to the joint venture that exceed the percentage of our investment in the joint venture, and this could reduce the returns on our stockholders' investments.
There is no separate counsel for us and our affiliates, which could result in conflicts of interest.
Nelson Mullins Riley & Scarborough LLP ("Nelson Mullins") acts as legal counsel to us and also represents our Sponsor, Advisor, and some of their affiliates. There is a possibility in the future that the interests of the various parties may become adverse and, under the code of professional responsibility of the legal profession, Nelson Mullins may be precluded from representing any one or all of such parties. If any situation arises in which our interests appear to be in conflict with those of our Advisor or its affiliates, additional counsel may be retained by one or more of the parties to assure that their interests are adequately protected. Moreover, should a conflict of interest not be readily apparent, Nelson Mullins may inadvertently act in derogation of the interest of the parties which could affect our ability to meet our investment objectives.
Our Chief Executive Officer and Chairmanchairman of our Board is a controlling person of an entityentities that has purchased, and may continue to purchase, shares of our common stock and preferred units of limited partnership interest in our operating partnership,own GRT OP Units, and therefore may face conflicts with regard to his fiduciary duties to the Company and those entities.
Conflicts of interest exist or could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and the GRT OP or any partner thereof, on the other. Our directors and officers have duties to the Company under applicable Maryland law in connection with their management of the Company. At the same time, we, as the general partner of the GRT OP, have fiduciary duties, and obligations to the GRT OP and its limited partners under Delaware law and the partnership agreement of the GRT OP in connection with the management of the GRT OP. Our fiduciary duties and obligations as general partner to the GRT OP and its partners may come into conflict with the duties of our directors and officers to the Company. Additionally, the partnership agreement provides that entity relatedwe and our directors and officers will not be liable for monetary damages to the GRT OP, any partners or assignees for losses sustained or liabilities incurred as a result of errors in judgment or of any act or omission if we acted in good faith. Moreover, the partnership agreement provides that entity making investmentsthe GRT OP is required to indemnify us, as general partner, any of our officers, directors or employees and other persons as we may designate from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including reasonable legal fees and expenses), judgments, fines, settlements and other amounts incurred in connection with any claims, demands, actions, suits or redeemingproceedings, relating to the operations of the GRT OP. No reported decision of a Delaware appellate court has interpreted provisions similar to the provisions of the partnership agreement of the GRT OP that modify and reduce our common stockfiduciary duties or obligations as the preferred units.
Our Chief Executive Officergeneral partner or reduce or eliminate our liability for money damages to the GRT OP and its partners. Additionally, the chairman of our Board is a controlling person of an entityentities that has purchased sharesown GRT OP Units which may be exchanged for our common stock in the future. The chairman of our common stock. Our Chief Executive Officer owes fiduciary duties to that entity and its security holders that may conflict with the fiduciary duties he owes to us and our stockholders. Our Chief Executive OfficerBoard may also make decisions on behalf of that entity related to investments in and redemptions of our common stock, which may result in that entity making an investment in or disposition of our common stock which may be to the detriment of our stockholders.those entities.
Further, because such entity holds investments in other entities sponsored by our sponsor, the interests of such entity and its security holders may not be aligned with our interests or those of our stockholders.
In addition, our ability to redeem shares pursuant to our SRP is subject to certain limitations, including a limitation on the number of shares we may redeem during each quarter. If that entity should elect to redeem shares in a given quarter, or if any single stockholder who owns a significant number of shares of our common stock elects to redeem shares in a given quarter, the limitations on redemption contained in our SRP may be met or exceeded.
Risks Related to Our Pending Mergers
The exchange ratio is fixed and will not be adjusted in the event of any change in the relative values of the shares of our common stock or GCEAR common stock.
Upon consummation of the Company Merger, each issued and outstanding share of GCEAR common stock (or fraction thereof) will be converted into the right to receive 1.04807 shares of our newly created Class E common stock, and each issued and outstanding share of GCEAR preferred stock will be converted into the right to receive one share of our newly created Series A Preferred Shares. This exchange ratio is fixed pursuant to the Merger Agreement and will not be adjusted to reflect events, circumstances or other developments of which we or GCEAR become aware or which occur after the date of the Merger Agreement, or any changes in the relative values of us and GCEAR including, but not limited to:
changes in the respective businesses, operations, assets, liabilities or prospects of us and GCEAR;
changes in general market and economic conditions and other factors generally affecting the relative values of our and GCEAR’s assets;
federal, state and local legislation, governmental regulation and legal developments in the businesses in which we and GCEAR operate; or
other factors beyond the control of us and GCEAR, including those described or referred to elsewhere in this “Risk Factors” section.
Any such changes may materially alter or affect the relative values of shares of our common stock or GCEAR common stock. Therefore, if, between the date of the Merger Agreement and the consummation of the Mergers, the value of shares of GCEAR common stock decreases or the value of shares of our common stock increases, the Merger Consideration may be more than the fair value of GCEAR stockholders’ shares of GCEAR common stock.
Completion of the Mergers is subject to a number of conditions, and if these conditions are not satisfied or waived, the Mergers will not be completed, which could result in the requirement that we pay certain termination fees or, in certain circumstances, that we pay expenses to GCEAR.
The Merger Agreement is subject to many conditions which must be satisfied or waived in order to complete the Mergers. The mutual conditions of the parties include, among others: (i) the approval of the Company Merger by the holders of a majority of the outstanding shares of GCEAR common stock; (ii) the approval of the Company Merger by our stockholders; (iii) the absence of any law, order or other legal restraint or prohibition that would prohibit, make illegal, enjoin, or otherwise restrict, or prevent the Mergers or any of the transactions contemplated by the Merger Agreement; and (iv) the effectiveness of the registration statement on Form S-4 filed by us for purposes of registering our Class E common stock to be issued in connection with the Company Merger. In addition, each party’s obligation to consummate the Company Merger is subject to certain other conditions, including, among others: (w) the accuracy of the other party’s representations and warranties (subject to customary materiality qualifiers and other customary exceptions); (x) the other party’s compliance with its covenants and agreements contained in the Merger Agreement; (y) the absence of any event, change, or occurrence arising during the period from the date of the Merger Agreement until the effective time of the Company Merger that, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on the other party; and (z) the receipt of an opinion of counsel of each party to the effect that such party has been organized and has operated in conformity with the requirements for qualification and taxation as a REIT and that the Company Merger will qualify as a tax-free reorganization.
There can be no assurance that the conditions to closing of the Mergers will be satisfied or waived or that the Mergers will be consummated. Failure to consummate the Mergers may adversely affect our results of operations and business prospects for the following reasons, among others: (i) we will incur certain transaction costs, regardless of whether the proposed Mergers close, which could adversely affect our financial condition, results of operations and ability to make distributions to our stockholders; and (ii) the proposed Mergers, whether or not they close, will divert the attention of certain management and other key employees of us and our affiliates from ongoing business activities, including the pursuit of other opportunities that could be beneficial to us, In addition, we or GCEAR may terminate the Merger Agreement under certain circumstances, including, among other reasons, if the Mergers are not completed by August 31, 2019 and if the Merger Agreement is terminated under certain circumstances specified in the Merger Agreement, we may be required to pay the GCEAR a termination fee of $52.2 million. The Merger Agreement also provides that we may be required to reimburse GCEAR’s transaction expenses, not to exceed $5.0 million, if the Merger Agreement is terminated under certain circumstances.
The pendency of the Mergers could adversely affect our business and operations.
Prior to the effective date of the Mergers, some of our tenants, prospective tenants or vendors may delay or defer decisions, which could negatively affect our revenues, earnings, cash flows and expenses, regardless of whether the Mergers are completed. Similarly, our current and prospective employees of our affiliates may experience uncertainty about their future roles with the Combined Company following the Mergers, which may materially adversely affect the ability of such entities to attract and retain key personnel during the pendency of the Mergers. In addition, due to operating restrictions in the Merger Agreement, subject to certain exclusions, we may be unable during the pendency of the Mergers to pursue strategic transactions, undertake significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions, even if such actions would prove beneficial.
The ownership percentage of our common stockholders will be diluted by the Company Merger.
The Company Merger will dilute the ownership percentage of our common stockholders. Following the issuance of shares of our Class E common stock to GCEAR stockholders pursuant to the Merger Agreement, our common stockholders are expected to hold approximately 31% of our common stock issued and outstanding immediately after the effective time of the Company Merger, based on the number of shares of our common stock, limited partnership units in our Operating Partnership,
and shares of GCEAR common stock currently outstanding and various assumptions regarding share issuances by us prior to the effective time of the Company Merger. Consequently, our common stockholders, as a general matter, may have less influence over our management and policies after the effective date of the Company Merger than they currently exercise over our management and policies.
The Merger Agreement contains provisions that could discourage a potential competing acquisition proposal of us or could result in any competing proposal being at a lower price than it might otherwise be.
The Merger Agreement contains provisions that, subject to limited exceptions necessary to comply with the duties of our directors, restrict the ability of us to solicit, initiate, knowingly encourage, or knowingly facilitate competing third-party proposals to acquire all, or a significant part, of us. In addition, each of us and GCEAR generally has an opportunity to offer to modify the terms of the proposed Mergers in response to any competing acquisition proposals that may be made before the GCEAR board of directors or our Board, as the case may be, may withdraw or qualify its recommendation. Upon termination of the Merger Agreement in certain circumstances, we may be required to pay a termination fee to GCEAR, and in certain other circumstances, we may be required to pay GCEAR’s transaction expenses.
These provisions could discourage a potential competing acquirer that might have an interest in acquiring all, or a significant part, of either GCEAR or us from considering or proposing an acquisition, even if it were prepared to pay consideration with a higher per share cash or market value than the market value imputed to the exchange ratio proposed to be received or realized in the Mergers, or might result in a potential competing acquirer proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable in certain circumstances.
The Merger Agreement includes restrictions on our ability to make excess distributions to our stockholders, even if we would otherwise have net income and net cash available to make such distributions.
The Merger Agreement generally prohibits us from making distributions to our stockholders in excess of $0.55 per share of our common stock (determined on an annual basis), unless we obtain the prior written consent of GCEAR. While we and GCEAR have generally agreed to use our reasonable best efforts to close the Mergers in an expeditious manner, factors could cause the delay of the closing, which include obtaining the approval of the Company Merger from the common stockholders of us and GCEAR. Therefore, even if we have available net income or net cash to make distributions to our stockholders and satisfy any other conditions to make such distributions, the terms of the Merger Agreement could prohibit such action.
The borrowings we incur in connection with the Mergers may limit our financial and operating flexibility and we may incur additional borrowings, which could increase the risks associated with our borrowings.
In connection with the Mergers, we expect to incur approximately $715.0 million of new borrowings in order to extinguish GCEAR’s credit facility. In addition, we may determine to incur additional borrowings in the future pursuant to our unsecured credit facility with KeyBank, National Association (“KeyBank”). Following consummation of the Mergers, we expect to have approximately $481.0 million of borrowing availability under such unsecured credit facility. Our borrowings could have material adverse consequences for our business and may:
require us to dedicate a large portion of our cash flow to pay principal and interest on our borrowings, which will reduce the availability of cash flow to fund working capital, capital expenditures, and other business activities;
increase our vulnerability to general adverse economic and industry conditions;
subject us to maintaining various debt, operating income, net worth, cash flow, and other financial covenant ratios;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
restrict our operating policies and ability to make strategic acquisitions, dispositions, or exploiting business opportunities;
place us at a competitive disadvantage compared to our competitors that have less borrowings;
limit our ability to borrow more funds (even when necessary to maintain adequate liquidity), dispose of assets, or make distributions to stockholders; or
increase our costs of capital.
Under the agreements governing our outstanding borrowings, we may incur additional borrowings. If new borrowings are added to our existing borrowing levels, the related risks that we now face would increase. In addition, at the time that any of our outstanding borrowings or new borrowings mature, we may not be able to refinance such borrowings or have the funds to pay them off.
Furthermore, the amounts borrowed pursuant to our unsecured credit facility bear interest at variable rates. If market interest rates increase, the interest rate on our variable rate borrowings will increase and will create higher debt service requirements, which would adversely affect our cash flow and could adversely impact our results of operations. While we may enter into agreements limiting our exposure to higher debt service requirements, any such agreements may not offer complete protection from this risk.
The Company Merger is subject to approval by common stockholders of GCEAR and us.
In order for the Company Merger to be completed, GCEAR stockholders must approve the Company Merger, which requires the affirmative vote of a majority of all the votes entitled to be cast on such proposal at the GCEAR annual meeting. Pursuant to the Merger Agreement, as a condition to completing the Company Merger, our stockholders must also approve the Company Merger, which requires the affirmative vote of a majority of all the votes cast on such proposal at our annual meeting. If these required votes are not obtained, the Company Merger may not be consummated.
The Merger Agreement contains provisions that grant the GCEAR board of directors or our Board the ability to change its recommendation regarding the Mergers in certain circumstances based on the exercise of the GCEAR or our directors’ duties.
GCEAR may change its recommendation regarding the Mergers, subject to the terms of the Merger Agreement, in response to a material change in circumstances or development that was not known to the GCEAR board of directors prior to the execution of the Merger Agreement (or if known, the consequences of which were not known or reasonably foreseeable), which change in circumstances or development, or any material consequence thereof, becomes known to the GCEAR board of directors prior to the effective time of the Mergers if the GCEAR board of directors determines in good faith, after consultation with its outside legal counsel, that failure to change its recommendation with respect to the Mergers would be inconsistent with the GCEAR directors’ duties under applicable law.
In addition, we may change our recommendation regarding the Mergers, subject to the terms of the Merger Agreement, in response to a material change in circumstances or development that was not known to our Board prior to the execution of the Merger Agreement (or if known, the consequences of which were not known or reasonably foreseeable), which change in circumstances or development, or any material consequence thereof, becomes known to our Board prior to the effective time of the Mergers if our Board determines in good faith, after consultation with its outside legal counsel, that failure to change its recommendation with respect to the Mergers would be inconsistent with our directors’ duties under applicable law.
There may be unexpected delays in the consummation of the Mergers.
The Mergers are expected to close during the first half of 2019 assuming that all of the conditions in the Merger Agreement are satisfied or waived. The Merger Agreement provides that either we or GCEAR may terminate the Merger Agreement if the Mergers have not occurred by August 31, 2019. Certain events may delay the consummation of the Mergers. Some of the events that could delay the consummation of the Mergers include difficulties in obtaining the approval of our and GCEAR's stockholders, or satisfying the other closing conditions to which the Mergers are subject.
We may incur adverse tax consequences if GCEAR has failed or fails to qualify as a REIT for U.S. federal income tax purposes.
If GCEAR has failed or fails to qualify as a REIT for U.S. federal income tax purposes and the Mergers are completed, we may inherit significant tax liabilities and could lose our REIT status should disqualifying activities continue after the Mergers.
Risks Related to the Combined Company Following Consummation of the Proposed Mergers
The future results of the Combined Company will suffer if the Combined Company does not effectively manage its expanded operations following the Mergers.
Following the Mergers, the Combined Company expects to continue to expand its operations through additional acquisitions and other strategic transactions, some of which may involve complex challenges. The future success of the Combined Company will depend, in part, upon the ability of the Combined Company to manage its expansion opportunities, which may pose substantial challenges for the Combined Company to integrate new operations into its existing business in an efficient and timely manner, and upon its ability to successfully monitor its operations, costs, regulatory compliance and service quality, and to maintain other necessary internal controls. There is no assurance that the Combined Company’s expansion or acquisition opportunities will be successful, or that the Combined Company will realize its expected operating efficiencies, cost savings, revenue enhancements, or other benefits.
The Combined Company will be newly self-managed.
The Self Administration Transaction (as described in Item 1 above) was consummated on December 14, 2018, and assuming the Mergers are consummated, the Combined Company will be a self-managed REIT. The Combined Company will no longer bear the costs of the various fees and expense reimbursements previously paid to the former external advisors of GCEAR and us and their affiliates; however, the Combined Company’s expenses will include the compensation and benefits of the Combined Company’s officers, employees and consultants, as well as overhead previously paid by the former external advisors of GCEAR and us and their affiliates. The Combined Company’s employees will provide services historically provided by the external advisors and their affiliates. The Combined Company will be subject to potential liabilities that are commonly faced by employers, such as workers’ disability and compensation claims, potential labor disputes, and other employee-related liabilities and grievances, and the Combined Company will bear the cost of the establishment and maintenance of any employee compensation plans. In addition, the Combined Company has not previously operated as a self-managed REIT and may encounter unforeseen costs, expenses, and difficulties associated with providing these services on a self-advised basis. If the Combined Company incurs unexpected expenses as a result of its self-management, its results of operations could be lower than they otherwise would have been.
The Combined Company may need to incur additional indebtedness in the future.
In connection with executing the Combined Company’s business strategies following the Mergers, the Combined Company expects to evaluate the possibility of acquiring additional properties and making strategic investments, and the Combined Company may elect to finance these endeavors by incurring additional indebtedness. The amount of such indebtedness could have material adverse consequences for the Combined Company, including: (i) hindering the Combined Company’s ability to adjust to changing market, industry or economic conditions; (ii) limiting the Combined Company’s ability to access the capital markets to refinance maturing debt or to fund acquisitions or emerging businesses; (iii) limiting the amount of free cash flow available for future operations, acquisitions, dividends, stock repurchases or other uses; (iv) making the Combined Company more vulnerable to economic or industry downturns, including interest rate increases; and (v) placing the Combined Company at a competitive disadvantage compared to less leveraged competitors.
Following the consummation of the Mergers, the Combined Company will assume certain potential liabilities relating to GCEAR.
Following the consummation of the Mergers, the Combined Company will have assumed certain potential liabilities relating to GCEAR. These liabilities could have a material adverse effect on the Combined Company’s business to the extent the Combined Company has not identified such liabilities or has underestimated the amount of such liabilities.
If and when the Combined Company has a Strategic Transaction, the market value ascribed to the shares of common stock of the Combined Company upon the Strategic Transaction may be significantly lower than the estimated value per share of us and GCEAR considered by our respective boards in approving and recommending the Mergers.
In approving and recommending the Mergers, our Board, our special committee, the GCEAR board of directors, and the GCEAR special committee considered the most recent estimated value per share of us and GCEAR as determined by our respective boards with the assistance of our respective third-party valuation experts. In the event that the Combined Company completes a Strategic Transaction after consummation of the Mergers, such as a listing of its shares on a national securities exchange, a merger in which stockholders of the Combined Company receive securities that are listed on a national securities exchange, or a sale of the Combined Company for cash, the market value of the shares of the Combined Company upon consummation of such Strategic Transaction may be significantly lower than the current estimated values considered by our Board, our special committee, the GCEAR board of directors and the GCEAR special committee and the estimated value per share of us that may be reflected on the account statements of stockholders of the Combined Company after consummation of the Mergers. For example, if the shares of the Combined Company are listed on a national securities exchange at some point
after the consummation of the Mergers, the trading price of the shares may be significantly lower than our estimated value per share of $9.62 (as of December 31, 2018). There can be no assurance, however, that any such Strategic Transaction will occur.
The estimated NAV of the Combined Company’s common stock may decline as a result of the Company Merger.
The estimated NAV of the Combined Company’s common stock may decline as a result of the Mergers if the Combined Company does not achieve the perceived benefits of the Mergers as rapidly or to the extent anticipated by our management or if the effect of the Mergers on our financial results is not consistent with the expectations of our management. In addition, if the Company Merger is consummated, our stockholders will own interests in a company operating an expanded business with a different mix of properties, risks and liabilities. Current stockholders may not wish to continue to invest in us if the Company Merger is consummated or for other reasons and may wish to submit some or all of their shares of our common stock for redemption. In addition, GCEAR stockholders are expected to own approximately 69% of the outstanding shares of our common stock, on a pro forma basis, following the Company Merger. They may determine not to continue to hold their shares of our common stock and submit their shares for redemption following the Company Merger, which may result in additional pressure on the value of our common stock.
Risks Related to Our Corporate Structure
The limit on
Our charter and bylaws, the numberpartnership agreement of sharesour operating partnership and Maryland law contain provisions that may delay, defer or prevent a person may own may discourage a takeoverchange of control transaction that could otherwise result inmight involve a premium price for our shares or that our stockholders otherwise believe to be in their best interest.
Our charter contains certain ownership limits with respect to our stockholders.shares.
In order for us
Generally, to continue to qualifymaintain our qualification as a REIT, no more than 50% in value of our outstanding stockshares may be beneficially owned, directly or indirectly, by five or fewer individuals (including certain types of entities) at any time during the last half of eachour taxable year. To ensure that we do not failyear (except with respect to qualifythe first taxable year for which an election to be taxed as a REIT under this test,is made). The Code defines “individuals” for purposes of the requirement described in the preceding sentence to include some types of entities. Our charter authorizes our Board to take such
actions as it determines are necessary or appropriate to preserve our qualification as a REIT. Our charter restrictsprohibits the ownership by one person or entity to noany Person (as defined in our charter) of more than 9.8% in(in value of our outstanding stock or 9.8% in value or number, whichever is more restrictive, as determined in good faith by our Board) of the aggregate of our common stock or more than 9.8% of the value (as determined in good faith by our Board) of the aggregate of our outstanding common stock. Shares (as defined in our charter), unless waived by our Board. For these purposes, our charter includes a “group” as that term is used for purposes of Section 13(d)(3) of the Exchange Act in the definition of “Person.” Our Board may exempt a person, prospectively or retroactively, from these ownership limits if certain conditions are satisfied.
This restrictionownership limit and the other restrictions on ownership and transfer of our shares contained in our charter may:
•discourage a tender offer or other transactions or a change in management or of control that might involve a premium price for our shares or that our stockholders might otherwise believe to be in their best interest; or
•result in the transfer of shares acquired in excess of the restrictions to a trust for the benefit of a charitable beneficiary and, as a result, the forfeiture by the acquirer of the benefits of owning the additional shares.
Certain provisions of Maryland law could inhibit changes in control, which may discourage third parties from conducting a tender offer or seeking other change of control transactions that might involve a premium price for our shares or that our stockholders might otherwise believe to be in their best interest.
Certain provisions of the MGCL may have the effect of delaying, deferringinhibiting a third party from making a proposal to acquire us or preventingof impeding a change inof control under circumstances that otherwise could provide the holders of us, including an extraordinary transaction (consisting, in this instance, of actions such as a merger, tender offer or sale of all or substantially all of our assets) that might providecommon stock with the opportunity to realize a premium price for holders of our common stock.
Our charter permits our Board to issue stock with terms that may subordinate the rights of common stockholders or discourage a third party from acquiring us in a manner that might result in a premium price to our stockholders.
Our charter permits our Board to issue up to 1,000,000,000 shares of capital stock. In addition, our Board, without any action by our stockholders, may amend our charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series of stock that we have authority to issue. Our Board may classify or reclassify any unissued common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms or conditions of redemption of any such stock. Thus, our Board could authorize the issuance of preferred stock with terms and conditions that could have a priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Preferred stock could also have the effect of delaying, deferring or preventing a change in control of our company, including an extraordinary transaction (consisting, in this instance, of actions such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our common stock.
If the Mergers are consummated, we will issue Series A Preferred Shares, which will rank junior to our existing and future indebtedness and will rank junior to any class or series of stock we may issue in the future with terms specifically providing that such stock ranks senior to our Series A Preferred Shares with respect to the payment of dividends and the distribution of assets in the event of our involuntary liquidation, dissolution or winding up, and the interests of the holders of our Series A Preferred Shares could be diluted by the issuance of additional shares of preferred stock and by other transactions.
If the Mergers are consummated, we will issue Series A Preferred Shares, and the payment of amounts due on our Series A Preferred Shares will be junior in payment preference to all of our existing and future debt and any securities we may issue in the future that have rights or preferences senior to those of our Series A Preferred Shares. We may issue additional shares of preferred stock in the future which, upon the prior affirmative vote or consent of the holders of at least two-thirds of the Series A Preferred Shares outstanding at the time, are on a parity with or senior to the Series A Preferred Shares with respect to the payment of dividends and the distribution of assets upon involuntary liquidation, dissolution or winding up. Additional issuance of preferred securities or other transactions could reduce the pro-rata assets available for distribution upon liquidation and the holders of our Series A Preferred Shares may not receive their full liquidation preference if there are not sufficient assets. In addition, issuance of additional preferred securities or other transactions could dilute voting rights of the holders of the Series A Preferred Shares with respect to certain matters that require votes or the consent of such holders.
If the Mergers are consummated, we may not be able to pay dividends or other distributions on our Series A Preferred Shares.
If the Mergers are consummated, there can be no guarantee that we will have sufficient cash to pay dividends on the Series A Preferred Shares. Payment of our dividends depends upon our earnings, our financial condition, maintenance of our REIT qualification and other factors as our Board may deem relevant from time to time. We cannot assure the holders of our Series A Preferred Shares that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us in an amount sufficient to enable us to make distributions on our Series A Preferred Shares and on our common stock, to pay our indebtedness or to fund our other liquidity needs.including:
If the Mergers are consummated, our Series A Preferred Shares will be• “business combination” provisions that, subject to interest rate risk.
If the Mergers are consummated, dividends payable on the Series A Preferred Shares will be subject to interest rate risk. Because dividends on our Series A Preferred Shares will be predetermined, our costs may increase upon maturity or redemption of the securities. This risk might requirelimitations, prohibit certain business combinations between us to sell investments at a time when we would otherwise not do so, which could adversely affect our ability to generate cash flow.
We are not afforded the protection of Maryland law relating to business combinations.
Under Maryland law, "business combinations" between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
“interested shareholder” (defined generally as any person who beneficially owns directly or indirectly, 10% or more of the voting power of the corporation's outstanding voting stock;our shares or
an affiliate thereof or an affiliate or associate of the corporationours who at any time within the two-year period prior to the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of our then-outstanding voting shares at any time within the then outstanding stock oftwo-year period immediately prior to the corporation.date in question) for five years after the most recent date on which the shareholder becomes an interested shareholder, and thereafter impose fair price and/or supermajority shareholder voting requirements on these combinations; and
These prohibitions are intended to prevent
• “control share” provisions that provide that a change of control by interested stockholders who do not have the supportshareholder’s “control shares” of our Board. SinceCompany (defined as shares (other than shares acquired directly from us) that, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) have no voting rights with respect to their control shares, except to the extent approved by our charter contains limitationsstockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on ownership of 9.8% or more of our common stock,the matter, excluding all interested shares.
As permitted by the MGCL, we optedhave elected to opt out of the business combinations statute incombination and control share provisions of the MGCL. However, we cannot assure you that our charter. Therefore, weBoard will not opt to be affordedsubject to such provisions of the protectionsMGCL in the future, including opting to be subject to such provisions retroactively.
Further, Maryland statutory law provides that an act of thisa director relating to or affecting an acquisition or a potential acquisition of control of a corporation may not be subject to a higher duty or greater scrutiny than is applied to any other act of a director. Hence, directors of a Maryland corporation by statute and, accordingly, there is no guarantee that the ownership limitationsare not required to act in our charter would providecertain takeover situations under the same measurestandards of protectioncare, and are not subject to the same standards of review, as the business combinations statuteapply in Delaware and prevent an undesired change of control by an interested stockholder.other corporate jurisdictions.
Our stockholders'stockholders’ investment return maywould be reduced if we arewere required to register as an investment company under the 1940 Act. IfAct and we lose our exemption from registration under the 1940 Act, we willwould not be able to continue our business unless and until we registerregistered under the 1940 Act.
We doconduct our operations so that we and our subsidiaries are not intendrequired to register as an investment company under the 1940 Act. As of December 31, 2018, we owned 35 buildings located on 27 properties, and our intended investments in real estate will represent the substantial majority of our total asset mix, which would not subject us to the 1940 Act. In order to maintain an exemption from regulation under the 1940 Act, we must engage primarily in the business of buying real estate.
To maintain compliance with our 1940 Act exemption, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition,If we or our subsidiaries fail to maintain an exception or exemption from the 1940 Act, we may be required to, acquire additional income-among other things, substantially change the manner in which we conduct our operations
to avoid being required to register as an investment company under the 1940 Act or loss-generating assets that we might not otherwise acquire or forego opportunities to acquire interests in companies that we would otherwise want to acquire.alternatively, register as an investment company under the 1940 Act. If we arewere required to register as an investment company but failfailed to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of usthe Company and liquidate our business.
Our stockholders are bound by the majority vote on matters on which our stockholders are entitled to vote and, therefore, a stockholder's vote on a particular matter may be superseded by the vote of other stockholders.
Our stockholders may vote on certain matters at any annual or special meeting of stockholders, includingstockholders’ interest in the election of directors. However, our stockholdersCompany will be bound bydiluted if we issue additional shares or if GRT OP issues additional units.
Our stockholders’ interest in the majority vote on matters requiring approval of a majority of the stockholders evenCompany will be diluted if they do not vote with the majority on any such matter.
Ifwe issue additional shares. Our stockholders do not agree withhave preemptive rights to any shares issued by us in the decisions of our Board, they only have limited control over changes in our policies and operations and may not be ablefuture. Subject to change such policies and operations, except as provided for in our charter and under applicable law.
Our Board determines our major policies, including our policies regarding investments, operations, capitalization, financing, growth, REIT qualification and distributions. Our Board may amend or revise these and other policies without a vote of our stockholders. Under the MGCL and our charter, our stockholders have a right to vote only on the following:
•the election or removal of directors;
amendment of our charter, except thatMaryland law, our Board may amend our charter without stockholder approval to increase or decrease the aggregate number of ourauthorized shares toof stock, increase or decrease the number of our shares of any class or series of stock designated, or reclassify any unissued shares without obtaining stockholder approval. Further, our outstanding and any later-issued Series A Preferred Shares may be converted into our common stock under certain circumstances. Existing stockholders will experience dilution of their equity investment or voting power in the Company if we issue additional shares in the future, including issuing shares of restricted common stock or restricted stock units (“RSUs”) to our independent directors and executive officers, issuing shares in connection with an exchange of limited partnership interests of the GRT OP, or converting shares of the outstanding tranche of our Series A Preferred Shares into shares of our common stock and an additional tranche of Series A Preferred Shares that we have the authorityare obligated to issue to changeunder certain circumstances and/or issuing shares under our name, to change the name or other designation or the par value of any class or series of our shares and the aggregate par value of our shares, or to effect certain reverse stock splits, provided however, that any such amendment does not adversely affect the rights, preferences and privileges of the stockholders;
•our liquidation or dissolution; and
any merger, consolidation, conversion, statutory share exchange or sale or other disposition of substantiallyDRP. Furthermore, because we own all of our assets.
All other matters are subjectassets and liabilities through the GRT OP, directly or indirectly through subsidiaries, to the discretion ofextent we issue additional GRT OP unit, our Board. Therefore,stockholders' overall interest in our stockholders are limited in their ability to change our policies and operations.company will be diluted.
Our rights and the rights of our stockholders to recover claims against our officers and directors are limited, which could reduce our stockholders’ and our recovery against them if they cause us to incur losses.
Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the corporation’s best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter generally requires us to indemnify our directors and officers employees and agents for actions taken by them in good faith and without negligence or misconduct or, into the care of independent directors, gross negligence or willful misconduct.maximum extent permitted under Maryland law. Additionally, our charter limits the liability of our directors and officers for monetary damages subject to certain restrictions set forththe maximum extent permitted under Maryland lawlaw. The former directors and officers of EA-1 also have indemnification agreements that we previously assumed for claims relating to such person’s status as a former director or inofficer of EA-1. Further, our charter.charter permits the Company, with the approval of our Board, to provide such indemnification and advancement of expenses to any of our employees or agents. As a result, we and our stockholders may have more limited rights against our directors, officers, employees and agents, than might
otherwise exist under common law, which could reduce our stockholders’ and our recovery against them. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and agents in some cases which would decrease the cash otherwise available for distribution to our stockholders.
Our Board may change anyHolders of our investment objectives,Series A Preferred Shares have a right to require us to redeem the Series A Preferred Shares for cash in the event that we have not listed our securities on a national exchange by a certain date. This redemption obligation requires us to allocate cash to such redemption on limited notice when there may be a shortage of cash or when we may prefer to allocate cash to other uses consistent with our business plans. Such holders also have a right to convert their Series A Preferred Shares into common shares as soon as August 2023 and such conversion would dilute the interests of our other stockholders. Furthermore, we may be obligated to issue a second tranche of such securities, increasing the holder’s interest in our Company and further diluting the interests of other stockholders. Any of the foregoing risks could have a material adverse effect on us.
We have issued 5,000,000 Series A Preferred Shares that rank senior to all other shares of our stock, including our focuscommon stock, and grant the holder certain rights that are superior or additional to the rights of common stockholders, including with respect to the payment of distributions, liquidation preference, redemption rights, and conversion rights. Distributions on single tenant business essential properties.
Our Board may changethe Series A Preferred Shares are cumulative and are declared and payable quarterly in arrears. We are obligated to pay the holder of the Series A Preferred Shares its current distributions and any accumulated and unpaid distributions prior to any distributions being paid to our common stockholders and, therefore, any cash available for distribution is used first to pay distributions to the holder of the Series A Preferred Shares. The Series A Preferred Shares also have a liquidation preference in the event of our investment objectives, including our focus on single tenant business essential properties. If stockholders do not agree with a decisionvoluntary or involuntary liquidation, dissolution, or winding up of our Boardaffairs (a “liquidation”) which could negatively affect any payments to changethe common stockholders in the event of a liquidation. Under the terms of the original purchase agreement for the Series A Preferred Shares, the holder of the Series A Preferred Shares agreed to purchase an additional 5,000,000 Series A Preferred Shares at a later date for an additional purchase price of $125.0 million, subject to satisfaction of certain conditions. Accordingly, under certain circumstances, we may be obligated to issue a second tranche of the Series A Preferred Shares.
The holder of the Series A Preferred Shares has a right to require us to redeem the Series A Preferred Shares (including any second tranche) for cash in the event that there has not been a listing by August 2023. This redemption obligation would require us to allocate cash to such redemption on limited notice when there may be a shortage of our investment objectives, they only have limited control over such changes. Additionally, we cannot assure stockholders thatcash or when we would be successful in attainingprefer to allocate cash to other uses consistent with our business plans. In addition, the holder of the Series A Preferred Shares has the right to convert any or all of these investment objectives, which may adversely impact our financial performance and ability to make distributions at our current level to stockholders.
Our stockholders' interests in us will be diluted as we issue additional shares.
Our stockholders do not have preemptive rights to any shares issuedthe Series A Preferred Shares held by us in the future. Subject to any limitations set forth under Maryland law, our Board may increase the number of authorized shares of stock (currently 1,000,000,000 shares), increase or decrease the number of shares of any class or series of stock designated, or reclassify any unissued shares without the necessity of obtaining stockholder approval. All of such shares may be issued in the discretion of our Board. Therefore, as we (1) sell shares in our offerings or sell additional shares in the future, including those issued pursuant to our DRP, (2) sell securities that are convertibleholder into shares of our common stock (3) issue sharesbeginning as soon as August 2023. Such conversion of the Series A Preferred Shares, whether the current tranche or both the current and second tranche, would be dilutive to our common stock in a private offering of securities to institutional investors, (4) issue shares of restricted common stock or stock options to our independent directors or
(5) issue shares of our common stock in connection with an exchange of limited partnership interests of our Operating Partnership, existing stockholders, and, investors purchasing shares in our public offering will experience dilution of their equity investment in us. Because the limited partnership interests of our operating partnership may, in the discretionevent of our Board, be exchanged for shares of our common stock, any merger, exchange or conversion between our operating partnership and another entity ultimately could result in the issuance of a substantial numbersecond tranche and the conversion of sharesboth tranches, would result in the holder of the Series A Preferred Shares owning approximately 8.0% of our common stock, thereby dilutingstock.
If we fail to pay distributions on the percentage ownership interestSeries A Preferred Shares for six quarters (whether or not consecutive), the holder will be entitled to elect two additional directors of other stockholders. Our Advisor maythe Company (the Preferred Shares Directors”). The election will take place at the next annual meeting of stockholders, or at a special meeting of the holder of Series A Preferred Shares called for that purpose, and such right to elect to receivePreferred Stock Directors shall continue until all distributions accumulated on the performanceSeries A Preferred Shares have been paid in full for all past distribution in units of our operating partnership and may also elect to receive reimbursements of expenses in such units or in our Class I shares, which would dilute the percentage ownership interest of our other stockholders. Because of these and other reasons described in this "Risk Factors" section, stockholders should not expect to be able to own a significant percentage of our shares.
Payment of substantial fees and expenses to our Advisor and its affiliates will reduce cash available for investment and distribution.
Our Advisor and its affiliates will perform services for us in connection with the offer and sale of our shares, the selection and acquisition of our investments,periods and the managementaccumulated distribution for the then current distribution period shall have been authorized, declared and paid in full or authorized, declared and a sum sufficient for the payment thereof irrevocably set apart for payment in trust.
If any of our properties. They will be paid substantial fees and expense reimbursements for these services, which will reduce the amount of cash available for investment in properties or distributionforegoing risks were to stockholders.materialize, it could have a material adverse effect on us.
We are uncertain of our sources of debt or equity for funding our future capital needs. If we cannot obtain funding on acceptable terms, our ability to make necessary capital improvements to our properties may be impaired or delayed.
The gross proceeds of our public offering will be used primarily to purchase real estate investments and to pay various fees and expenses. In addition, to
To continue to qualify as a REIT, we generally must distribute to our stockholders at least 90% of our taxable income each year, excluding capital gains. Because of this distribution requirement, it is not likely that we will be able to fund a significant portion of our future capital needs from retained earnings. We have not identified all of our sources of debt or equity for funding, and such sources of funding may not be available to us on favorable terms or at all. If we do not have access to sufficient funding in the future, we may not be able to make necessary capital improvements to our properties, pay other expenses or expand our business.
Our bylaws designate the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for certain actions and proceedings that may be initiated by our stockholders.
Our bylaws provide that, unless we consent in writing to the selection of a different forum, the Circuit Court for Baltimore City, Maryland, or, if that court does not have jurisdiction, the U.S. District Court for the District of Maryland, Baltimore Division, will be the sole and exclusive forum for: (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach by any director, officer or other employee of the Company of a duty owed to the Company or our stockholders or of any standard of conduct set forth in the Maryland General Corporation Law (“MGCL”), (iii) any action asserting a claim arising pursuant to any provision of the MGCL including, but not limited to, the meaning, interpretation, effect, validity, performance or enforcement of our charter or our bylaws, or (iv) any action asserting a claim governed by the internal affairs doctrine. This exclusive forum provision does not apply to claims under the Securities Act, the
Exchange Act, or any other claim for which the federal courts have exclusive jurisdiction Any person or entity purchasing or otherwise acquiring or holding any interest in shares of our common stock will be deemed to have notice of and to have consented to these provisions of our bylaws, as they may be amended from time to time. Our Board, without stockholder approval, adopted this provision of our bylaws so that we may respond to such litigation more efficiently and reduce the costs associated with our responses to such litigation, particularly litigation that might otherwise be brought in multiple forums. This exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that the stockholder believes is favorable for disputes with the Company or our directors, officers, agents or employees, if any, and may discourage lawsuits against us and our directors, officers, agents or employees, if any. Alternatively, if a court were to find this provision of our bylaws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings notwithstanding that the MGCL expressly provides that the charter or bylaws of a Maryland corporation may require that any internal corporate claim be brought only in courts sitting in one or more specified jurisdictions, we may incur additional costs that we do not currently anticipate associated with resolving such matters in other jurisdictions, which could have a material adverse effect on us.
Risks Related to Investments in Single Tenant Real EstateOur Business
Many of
We are primarily dependent on single-tenant leases for our properties depend upon a single tenant for all or a majority of their rental income,revenue, and our financial condition and ability to make distributions may be adversely affected by the bankruptcy, or insolvency, aor downturn in the business of, or a lease termination ofor election by a single tenant including those caused by the current economic climate.not to renew could have a material adverse effect on us.
Most of our
Our properties are occupied by only one tenantprimarily leased to single tenants or will derive a majority of their rental income from one tenantsingle tenants and, therefore, the success of those properties is materially dependent on the financial stability of the companies to which we have leased and/or who have guaranteed such tenants. The nation as a whole and our local economies are currently experiencing economic uncertainty affecting companies of all sizes and industries. A tenant at one or more of our properties may be negatively affected by the current economic climate.leases. Lease payment defaults, by tenants, including those caused by the current economic climate, could cause us to reduce the amount of distributions we pay. A default of a tenant on its lease payments to us and the potential resulting vacancy would cause us to lose the revenue from the property andpay and/or force us to find an alternative source of revenue to meet any mortgagea debt payment and prevent a foreclosure if the property is subject to a mortgage. In the event of a default under a lease, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-letting the property. If a lease is terminated or an existing tenant elects not to renew a lease upon its expiration, there is no assurance that we will be able to lease the property for the rent previously received or sell the property without incurring a loss. A default by a tenant, the failure of a guarantor to fulfill its obligations, or othera premature termination of a lease, or a tenant'stenant’s election not to extend a lease upon its expiration, could have ana material adverse effect on us. Additionally, in certain instances, we may enter into leases that do not include a credit party guaranty. Moreover, we can provide no assurance that our financial conditionstrategy of owning and operating office and industrial properties that are primarily leased to single tenants will be successful or that we will attain our abilityinvestment and portfolio management objectives. Furthermore, although we have no current intention to pay distributions at our current level.do so, we may also invest in single-tenant, leased office and industrial properties outside of the United States and we can provide no assurance that we will have success in any such investments. The occurrence of any of the foregoing could have a material adverse effect on us.
As of December 31, 2018, our five largest tenants represented approximately 39.8% of net rent; therefore, we
We currently rely on these five tenants for a substantialmeaningful amount of revenue and adverse effects to their business could negatively affect our performance.have a material adverse effect on us.
As of December 31, 2018, our
Our five largest tenants, based on net rental income,Annualized Base Rent as of December 31, 2021, were SouthernAmazon.com, Inc. located in Illinois, Ohio and Virginia (approximately 4.5%), Keurig Green Mountain, Inc., located in Massachusetts (approximately 3.2%), General Electric Company Services,located in Georgia, Ohio and Texas (approximately 3.1%), Wood Group USA, Inc. located in Texas (approximately 2.7%) and Cigna Corporation located in Alabama (approximately 10.9%), American Express Travel Related Services Company, Inc., located in Arizona (approximately 7.5%), Amazon.com.dedc, LLC, located in Ohio (approximately 7.3%), Bank of America, N.A., located in California (approximately 7.2%), and Wyndham Worldwide Operations, located in New Jersey (approximately 6.9%2.5%). The revenues generated by the properties leased and/or guaranteed by these tenants occupycompanies are substantially reliant upon the financial condition of these tenantssuch companies and, accordingly, any event of bankruptcy, insolvency, or a general downturn in the business of any of these tenants may result in the failure or delay of such tenant'stenant’s rental payments, which maycould have a substantialmaterial adverse effect on us.
Approximately a quarter of the leases in our financial performance.
A high concentration of our properties in a particular geographic area, or that have tenants in a similar industry, would magnify the effects of downturns in that geographic area or industry.
We expect that our properties will be diverse accordingportfolio are scheduled to geographic area and industry of our tenants. However,expire in the event that we havenext three years and more than a concentration of properties in any particular geographic area, any adverse situation that disproportionately affects that geographic area would have a magnified adverse effect on our portfolio. Similarly, if our tenants are concentrated in a certain industry or industries, any adverse effect to that industry generally would have a disproportionately adverse effect on our portfolio. As of December 31, 2018, approximately 16.6%, 13.3%, 13.3%, and 12.5% of our net rent subsequent to December 31, 2018 was concentrated in the Consumer Services, Utilities, Capital Goods, and Technology Hardware & Equipment industries, respectively. Additionally, as of December 31, 2018, approximately 12.8%, 11.3%, 11.2%, 10.9%, and 10.6%, of our net rent subsequent to December 31, 2018 was concentrated in the states of Ohio, Illinois, California, Alabama, and New Jersey, respectively.
A significant portionthird of our leases are duescheduled to expire aroundin the same period of time,next four years, which may (i) cause a loss in the value of our stockholders’ investment until the affected properties are re-leased (ii)or sold, increase our exposure to downturns in the real estate market during the time that we are trying to re-lease or sell such space, and (iii) increase our capital expenditure requirements during the releasing period.re-leasing or sale period, any of which could have a material adverse effect on us.
The tenant
Our lease expirations by year based on
net rent subsequent toAnnualized Base Rent as of December 31,
20182021 are as follows (dollars in thousands):
| | | Year of Lease Expiration | | Net Rent (1)
(unaudited) | | Number of
Lessees | | Approx. Square
Feet | | Percentage of
Net Rent | |
| 2019 - 2021 | | $ | 8,956 |
| | 3 |
| | 746,900 |
| | 11.4 | % | |
Year of Lease Expiration (1) | | Year of Lease Expiration (1) | | Annualized Base Rent
(unaudited) | | Number of Leases | | Approx. Square Feet | | Percentage of Annualized Base Rent |
| 2022 | | 1,204 |
| | 1 |
| | 312,000 |
| | 1.5 |
| 2022 | | $ | 10,652 | | | 9 | | | 871,400 | | | 2.9 | % |
| 2023 | | 6,913 |
| | 2 |
| | 658,600 |
| | 8.8 |
| 2023 | | 27,969 | | | 12 | | 1,262,300 | | 7.7 | |
| 2024 | | 9,034 |
| | 4 |
| | 571,500 |
| | 11.5 |
| 2024 | | 47,231 | | | 20 | | 4,349,400 | | 13.1 | |
| 2025 | | 7,557 |
| | 5 |
| | 728,800 |
| | 9.6 |
| 2025 | | 40,416 | | | 24 | | 3,052,100 | | 11.2 | |
| 2026 | | 9,909 |
| | 3 |
| | 1,331,700 |
| | 12.6 |
| 2026 | | 28,691 | | | 11 | | 2,425,900 | | 7.9 | |
| 2027 and beyond | | 34,820 |
| | 9 |
| | 2,991,100 |
| | 44.6 |
| |
| 2027 | | 2027 | | 33,228 | | | 16 | | 1,614,700 | | 9.2 | |
| >2028 | | >2028 | | 173,734 | | | 63 | | 13,961,400 | | 48.0 | |
| Vacant | | Vacant | | — | | | — | | | 1,604,900 | | — | |
| Total | | $ | 78,393 |
| | 27 |
| | 7,340,600 |
| | 100.0 | % | Total | | $ | 361,921 | | | 155 | | 29,142,100 | | 100.0 | % |
| |
(1) | Net rent is based on (a) the contractual base rental payments assuming the lease requires the tenant to reimburse us for certain operating expenses or the property is self-managed by the tenant and the tenant is responsible for all, or substantially all, of the operating expenses; or (b) contractual rent payments less certain operating expenses that are our responsibility for the 12-month period subsequent to 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. |
(1) Expirations that occur on the last day of the month are shown as expiring in the subsequent month.
We may experience similar concentrations of lease expiration dates in the future. As the expiration date of a lease for a single-tenant building approaches, the value of the property generally declines because of the risk that the building may not be re-leased upon expiration of the existing lease or may not be re-leased on terms as favorable as those of the current leases. lease(s).
Therefore, if we were to list or liquidate our portfolioany of these assets prior to the favorable re-leasing of the space, our stockholderswe may suffer a loss on theirour investment. Our stockholders may also suffer a loss (and a reduction in distributions) after the expiration of the applicable lease termsterm if we are not able to re-lease such space on favorable terms. These expiring leases, therefore, increase our risk to real estate downturns during and approaching these periods of concentrated lease expirations. In addition, we may have to spend significant capital in order to ready the space for new tenants. To meet our need for cash at this time,during these times, we may have to increase borrowings or reduce our distributions, or both. The occurrence of any of the foregoing risks could have a material adverse effect on us.
If
Our portfolio has geographic market concentrations that make us especially susceptible to adverse developments in those geographic markets.
In addition to general, regional, national and international economic conditions, our operating performance is impacted by the economic conditions of the specific geographic markets in which we have concentrations of properties. We have significant property concentrations based on ABR as of December 31, 2021 in Texas (11.4%), California (10.9%), Arizona (9.3%) and Ohio (8.4%). In the future, we may experience additional geographic concentrations, which could adversely affect our operating performance if conditions become less favorable in any of the states or markets within such states in which we have a tenant declares bankruptcy,concentration of properties. We cannot assure you that any of our markets will grow, not experience adverse developments or that such markets will not become less desirable to investors. Our operations may also be affected if competing properties are built in our markets. A downturn in the economy in the states or regions in which we have a concentration of properties, or markets within such states or regions, could adversely affect our tenants operating businesses in those states, impair their ability to pay rent to us and materially and adversely affect us.
We may be unable to collect balances due under relevant leases.benefit from increases in market rental rates because our leases typically are long-term, have initial lease term rent escalations that are fixed and contain limitations on market rental rate resets upon renewal.
Any
Based on ABR, as of December 31, 2021, our weighted average lease term was approximately 6.25 years and approximately 98.6% of our tenants, or any guarantor of a tenant's lease obligations, could be subject to a bankruptcy proceeding pursuant to Title 11 of the bankruptcy laws of the United States. Such a bankruptcy filing would bar all efforts by us to collect pre-bankruptcy debts from these entities or their properties, unless we receive an enabling order from the bankruptcy court. Post-bankruptcy debts would be paid currently. If a lease is assumed, all pre-bankruptcy balances owing under it must be paid in full. If a lease is rejected by a tenant in bankruptcy, we would have a general unsecured claim for damages. If a lease is rejected, it is unlikely we would receive any payments from the tenant because our claim is capped at the rent reserved under the lease, without acceleration, for the greater of one year or 15% of the remaining term of the lease, but not greater than three years, plus rent already due but unpaid. This claim could be paid only in the event funds were available, and then only in the same percentage as that realized on other unsecured claims.
A tenant or lease guarantor bankruptcy could delay efforts to collect past due balances under the relevant leases and could ultimately preclude full collection of these sums. Such an event could cause a decrease or cessation of rental payments that would mean a reduction in our cash flow and the amount available for distributions to stockholders. In the event of a bankruptcy, we cannot assure stockholders that the tenant or its trustee will assume our lease. If a given lease, or guaranty of a lease, is not assumed, our cash flow and the amounts available for distributions to stockholders may be adversely affected. Further, our lenders may have a first priority claim to any recovery under the leases, any guarantees and any credit support, such as security deposits and letters of credit.
If a sale-leaseback transaction is recharacterized in a tenant's bankruptcy proceeding, our financial condition could be adversely affected.
We may enter into sale-leaseback transactions, whereby we would purchase a property and then lease the same property back to the person from whom we purchased it. In the event of the bankruptcy of a tenant, a transaction structured as a sale-leaseback may be recharacterized as either a financing or a joint venture, either of which outcomes could adversely affect our business. If the sale-leaseback were recharacterized as a financing, we might not be considered the owner of the property, and as a result would have the status of a creditor in relation to the tenant. In that event, we would no longer have the right to sell or encumber our ownership interest in the property. Instead, we would have a claim against the tenant for the amounts owed under the lease, with the claim arguably secured by the property. The tenant/debtor might have the ability to propose a plan restructuring the term, interest rate and amortization schedule of its outstanding balance. If confirmed by the bankruptcy court, we could be bound by the new terms, and prevented from foreclosing our lien on the property. If the sale-leaseback were recharacterized as a joint venture, our lessee and we could be treated as co-venturers with regard to the property. As a result, we could be held liable, under some circumstances, for debts incurred by the lessee relating to the property. Either of these outcomes could adversely affect our cash flow and the amount available for distributions to stockholders.
Net leases may not result in fair market lease rates over time.
A large portion of our rental income is derived from net leases. Net leases are typically (1) longer lease terms; and (2)contained fixed rental rate increases during the primaryinitial lease term. By entering into longer term leases, we are subject to the risk during the initial term that we would not be able to increase our rental rates to market rental rates if prevailing rental rates have increased. In addition, during periods of high inflation, fixed rental rate increases subject us to the risk of receiving lower rental revenue than we otherwise would have been entitled to receive if the rental rate increases were based on an increase in the consumer price index over a specified period. In addition, our leases often contain provisions (including caps, collars, fixed increases, etc.) that may limit our ability to reset rental rates to market rental rates upon expiration of the initial lease term. Any inability to take advantage of increases in prevailing rental rates could adversely impact the value of our properties and thus, there is an increased risk that these contractual lease terms will fail to result in fairon the market rental rates. As a result,price of our income and distributions to our stockholders could be lower than they would otherwise be if we did not engage in net leases.common shares.
Our real estate investments may include special use single tenant properties, thatand, as such, it may be difficult to re-lease or sell or re-lease upon tenant defaults or early lease terminations.these properties, which could have a material adverse effect on us.
We focus our investments on commercialoffice and industrial properties, a number of which may include manufacturing facilities andhave special uses. Special use single tenant properties. These types of properties aremay be relatively illiquid compared to other types of real estate and financial assets. ThisUpon expiration or early termination of a lease, this illiquidity willcould limit our ability to quickly change our portfolio in response to changes in economic, market or other conditions.conditions to an even greater extent than the typically illiquid nature of real estate assets. With these properties, if the current lease is terminated or not renewed or, in the case of a mortgage loan, if we take such property in foreclosure, we may be required to renovate theor demolish a vacant property or to make rent concessions in order to lease the propertytry to another tenantre-lease or sell the property.it, grant rent or other concessions and/or make significant capital expenditures to improve theseproperties in order to retain existing tenants. In addition, in the event we are forced to sell the property, we may have difficulty selling it to a party other than the tenant company that has leased and/or borrowerguaranteed the lease of the property due to the special purpose for which the property may have been designed. These and other limitations could have a material adverse effect on us and may affect our ability to re-lease or sell these properties upon expiration or re-leaseearly termination of a lease, which could have a material adverse effect on us.
We face significant competition for tenants, which may decrease or prevent increases of the occupancy and rental rates of our properties, which could have a material adverse effect on us.
The commercial real estate markets in which we operate are highly competitive. The leasing of real estate is also often highly competitive, and we may experience competition for tenants from owners and managers of competing properties. An oversupply of properties in the industries and geographies in which we concentrate could further increase competition. As a result, we may have to reduce our rental rates or to offer more substantial rent abatements, tenant improvements, early termination rights, below-market renewal options or other lease incentive payments or we might not be able to timely lease the space. If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates or to offer more substantial rent abatements, tenant improvements, early termination rights, below-market renewal options or other lease incentives in order to retain tenants when our leases expire. Competition for companies that may lease or guarantee our
properties could decrease or prevent increases of the occupancy and rental rates of our properties.Furthermore, at the time we elect to dispose of our properties, we will also be in competition with sellers of similar properties to locate suitable purchasers for our properties. The occurrence of any of the foregoing could have a material adverse effect on us.
We depend on current key personnel for our future success, and the loss of such personnel or inability to attract and retain personnel could harm our business and the loss of services of one or more members of our executive management team, or our inability to attract and retain highly qualified personnel, could adversely affect our business, diminish our investment opportunities and weaken our business relationships with lenders, business partners, companies that may lease or guarantee our properties and other industry participants, any of which could have a material adverse effect on us.
Our future success will depend in large part on our ability to attract and retain a sufficient number of qualified personnel. Competition for such personnel is intense, and we cannot assure stockholders that we will be successful in attracting and retaining such skilled personnel. Our future success also depends upon the service of our executive management team, who we believe have extensive market knowledge and business relationships and will exercise substantial influence over the Company’s operating, financing, acquisition and disposition activity. Among the reasons that they are important to our success is that we believe that each has a national or regional industry reputation that is expected to attract business and investment opportunities and assist us in negotiations with lenders, companies that may lease or guarantee our properties and other industry personnel. As a result, the loss of one or more of them could harm our business. We believe that many of our other key executive personnel also have extensive experience and strong reputations in the industry. In particular, the extent and nature of the business relationships that these individuals have developed is critically important to the success of our business. The loss of services of one or more members of our executive management team, or our inability to attract and retain highly qualified personnel, could adversely affect our business and weaken our business relationships with lenders, business partners, companies that may lease or guarantee our properties and other industry participants, any of which could have a material adverse effect on us.
Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, any of which could have a material adverse effect on us.
A cyber incident is any intentional or unintentional adverse event that threatens the confidentiality, integrity, or availability of our information resources and can include unauthorized persons gaining access to systems to disrupt operations, corrupting data or stealing confidential information. The risk of a cyber incident or disruption, including by computer hackers, foreign governments, information service interruptions and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks have increased globally. As our reliance on technology increases, so do the risks posed to our systems – both internal and external. Our primary risks that could directly result from the occurrence of a cyber incident are theft of assets; operational interruption; regulatory enforcement, lawsuits and other legal proceedings; damage to our relationships with our tenants; and private data exposure. A significant and extended disruption could damage our business or reputation, cause a loss of revenue, have an adverse effect on tenant relations, cause an unintended or unauthorized public disclosure, or lead to the misappropriation of proprietary, personally identifying, or confidential information, any of which could result in us incurring significant expenses to resolve these kinds of issues. Although we have implemented processes, procedures and controls based on published best practices cybersecurity controls to help mitigate the risks associated with a cyber incident, there can be no assurance that these measures will be sufficient for all possible situations. Even security measures that are appropriate, reasonable and/or in accordance with applicable legal requirements may not be sufficient to protect the information we maintain. Unauthorized parties, whether within or outside the Company, may disrupt or gain access to our systems, or those of third parties with whom we do business, through human error, misfeasance, fraud, trickery, or other forms of deceit, including break-ins, use of stolen credentials, social engineering, phishing, computer viruses or other malicious codes, and similar means of unauthorized and destructive tampering. Even the most well-protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted cyber incidents evolve and generally are not recognized until launched against a target. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, making it impossible for us to entirely mitigate this risk. The occurrence of any of the foregoing risks could have a material adverse effect on us.
To the extent we are unable to pass along our property operating expenses to our tenants, our financial condition, results of operations and cash flow, may be negatively impacted.
Operating expenses associated with owning a property typically include real estate taxes, insurance, maintenance, repair and renovation costs, the cost of compliance with governmental regulation (including zoning) and the potential for liability under applicable laws. We generally lease our properties to tenants pursuant to triple-net leases that require the tenant to pay their proportionate share of substantially all such property operating expenses. However, on a limited basis we lease our properties to tenants pursuant to leases that do not pass along all such property operating expenses (e.g., triple-net leases that
cap the amount by which certain operating expenses may grow on a per annum basis and be reimbursed by the tenant, net leases (single net or double net) that require the tenant to pay their proportionate share of one or more of real estate taxes and insurance costs, modified gross leases in which a tenant pays only base rent at the lease’s inception but, in subsequent years, pays the base rent plus a proportional share of some of the property operating expenses to the extent that a tenant’s pro rata share of expenses exceeds a base year level set forth in the lease, etc.). Occasionally, we have entered into leases pursuant to which we retain responsibility for the costs of structural repairs and maintenance. An increase in property operating expenses that we are unable to pass along to our tenants could negatively impact our financial condition, results of operations and cash
flow. Similarly, vacancy in our portfolio would negatively impact our financial condition, results of operations and cash flow, as we would be responsible for all property operating expenses that we have formerly passed on to our tenants.
If global market and economic conditions deteriorate, it could have a material adverse effect on us.
Weak economic conditions generally, sustained uncertainty about global economic conditions, a tightening of credit markets, business layoffs, downsizing, industry slowdowns and other similar factors that affect our tenants could negatively impact real estate fundamentals and result in lower occupancy, lower rental rates and declining values in our real estate portfolio. Additionally, these factors and conditions could have an impact on our lenders or tenants, causing them to fail to meet their obligations to us. No assurances can be given regarding such macroeconomic factors or conditions, and our ability to lease our properties and increase or maintain rental rates may be negatively impacted, which may have a material adverse effect on our business, financial condition and results of operations.
Inflation may materially and adversely affect returnsus and our tenants.
Increased inflation could have a negative impact on variable rate debt we currently have or that we may incur in the future. During times when inflation is greater than the increases in rent provided by many of our leases, rent increases will not keep up with the rate of inflation. Increased costs may have an adverse impact on our tenants if increases in their operating expenses exceed increases in revenue, which may adversely affect the tenants’ ability to stockholders.pay rent owed to us.
General
Corporate responsibility, specifically related to environmental, social, and governance (“ESG”) factors, may impose additional costs and expose us to new risks.
The importance of sustainability evaluations is becoming more broadly accepted by investors and shareholders. Certain organizations that provide corporate governance and other corporate risk information to investors and shareholders have developed scores and ratings to evaluate companies and investment funds based upon ESG or “sustainability” metrics. Many investment funds focus on positive ESG business practices and sustainability scores when making investments and may consider a company’s sustainability score as a reputational or other factor in making an investment decision. In addition, investors, particularly institutional investors, use these scores to benchmark companies against their peers, and if a company is perceived as lagging, these investors may engage with companies to require improved ESG disclosure or performance. We may face reputational damage in the event our corporate responsibility procedures or standards do not meet the standards set by various constituencies. A low sustainability score could result in a negative perception of the Company, or exclusion of our common stock from consideration by certain investors.
If we fail to maintain effective internal controls over financial reporting, we may not be able to accurately and timely report our financial results.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports, effectively prevent fraud and operate successfully. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. For so long as our common stock is not traded on a national securities exchange, we will be exempt from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and we can provide no assurance that the system and process evaluation and testing of our internal control over financial reporting that we perform to allow management to report on the effectiveness of such internal controls will be effective.
As a result of material weaknesses or significant deficiencies that may be identified in our internal control over financial reporting in the future, we may also identify certain deficiencies in some of our disclosure controls and procedures that we believe require remediation. If we or our independent registered public accounting firm discover any such material weaknesses or significant deficiencies, we will make efforts to further improve our internal control over financial reporting controls, but there is no assurance that we will be successful. Any failure to maintain effective controls or timely effect any necessary improvement of our internal control over financial reporting controls could harm operating results or cause us to fail to meet our reporting obligations. Ineffective internal control over financial reporting and disclosure controls could also cause investors to lose confidence in our reported financial information.
Risks Related to Investments in Real Estate
Our operating results will be affected by economic and regulatory changes that have an adverse impact on the real estate market in general, and we cannot assure our stockholders that we will be profitable or that we will realize growth in the value of our real estate properties.
We own and operate real estate and face risks related to investments in real estate. As of December 31, 2021, our real estate portfolio included 121 properties in 26 states and 134 lessees consisting substantially of office, industrial, and manufacturing facilities and one land parcel. Our operating results will be subject to risks generally incident to the ownership of real estate. These include risks described elsewhere in this "Risk Factors" section and other risks, including the following:
•the value of real estate including,fluctuates depending on conditions in the general economy and without limitation:
the real estate business. Additionally, adverse changes in generalthese conditions may result in a decline in rental revenues, sales proceeds and occupancy levels at our properties and could have a material adverse effect on us. If rental revenues, sales proceeds and/or occupancy levels decline, we generally would expect to have less cash available to pay indebtedness and for distribution to stockholders;
•it may be difficult to sell real estate quickly, or potential buyers of our properties may experience difficulty in obtaining financing, which may limit our ability to dispose of properties promptly in response to changes in economic or local conditions;other conditions. Additionally, we may be unable to identify, negotiate, finance or consummate dispositions of our properties, on favorable terms, or at all;
changes in supply of or demand for similar or competing
•our properties in an area;may be subject to impairment losses, which could have a material adverse effect on us;
changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive;
•changes in tax, real estate, environmental or zoning laws and zoning laws; regulations;
•changes in property tax assessments and insurance costs;
increases
•changes in interest rates and tight money supply;rising inflation;
•the cost and availability of credit may be adversely affected by illiquid credit markets and wider credit spreads, and our inability or the inability of our tenants to timely refinance maturing liabilities to meet liquidity needs could have a material adverse effect on us; and
loss
•we may from time to time be subject to litigation, which may significantly divert the attention and resources of entitlements.the Company’s management and result in defense costs, settlements, fines or judgments against us, some of which are not, or cannot be, covered by insurance, and any of which could have a material adverse effect on us.
These and other reasonsrisks could have a material adverse effect on us and may prevent us from being profitable orrealizing value from realizing growth or maintaining the value of our real estate properties.
We may obtain only limited warranties when we purchase a property.
The seller of a property will often sell such property in its "as is"“as is” condition on a "where is"“where is” basis and "with“with all faults," ”
without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements maytypically contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing.closing and subject to a floor and cap. Also, most sellers of large commercial properties are special purpose entities without significant assets other than the property itself.itself and there is often no credit behind the surviving provisions of a purchase agreement. The purchase of properties with limited warranties and/or from undercapitalized sellers increases the risk that we may lose some or all of our invested capital in the property as well as the loss of rental income from that property.
Our inability to sell a property when we desire to do soand could adversely impact our ability to pay cash distributions to stockholders at our current level.
The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. Real estate generally cannot be sold quickly. Also, the tax laws applicable to REITs require that we hold our properties for investment, rather than for sale in the ordinary course of business, which may causeexpose us to forego or defer sales of properties that otherwise would be in our best interest. Therefore, we may not be able to dispose of properties promptly, or on favorable terms, in response to economic or other market conditions, and this may adversely impact our ability to make distributions to stockholders at our current level.unknown liabilities.
In addition, we may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure stockholders that we will have funds available to correct such defects or to make such improvements.
In acquiring a property, we may agree to restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These provisions would also restrict our ability to sell a property.
We may not be able to sell our properties at a price equal to, or greater than, the price for which we purchased such properties, which may lead to a decrease in the value of our assets.
We may be purchasing our properties at a time when capitalization rates are at historically low levels and purchase prices are high. Therefore, the value of our properties may not increase over time, which may restrict our ability to sell our properties, or in the event we are able to sell such property, may lead to a sale price less than the price that we paid to purchase the properties.
We may acquire or finance properties with lock-out provisions, which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties.
Lock-out provisions are provisions that generally prohibit repayment of a loan balance for a certain number of years following the origination date of a loan. SuchWe may finance properties with lock-out provisions, are typically provided for by the Code or the terms of the agreement underlying a loan. Lock-out provisionswhich could materially restrict us from selling or otherwise disposing of or refinancing properties. These provisions would affect our ability to turn our investments into cash and thus affect cash available for distribution to stockholders. Lock-out provisionsour stockholders and may prohibit us from reducing the outstanding indebtedness with respect to any such properties by repaying or refinancing such indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to such properties. Any mortgage debt that we place on our properties may also impose prepayment penalties upon the sale of the mortgaged property. If a lender invokes these penalties upon the sale of a property or prepayment of a mortgage on a property, the cost to usthe Company to sell, repay or refinance the property could increase substantially.
Lock-out provisions could impair our ability to take actions during the lock-out period that would otherwise be in our stockholders' best interests and, therefore, may have an adverse impact on the value of the shares, relative to the value that would result if the lock-out provisions did not exist. In particular, lock-out provisions could preclude us from participating in
major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in our stockholders'stockholders’ best interests. The occurrence of any of the foregoing could have a material adverse effect on us.
Adverse economic conditions may negatively affect our property values, returns and profitability.
The following market and economic challenges may adversely affect our property values or operating results:
•poor economic times may result in a tenant's failure to meet its obligations under a lease or bankruptcy;
•re-leasing may require reduced rental rates under the new leases;
•increase in the cost of supplies and labor that impact operating expenses; and
increased insurance premiums, resulting in part from the increased risk of terrorism, may reduce funds available for distribution, or, to the extent we are able to pass such increased insurance premiums on to our tenants, may increase tenant defaults.
We are susceptible to the effects of macroeconomic factors that can result in unemployment, shrinking demand for products, large-scale business failures, and tight credit markets. Our property values and operations could be negatively affected by such adverse economic conditions.
If we suffer losses that are not covered by insurance or that are in excess of insurance coverage, weit could lose invested capital and anticipated profits.have a material adverse effect on us.
Material
We may suffer losses may occurthat are not covered by insurance or that are in excess of insurance proceeds with respect to any property, as insurance may not be sufficient to fund the losses. However, thereinsurance.There are types of losses, generally of a catastrophic nature, such as losses due to wars, acts of terrorism, earthquakes, fires, floods, hurricanes, pollution or environmental matters, which are either uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. In addition, we may decide not to obtain, even though available, any or adequate earthquake or similar catastrophic insurance coverage because the premiums are too high even in instances where it may otherwise be available. Insurance risks associated with potential terrorism acts could sharply increasehigh.Generally, our leases require each tenant to procure, at its own expense, commercial general liability insurance, as well as property insurance covering the premiums we paybuilding for coverage against propertythe full replacement value and casualty claims. Additionally, mortgage lenders in some cases have begun to insist that commercial property owners purchase specific coverage against terrorismnaming the ownership entity and the lender, if applicable, as a condition for providing mortgage loans. It is uncertain whether such insurance policies will be available, or available at reasonable cost, which could inhibit our ability to finance or refinance our potential properties. In these instances, we may bethe additional insured on the policy. Tenants are required to provide other financial support, either through financial assurances or self-insurance,proof of insurance by furnishing a certificate of insurance to us on an annual basis. The insurance certificates are tracked and reviewed for compliance by our property manager. Separately, we obtain, to the extent available, contingent liability and property insurance and flood insurance, rent loss insurance covering at least one year of rental loss, and a pollution insurance policy for all of our properties.However, the coverage and amounts of our environmental and flood insurance policies may not be sufficient to cover potential losses.our entire risk. We cannot assure stockholders that we will have adequate coverage for such losses. The Terrorism Risk Insurance ActIf we suffer losses that are not covered by insurance or that are in excess of 2002 is designed forinsurance coverage, it could have a sharing of terrorism losses between insurance companies and the federal government. We cannot be certain how this act will impact us or what additional cost to us, if any, could result. If such an event damaged or destroyed one or more of our properties, we could lose both our invested capital and anticipated profits from such property.material adverse effect on us.
We are subject to risks from climate change and natural disasters such as earthquakes and severe weather conditions.
Our properties are located in areas that may be subject to climate change and natural disasters, such as earthquakes and wildfires, and severe weather conditions. NaturalClimate change and natural disasters, including rising sea levels, flooding, extreme weather, and severe weather conditionschanges in precipitation and temperature, may result in significantphysical damage to, or a total loss of, our properties located in areas affected by these conditions, including those in low-lying areas close to sea level, and/or decreases in demand, rent from, or the value of those properties. In addition, we may incur material costs to protect these properties, including increases in our insurance premiums as a result of the threat of climate change, or the effects of climate change may not be covered by our insurance policies. Furthermore, changes in federal and state legislation and regulations on climate change could result in increased utility expenses and/or increased capital expenditures to improve the energy efficiency and reduce carbon emissions of our properties in order to comply with such regulations or result in fines for non-compliance.
The extent of our casualty losses and loss in operating income in connection with such events is a function of the severity of the event and the total amount of exposure in the affected area. When we have a geographic concentration of exposures, a single catastrophe (such as an earthquake, especiallyearthquake) affecting an area in California or Oregon) affecting a region maywhich we have a significant negativeconcentration of properties, such as in Texas, California, Ohio, Arizona, Georgia, Illinois or New Jersey, could have a material adverse effect on our financial condition and results of operations.us. We also own at least one property near an earthquake fault line. As a result, our operating and financial results may vary significantly from one period to the next, and our financial results may be adversely affected by our exposure to losses arising from climate change, natural disasters or severe weather conditions.
Delays in the acquisition, development and construction of properties may have adverse effects on our results of operations and returns to stockholders.
Delays we encounter in the selection, acquisition and development of real properties could adversely affect our stockholders' returns. Investments in unimproved real property, properties that are in need of redevelopment, or properties that are under development or construction will be subject to the uncertainties associated with the development and construction of real property, including those related to re-zoning land for development, environmental concerns of governmental entities and/or community groups and our builders' ability to build in conformity with plans, specifications, budgets and timetables. If a builder fails to perform, we may resort to legal action to rescind the purchase or the construction contract or to compel performance. A builder's performance may also be affected or delayed by conditions beyond the builder's control.
Where properties are acquired prior to the start of construction or during the early stages of construction, it will typically take up to one year or more to complete construction and lease available space. Therefore, stockholders could suffer delays in the receipt of cash distributions attributable to those particular real properties. We may incur additional risks when we make periodic progress payments or other advances to builders before they complete construction. These and other factors can result in increased costs of a project or loss of our investment. We also must rely on rental income and expense projections and estimates of the fair market value of a property upon completion of construction when agreeing upon a purchase price at the time we acquire the property. If our projections are inaccurate, we may pay too much for a property, and the return on our investment could suffer.
Costs of complying with governmental laws and regulations, including those relating to environmental matters may adversely affect our income and the cash available for distribution.ADA, may have a material adverse effect on us.
All real property we acquire, and theOur operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human healthzoning and safety.state and local fire and life safety requirements.
Under various federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real property may be held liable for the costs of removing or remediating hazardous or toxic substances. These laws often impose clean-up responsibility and liability without regard to whether the owner or operator was responsible for, or even knew of, the presence of the hazardous or toxic substances. The costs of investigating, removing or remediating these substances may be
substantial, and the presence of these substances may adversely affect our ability to lease or sell the property or to borrow using the property as collateral and may expose us to liability resulting from any release of or exposure to these substances, any of which could have a material adverse effect on us. If we arrange for the disposal or treatment of hazardous or toxic substances at another location, we may be liable for the costs of removing or remediating these substances at the disposal or treatment facility, whether or not the facility is owned or operated by us. We may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site that we own or operate. Certain environmental laws also impose liability in connection with the handling of or exposure to asbestos-containing materials, pursuant to which third parties may seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials and other hazardous or toxic substances. We maintain a pollution insurance policy for all of our properties to insure against the potential liability of remediation and exposure risk. Compliance with current and future laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals.may require us to incur material expenditures, which could have a material adverse effect on us. Some of these laws and regulations may impose joint and several liability on tenants, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. This liability could be substantial. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may adversely affect our ability to sell, rent or pledge such property as collateral for future borrowings.
Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require us to incur material expenditures. Future laws, ordinances or regulations may impose material environmental liability. Additionally, our tenants'tenants’ operations, the existing condition of land when we buyacquired it, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties may affect our properties. In addition, thereThere are various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply, and that may subject us to liability in the form of fines or damages for noncompliance. Anynoncompliance, which could result in material expenditures, fines, or damages we must pay will reduce our ability to make distributions to stockholders and may reduce the value of our stockholders' investments.
expenditures. We cannot assure our stockholders that the independent third-party environmental assessments we obtain prior to acquiring any properties we purchase will reveal all environmental liabilities or that a prior owner of a property did not create a material environmental condition not known to us. We cannot predict what other environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted, or what environmental conditions may be found to exist in the future. We cannot assure stockholders that our business, assets, results of operations, liquidity or financial condition will not be adversely affected by these laws, which may adversely affect cash available for distribution, and the amount of distributions to stockholders.
Our costs associated with complying with the Americans with Disabilities Act may affect cash available for distribution.
Our properties will be subject to the Americans with Disabilities Act of 1990, or ADA. Under the ADAall places of public accommodationaccommodations and commercial facilities are required to comply withmeet certain federal requirements related to access and use by disabled persons. The ADA has separate compliance requirements for "public accommodations" and "commercial facilities" that generally requirerequires that buildings and services, including restaurants and retail stores, be made accessible and available to people with disabilities. The ADA'sADA’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties, or, in some cases, an award of damages. We will attemptaim to acquireown and operate properties that comply with the ADA or may place the burden on the seller or othera third party to ensure compliance with the ADA. However, we cannot assure our stockholders that we will be able to acquire properties or allocate responsibilities in this manner. Failing to comply could result in the imposition of fines by the federal government or an award of damages to private litigants. Although we diligence compliance with laws, including the ADA, when we acquire properties, we may incur additional costs to comply with the ADA or other regulations related to access by disabled persons. If required changes involve a greater amount of expenditures than we currently anticipate, it could have a material adverse effect on us.
Furthermore, our properties may be subject to various federal, state and local regulatory requirements, such as zoning and state and local fire and life safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. Through our due diligence process and protections in our leases, we aim to own and operate properties that are in material compliance with all such regulatory requirements. However, we cannot assure our funds used for ADA compliance may affect cash available for distributionstockholders that these requirements will not be changed or that new requirements will not be imposed which would require significant unanticipated expenditures by us and could have a material adverse effect on us.
The occurrence of any of the amount of distributions to stockholders.foregoing could have a material adverse effect on us.
If we sell properties by providing financing to purchasers, defaults by the purchasers would adversely affect our cash flows.could have a material adverse effect on us.
In some instances we may sell our properties by providing financing to purchasers.
When we provide financing to purchasers, we will bear the risk that the purchaser may default, which could negatively impact our cash distributions to stockholders.have a material adverse effect on us. Even in the absence of a purchaser default, the distribution of the proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the promissory notes or other property we may accept upon the sale are actually paid, sold, refinanced or otherwise disposed of. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years. If any purchaser defaults under a financing arrangement with us, it could negatively impact our ability to make distributions to stockholders at our current level.have a material adverse effect on us.
We will be subject to risks associated with the co-owners in our co-ownership arrangements that otherwise may not be present in other real estate investments.
We may enter into joint ventures or other co-ownership arrangements with respect to a portion of the properties we acquire. Ownership of co-ownership interests involves risks generally not otherwise present with an investment in real estate such as the following:
the risk that a co-owner may at any time have economic or business interests or goals that are or become inconsistent with our business interests or goals;
the risk that a co-owner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives;
the risk that disputes with co-owners may result in litigation, which may cause us to incur substantial costs and/or prevent our management from focusing on our business objectives;
the possibility that an individual co-owner might become insolvent or bankrupt, or otherwise default under the applicable mortgage loan financing documents, which may constitute an event of default under all of the applicable mortgage loan financing documents or allow the bankruptcy court to reject the tenants-in-common agreement or management agreement entered into by the co-owner owning interests in the property;
the possibility that a co-owner might not have adequate liquid assets to make cash advances that may be required in order to fund operations, maintenance and other expenses related to the property, which could result in the loss of current or prospective tenants and may otherwise adversely affect the operation and maintenance of the property, and could cause a default under the mortgage loan financing documents applicable to the property and may result in late charges, penalties and interest, and may lead to the exercise of foreclosure and other remedies by the lender;
the risk that a co-owner could breach agreements related to the property, which may cause a default under, or result in personal liability for, the applicable mortgage loan financing documents, violate applicable securities laws and otherwise adversely affect the property and the co-ownership arrangement; or
the risk that a default by any co-owner would constitute a default under the applicable mortgage loan financing documents that could result in a foreclosure and the loss of all or a substantial portion of the investment made by the co-owner.
Any of the above might subject a property to liabilities in excess of those contemplated and thus reduce the amount available for distribution to our stockholders.
In the event that our interests become adverse to those of the other co-owners, we may not have the contractual right to purchase the co-ownership interests from the other co-owners. Even if we are given the opportunity to purchase such co-ownership interests in the future, we cannot guarantee that we will have sufficient funds available at the time to purchase co-ownership interests from the co-owners.
We might want to sell our co-ownership interests in a given property at a time when the other co-owners in such property do not desire to sell their interests. Therefore, we may not be able to sell our interest in a property at the time we would like to sell. In addition, we anticipate that it will be much more difficult to find a willing buyer for our co-ownership interests in a property than it would be to find a buyer for a property we owned outright.
Risks Associated with Debt Financing
If we breach covenants under our currentunsecured credit agreement with KeyBank and other syndication partners, we could be held in default under such agreement, which could accelerate our repayment date and materially adversely affect the value of our stockholders' investment incould have a material adverse effect on us.
If we were to default under our credit agreement, the lenders would have the ability to immediately declare the loans due
and payable in whole or in part. In such event, we may not have sufficient available cash to repay such debt at the time it
becomes due, or be able to refinance such debt on acceptable terms or at all. Pursuant to the Second Amended and Restated Credit Agreement dated as of April 30, 2019 (as amended by the First Amendment to the Second Amended and Restated Credit Agreement dated as of October 1, 2020, the Second Amendment to the Second Amended and Restated Credit Agreement dated as of December 18, 2020 and the Third Amendment to the Second Amended and Restated Credit Agreement dated as of July 14, 2021 (the “Third Amendment”), the “Second Amended and Restated Credit Agreement”), with KeyBank, National Association (“KeyBank”), as administrative agent, and other syndication partners under whicha syndicate of lenders, we, through our Operating Partnership,GRT OP, L.P., a Delaware limited partnership and a subsidiary of the Company, as the Borrower, wereborrower, have been provided with a revolving$1.9 billion credit facility consisting of the Revolving Credit Facility maturing in an initial commitment amountJune 2022 with (subject to the satisfaction of certain customary conditions) a one-year extension option, a $200 million senior unsecured term loan maturing in June 2023 (the “$200M 5-Year Term Loan”), a $400 million senior unsecured term loan maturing in April 2024 (the “$400M 5-Year Term Loan”), a delayed draw $400 million senior unsecured term loan maturing in December 2025 (the "$400M 5-Year Term Loan 2025”) (collectively, the “KeyBank Loans”), and a $150 million senior unsecured term loan maturing in April 2026 (the “$150M 7-Year Term Loan”). The credit facility also provides the option, subject to obtaining additional commitments from lenders and certain other customary conditions, to increase the commitments under the Revolving Credit Facility, increase the existing term loans and/or incur new term loans by up to $550an additional $600 million and a term loan in an initial commitment amount of up to $200 million, which commitments may be increased under certain circumstances up to a maximum total commitment of $1.25 billion.
the aggregate. In addition to customary representations, warranties, covenants, and indemnities, the Second Amended and Restated Credit Agreement contains a number of financial covenants and requires us andas described in Note 5, Debt, to our consolidated financial statements included in this Annual Report on Form 10-K.
Any of the Borrower to comply with the following at all times, which will be tested on a quarterly basis: (i) a maximum consolidated leverage ratio of 60%, or, the ratio may increase to 65% for up to four consecutive quarters afterforegoing could have a material acquisition; (ii) a minimum consolidated tangible net worth of approximately $530 million, plus 75% of net future equity issuances (including Operating Partnership units), minus 75% of the amount of any payments used to redeem equity (including Operating Partnership units) after June 28, 2018; (iii) a minimum consolidated fixed charge coverage ratio of not less than 1.50:1.00; (iv) a maximum total secured debt ratio of not greater than 40%, which ratio will increase by five percentage points for four quarters after closing of a material acquisition that is financed with secured debt; (v) a maximum total secured recourse debt ratio, excluding recourse obligations associated with interest rate hedges, of 10% of our total asset value (as defined); (vi) aggregate maximum unhedged variable rate debt of not greater than 30% of our total asset value; and (vii) a maximum payout ratio (as defined) of not greater than 95%.
If we were to default under the Amended and Restated Credit Agreement, the lenders could accelerate the date for our repayment of the loans, and could sue to enforce the terms of the loans.adverse effect on us.
We have broad authority to incur debt, and high debt levelsour indebtedness could hinder our abilityhave a material adverse effect on us.
Subject to make distributions and could decrease the value of our stockholders' investments.
Although, technically, our Board may approve unlimited levels of debt,certain limitations in our charter generally limits usthat may be eliminated in the future, we have broad authority to incurring debt no greater than 300% of our net assets before deducting depreciation or other non-cash reserves (equivalent to 75% leverage), unless any excess borrowing is approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report, along with a justification for such excess borrowing.incur debt. High debt levels would cause us to incur higher interest charges, which would result in higher debt service payments, and could be accompanied by restrictive covenants. These factors
Our indebtedness could limithave a material adverse effect on us, as well as:
•increasing our vulnerability to general adverse economic and industry conditions;
•limiting our ability to obtain additional financing to fund future working capital, acquisitions, capital expenditures and other general corporate requirements;
•requiring the amountuse of cash we have available to distribute and could result in a decline in the valuean increased portion of our stockholders' investments.cash flow from operations for the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund working capital, acquisitions, capital expenditures and general corporate requirements;
We have incurred, and intend
•limiting our flexibility in planning for, or reacting to, continue to incur, mortgage indebtedness and other borrowings, which may increasechanges in our business risks.and our industry;
•putting us at a disadvantage compared to our competitors with less indebtedness; and
•limiting our ability to access capital markets or limiting the possibility of a listing on a national securities exchange.
We have placed, and intend to continue to place, permanent financing on our properties or obtain aincrease our credit facility or other similar financing arrangement in order to acquire properties as funds are being raised in our public offering.properties. We may also decide to later further leverage our properties. We may incur mortgage debt and pledge allproperties or some of our real properties as security for that debt to obtain funds to acquire real properties.rely on securitization vehicles. We may borrow if we need funds to pay a desired distribution ratefor any purposes related to our stockholders. We may also borrow if we deem it necessary or advisable to assure that we qualify and maintain our qualification as a REIT for federal income tax purposes. If there is abusiness. A shortfall between the cash flow from our properties and the cash flow needed to service mortgage debt thencould have a material adverse effect on us.
Any of the amount available for distribution to our stockholders may be reduced.foregoing could have a material adverse effect on us.
We have incurred, and intend to continue to incur, indebtedness secured by our properties, which may result in foreclosure.
Most of our borrowings to acquire properties will be secured by mortgages on our properties. If we default on our secured indebtedness, the lender may foreclose and we could lose our entire investment in the properties securing such loan, which could adversely affect distributions to our stockholders. To the extent lenders require us to cross-collateralize our properties, or our loan agreements contain cross-default provisions, a default under a single loan agreement could subject multiple properties to foreclosure.
High interest rates may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire and the amount of cash distributions we can make.
If we place mortgage debt on properties, we run the risk of being unable to refinance the properties when the loans come due, or of being unable to refinance at cost effective rates. If interest rates are higher when the properties are refinanced, we may not be able to finance the properties and our income could be reduced. If any of these events occur, our cash flow would be
reduced. This, in turn, would reduce cash available for distribution to our stockholders and may hinder our ability to raise more capital by issuing more stock or by borrowing more money.
If we are unable to make our debt payments when required, a lender could foreclose on the property or properties securing such debt, which could reduce the amount of distributions we pay to stockholders and decrease the valuehave a material adverse effect on us.
Some of our stockholders' investments.
We may have a significant amount of acquisition indebtednessborrowings to acquire properties will be secured by first priority mortgages on our properties.properties, and we may in the future rely on securitization vehicles. In addition, a majoritysome of our properties contain, and any future acquisitions we make will likely contain mortgage financing. If we are unable to makedefault on our debt payments when required, asecured
indebtedness, the lender may foreclose and we could foreclose onlose our entire investment in the property or properties securing such debt. In any such event, weloan or vehicle, which could lose somehave a material adverse effect on us. To the extent lenders require us to cross-collateralize our properties, or allprovisions in our loan documents contain cross-default provisions, a default under a single loan agreement could subject multiple properties to foreclosure. Foreclosures of one or more of our investment in these properties which would reduce the amount of distributions we pay to stockholders and decrease the value of our stockholders' investments.could have a material adverse effect on us.
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders at our current level.level or otherwise have a material adverse effect on us.
When providing financing, a lender could impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt.debt, including customary restrictive covenants, that, among other things, restrict our ability to incur additional indebtedness, to engage in material asset sales, mergers, consolidations and acquisitions, and to make capital expenditures, and maintain financial ratios. Loan documents we enter into may contain covenants that limit our ability to further mortgage the property or discontinue insurance coverage or replace our Advisor.coverage. These or other limitations may adversely affect our flexibility and limit our ability to make distributions to stockholders at our current level.level or otherwise have a material adverse effect on us.
Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to make distributions to stockholders at our current level.level or otherwise have a material adverse effect on us.
We expect that we will incur indebtedness in the future. Interest we pay on our indebtedness will reduce cash available for distribution. Additionally, if we incur variable rate debt, increases in interest rates would increase our interest costs which could reduce our cash flows and our ability to make distributions to stockholders at our current level. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times that may not permit realization of the maximum return on such investments.
Disruptions in Any of the credit marketsforegoing risks could have a material adverse effect on us.
Failure to hedge effectively against interest rate changes may adversely affect our financial condition, results of
operations, cash flow, per share trading price of our common shares and ability to make distributions to our shareholders.
The REIT provisions of the Code impose certain restrictions on our ability to utilize hedges, swaps and other types of
derivatives to hedge our liabilities. Subject to these restrictions, we have entered, and may continue to enter into, hedging transactions to protect ourselves from the effects of interest rate fluctuations on floating rate debt. Our hedging transactions include entering into interest rate swap agreements. These agreements involve risks, such as the risk that such arrangements would not be effective in reducing our exposure to interest rate changes or that a court could rule that such an agreement is not legally enforceable. In addition, interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates, which could reduce the overall returns on our investments. Failure to hedge effectively against interest rate changes could materially adversely affect our financial condition, results of operations, financial conditioncash flow and ability to paymake distributions to stockholders at our current level.
shareholders. In addition, while such agreements would be intended to lessen the past, domesticimpact of rising interest rates on us, they could also expose us to the risk that the other parties to the agreements would not perform, and international financial markets experienced significant disruptions which were brought about in large part by failures inthat the U.S. banking system. These disruptions severely impacted the availability of credit and contributed to rising costs associated with obtaining credit. If debt financing is not available on terms and conditions we find acceptable, wehedging arrangements may not be ableeffective in reducing our exposure to obtain financing for investments. If these disruptionsinterest rate changes. Should we desire to terminate a hedging agreement, there could be significant costs and cash requirements involved to fulfill our obligation under the hedging agreement.
A substantial portion of our indebtedness bears interest at variable interest rates based on US Dollar London Interbank Offered Rate and certain of our financial contracts are also indexed to USD LIBOR. Changes in the credit markets resurface, our ability to borrow monies to financemethod of determining LIBOR, or the purchasereplacement of or other activities related to, real estate assets will be negatively impacted. If we are unable to borrow monies on terms and conditions that we find acceptable, weLIBOR with an alternative reference rate, may be forced to use a greater proportion of our offering proceeds to finance our acquisitions, reduce the number of properties we can purchase, and/or dispose of some of our assets. These disruptions could also adversely affect the return on the properties we do purchase. In addition, if we pay fees to lock in a favorable interest rate, falling interest rates on our current or other factorsfuture indebtedness and could require us to forfeit these fees. All of these events would have a material adverse effect on us.
On March 5, 2021, LIBOR’s regulator, the Financial Conduct Authority, and administrator, ICE Benchmark Administration, Limited, announced that the publication of the one-week and two-month USD LIBOR maturities and non-USD LIBOR maturities will cease immediately after December 31, 2021, with the remaining USD LIBOR maturities ceasing immediately after June 30, 2023. In the U.S., the Alternative Rates Reference Committee (the “ARRC”), a group of market participants convened in 2014 to help ensure a successful transition away from USD LIBOR, has identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. Liquidity in SOFR-linked products has increased significantly this year after the implementation of the SOFR First best practice as recommended by the Market Risk Advisory Committee of the Commodity Futures Trading Commission.
We have term loans totaling $950 million and interest swap agreements with a total notional amount of $750 million that currently use LIBOR as a reference rate and extend past June 30, 2023. Though an alternative reference rate for LIBOR, SOFR, exists, significant uncertainties still remain. We can provide no assurance regarding the future of LIBOR and when our resultsLIBOR-
based instruments will transition from LIBOR as a reference rate to SOFR or another reference rate. The discontinuation of operations,a benchmark rate or other financial conditionmetric, changes in a benchmark rate or other financial metric, or changes in market perceptions of the acceptability of a benchmark rate or other financial metric, including LIBOR, could, among other things, result in increased interest payments, changes to our risk exposures, or require renegotiation of previous transactions. In addition, any such discontinuation or changes, whether actual or anticipated, could result in market volatility, adverse tax or accounting effects, increased compliance, legal and ability to pay distributions to stockholders at our current level.operational costs, and risks associated with contract negotiations.
U.S. Federal Income Tax Risks
Failure to continue to qualify as a REIT would adversely affect our operations and our ability to make distributions at our current level asbecause we willwould incur additional tax liabilities.liabilities, which could have a material adverse effect on us.
We believe we operate in a manner that allows us to qualify as a REIT for U.S. federal income tax purposes under the Code. Qualification as a REIT involves highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. Our qualification as a REIT will depend upon our ability to meet, through investments, actual operating results, distributions and satisfaction of specific stockholder rules, theand various testsother requirements imposed by the Code.
If we fail to qualify as a REIT for any taxable year, we will be subject to U.S. federal income tax on our taxable income at corporate rates. If our REIT status is terminated for any reason,In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of such termination.losing our REIT status. Losing our REIT status would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax. In addition, distributions to our stockholders would no longer qualify for the distributionsdividends paid deduction, and we would no longer be required to make distributions.
Qualification as a REIT is subject to the satisfaction of tax requirements and various factual matters and circumstances that are not entirely within our control. New legislation, regulations, administrative interpretations, or court decisions could change the tax laws with respect to qualification as a REIT or the U.S. federal income tax consequences of being a REIT. Our failure to continue to qualify as a REIT would adversely affect the return ofcould have a stockholder's investment.material adverse effect on us.
To qualify as a REIT, and to avoid the payment of U.S. federal income and excise taxes and maintain our REIT status, we may be forced to borrow funds, use proceeds from the issuance of securities, (including our Follow-On Offering), or sell assets to pay distributions, which may result in our distributing amounts that may otherwise be used for our operations.operations, which could have a material adverse effect on us.
To obtain the favorable tax treatment accorded to REITs,qualify as a REIT, we normally will be required each year to distribute to our stockholders at least 90% of our REIT taxable income, generally determined without regard to the deduction for distributionsdividends paid and by excluding net capital gains. We will be subject to U.S. federal income tax on our undistributed taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributionsdividends we pay with respect to any calendartaxable year are less than the sum of (i) 85% of our ordinary income, (ii) 95% of our capital gain net income, and (iii) 100% of our undistributed income from prior years. These requirements could cause us to distribute amounts that otherwise would be spent on the acquisition, maintenance or development of properties and it is possible that we might be required to borrow funds, use proceeds from the issuance of securities, (including our Follow-On Offering), or sell assets in order to distribute enough of our taxable income to maintain our REIT status and to avoid the payment of U.S. federal income and excise taxes. We may be required to make distributions to our stockholders at times it would be more advantageous to reinvest cash in our business or when we do not have cash readily available for distribution, and we may be forced to liquidate assets on terms and at times unfavorable to us, which could have a material adverse effect on us. These methods of obtaining funding could affect future distributions by increasing operating costs and decreasing available cash. In addition, such distributions may constitute a return of capital.
Foreign purchasers of our common stock may be subject to Foreign Investment in Real Property Tax Act ("FIRPTA") tax upon the sale of their shares.
A foreign person disposing of a U.S. real property interest, including shares of a U.S. corporation whose assets consist principally of U.S. real property interests, is generally subject to a tax, known as FIRPTA tax, on the gain recognized on the disposition. Such FIRPTA tax does not apply, however, to the disposition of stock in a REIT if the REIT is "domestically controlled." A REIT is "domestically controlled" if less than 50% of the REIT's stock, by value, has been owned directly or indirectly by persons who are not qualifying U.S. persons during a continuous five-year period ending on the date of disposition or, if shorter, during the entire period of the REIT's existence.
We cannot assure stockholders that we will qualify as a "domestically controlled" REIT. If we were to fail to so qualify, gain realized by foreign investors on a sale of our shares would be subject to FIRPTA tax, unless the non-U.S. stockholder is a qualified foreign pension fund (or an entity wholly owned by a qualified foreign pension fund) or our shares were traded on an established securities market and the foreign investor did not at any time during a specified testing period directly or indirectly own more than 10% of the value of our outstanding common stock.
If our operating partnershipthe GRT OP fails to maintain its status as a partnership for U.S. federal income tax purposes, its income would be subject to taxation and our REIT status wouldcould be terminated.
We intend to maintain the status of our operating partnershipthe GRT OP as a partnership for U.S. federal income tax purposes. However, if the Internal Revenue Service ("IRS")IRS were to successfully challenge the status of our operating partnershipthe GRT OP as a partnership, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that our operating partnershipthe GRT OP could make to us.make. This would also result in our losing REIT status and becoming subject to a corporate level tax on our own income. This would substantially reduce our cash available to pay distributions and the return on our stockholders' investments.stockholders’ investment, which could have a material adverse effect on us. In addition, if any of the entities through which our operating partnershipthe GRT OP owns its properties, in whole or in part, loses its characterization as a partnership for federal income tax purposes, the underlying entity would become subject to taxation as a corporation, thereby reducing distributions to our operating partnershipthe GRT OP and jeopardizing our ability to maintain REIT status.
Stockholders may have tax liability on distributions they elect to reinvest in our common stock.
If stockholders participate in our DRP, they will be deemed to have received, and for income tax purposes will be taxed on, the amount reinvested in common stock to the extent the amount reinvested was not a tax-free return of capital. As a result, unless a stockholder is a tax-exempt entity, a stockholder may have to use funds from other sources to pay its tax liability on the value of the common stock received.
In certain circumstances, even if we qualify as a REIT, we and our subsidiaries may be subject to certain federal, state, and stateother income taxes, as a REIT, which would reduce our cash available for distribution to stockholders.our stockholders and could have a material adverse effect on us.
Even if we qualify and maintain our status as a REIT, we may be subject to certain U.S. federal, state and local income taxes on our income and assets, including taxes and undistributed income, built in gain tax on the taxable sale of assets, tax on income from some activities conducted as a result of a foreclosure, and non-U.S., state or statelocal income, property and transfer taxes. For example,Moreover, if we have net income from a "prohibited transaction"“prohibited transactions”, that income will be subject to a 100% tax. We may notIn addition, we could, in certain circumstances, be ablerequired to make sufficient distributionspay an excise or penalty tax (which could be significant in amount) in order to avoid excise taxes applicableutilize one or more relief provisions under the Code to REITs.maintain our qualification as a REIT. We may also decide to retain income we earn from the sale or other disposition of our property and pay income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, our stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability. We may also be subject to state and local taxes on our income or property, either directly or at the level of the operating partnershipGRT OP or at the level of the other companies through which we indirectly own our assets. In particular, we will be subject to U.S. federal and state income tax (and any applicable non-U.S. taxes) on the income earned by our taxable REIT subsidiaries. Any U.S. or federal, state or stateother taxes we pay will reduce our cash available for distribution to stockholders.our stockholders and could have a material adverse effect on us.
We may be required to pay some taxes due to actions of our taxable REIT subsidiarysubsidiaries, which would reduce our cash available for distribution to stockholders.our stockholders and could have a material adverse effect on us.
Any net taxable income earned directly by our taxable REIT subsidiary,subsidiaries, or through entities that are disregarded for U.S. federal income tax purposes as entities separate from our taxable REIT subsidiaries, will be subject to U.S. federal and possibly state corporate income tax. We have elected to treat Griffin Capital Essential Asset TRS, II, Inc. as a taxable REIT subsidiary, and we may elect to treat other subsidiaries as taxable REIT subsidiaries in the future. In this regard, several provisions of the laws applicable to REITs and their subsidiaries ensure that a taxable REIT subsidiary will be subject to an appropriate level of U.S. federal income taxation. For example, a taxable REIT subsidiary is limited in its ability to deduct certain interest payments made to an affiliated REIT. In addition, the REIT has to pay a 100% penalty tax on some payments that it receives or on some deductions taken by a taxable REIT subsidiary if the economic arrangements between the REIT, the REIT'sREIT’s customers, and the taxable REIT subsidiary are not comparable to similar arrangements between unrelated parties. Finally, some state and local jurisdictions may tax some of our income even though as a REIT we are not subject to federal income tax on that income because not all states and localities follow the federal income tax treatment of REITs. To the extent that we and our affiliates are required to pay U.S. federal, state and local taxes, we will have less cash available for distributions to our stockholders.
Distributions to tax-exempt investors may be classified as unrelated business taxable income.
Neither ordinary or capital gain distributions with respect to our common stock, nor gain from the sale of common stock, should generally constitute unrelated business taxable income (UBTI) to a tax-exempt investor. However, there are certain exceptions to this rule. In particular:
part of the income and gain recognized by certain qualified employee pension trusts with respect to our common stock may be treated as UBTI if shares of our common stock are predominately held by qualified employee pension trusts, and we are required to rely on a special look-through rule for purposes of meeting one of the REIT share ownership tests, and we are not operated in a manner to avoid treatment of such income or gain as UBTI;
part of the income and gain recognized by a tax exempt investor with respect to our common stock would constitute UBTI if the investor incurs debt in order to acquire the common stock; and
part or all of the income or gain recognized with respect to our common stock by social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans which are exempt from federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) or (c)(20) of the Code may be treated as UBTI.
Complying with the REIT requirements may cause us to foregoforgo otherwise attractive opportunities.opportunities, which could have a material adverse effect on us.
To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of shares of our common stock. We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution, or we may be required to liquidate otherwise attractive investments in order to comply with the REIT tests.tests, any of which could have a material adverse effect on us. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
Legislative or regulatory action could adversely affect investors.
Individuals with incomes below certain thresholds are subject to federal income taxation on qualified dividends at a maximum rate of 15%. For those with income above such thresholds, the qualified dividend rate is 20%. These tax rates are generally not applicable to distributions paid by a REIT, unless such distributions represent earnings on which the REIT itself has been taxed. As a result, distributions (other than capital gain distributions) we pay to individual investors generally will be subject to the tax rates that are otherwise applicable to ordinary income for federal income tax purposes, subject to a 20% deduction for REIT dividends available under the 2017 Tax Act. Stockholders are urged to consult with their own tax advisors with respect to the impact of recent legislation on their investment in our common stock and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our common stock.
To the extent our distributions represent a return of capital for tax purposes, a stockholder could recognize an increased capital gain upon a subsequent sale of the stockholder'sstockholder’s common stock.
Distributions in excess of our current and accumulated earnings and profits and not treated by us as a dividend will not be taxable to a stockholder to the extent those distributions do not exceed the stockholder’s adjusted tax basis in his or her common stock, but instead will constitute a return of capital and will reduce such adjusted basis. (Such distributions to Non-U.S. Stockholdersnon-U.S. stockholders may be subject to withholding, which may be refundable.) If distributions exceed such adjusted basis, then such adjusted basis will be reduced to zero and the excess will be capital gain to the stockholder.stockholder (assuming such stock is held as a capital asset for U.S. federal income tax purposes). If distributions result in a reduction of a stockholder’s adjusted basis in his or her common stock, then subsequent sales of such stockholder’s common stock potentially will result in recognition of an increased capital gain.
Because
Legislation that modifies the rules applicable to partnership tax audits may affect us.
Under the Bipartisan Budget Act of 2015, liability is imposed on the partnership (rather than its partners) for adjustments to reported partnership taxable income resulting from audits or other tax proceedings. The liability can include an imputed underpayment of tax, calculated by using the highest marginal U.S. federal income tax rate, as well as interest and penalties on such imputed underpayment of tax. It is possible that the Bipartisan Budget Act of 2015 rules could result in partnerships in which we directly or indirectly invest (including our operating partnership) being required to pay additional taxes, interest and penalties as a result of an audit adjustment, and we, as a direct or indirect partner of these partnerships, could be required to bear the economic burden of those taxes, interest, and penalties even though we may have not been a partner in the partnership during the year to which the audit relates and we, as a REIT, may not otherwise have been required to pay additional corporate-level taxes as a result of the complexityrelated audit adjustment. Using certain rules, partnerships may be able to transfer these liabilities to their partners. In the event any adjustments are imposed by the IRS on the taxable income reported by any subsidiary partnerships, we intend to utilize certain rules to the extent possible to allow us to transfer any liability with respect to such adjustments to the partners of the tax aspectssubsidiary partnerships who should properly bear such liability. However, there is no assurance that we will qualify under those rules or that we will have the authority to use those rules under the operating agreements for certain of our Follow-On Offeringsubsidiary partnerships.
The changes created by the Bipartisan Budget Act of 2015 rules are sweeping, and because those tax aspectsin many respects, dependent on the promulgation of future regulations or other guidance by the U.S. Department of the Treasury. Investors are not the same for all investors, stockholders shouldurged to consult their independent tax advisors with referencerespect to these changes and their tax situation before investingpotential impact on their investment in our shares.common stock.
Employee Retirement Income Security Act
Legislative or regulatory tax changes related to REITs could materially and adversely affect our business.
The U.S. federal income tax laws and regulations governing REITs and their stockholders, as well as the administrative interpretations of 1974 ("ERISA") Risks
Therethose laws and regulations, are special considerations that applyconstantly under review and may be changed at any time, possibly with retroactive effect. No assurance can be given as to employee benefit plans, Individual Retirement Accounts ("IRAs")whether, when, or other tax-favored benefit accounts investing in what form, the U.S. federal income tax laws applicable to us and our shares whichstockholders may be enacted. Changes to the U.S. federal income tax laws and interpretations of U.S. federal tax laws could causeadversely affect an investment in our shares to be a prohibited transaction which could result in additional tax consequences.common stock.
If stockholders are investing the assets of a pension, profit-sharing, 401(k), Keogh or other qualified retirement plan or the assets of an IRA in our common stock, they should satisfy themselves that, among other things:
•their investment is consistent with their fiduciary obligations under ERISA and the Code;
their investment is made in accordance with the documents and instruments governing their plan or IRA, including their plan's investment policy;
•their investment satisfies the prudence and diversification requirements of ERISA;
•their investment will not impair the liquidity of the plan or IRA;
•their investment will not produce UBTI for the plan or IRA;
•they will be able to value the assets of the plan annually in accordance with ERISA requirements; and
•their investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Code.
Persons investing the assets of employee benefit plans, IRAs, and other tax-favored benefit accounts should consider ERISA and related risks of investing in our shares.
ERISA and Code Section 4975 prohibit certain transactions that involve (1) certain pension, profit-sharing, employee benefit, or retirement plans or individual retirement accounts and Keogh plans, and (2) any person who is a "party-in-interest" or "disqualified person" with respect to such a plan. Consequently, the fiduciary of a plan contemplating an investment in the shares should consider whether we, any other person associated with the issuance of the shares, or any of their affiliates is or might become a "party-in-interest" or "disqualified person" with respect to the plan and, if so, whether an exemption from such prohibited transaction rules is applicable. In addition, the Department of Labor plan asset regulations provide that, subject to certain exceptions, the assets of an entity in which a plan holds an equity interest may be treated as assets of an investing plan, in which event the underlying assets of such entity (and transactions involving such assets) would be subject to the prohibited transaction provisions. We intend to take such steps as may be necessary to qualify us for one or more of the exemptions available, and thereby prevent our assets as being treated as assets of any investing plan.
In addition, if stockholders are investing the assets of an IRA or a pension, profit sharing, 401(k), Keogh or other employee benefit plan, they should satisfy themselves that their investment (i) is consistent with their fiduciary obligations under ERISA and other applicable law, (ii) is made in accordance with the documents and instruments governing their plan or IRA, including their plan’s investment policy, and (iii) satisfies the prudence and diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA. Stockholders should also determine that their investment will not impair the liquidity of the plan or IRA and will not produce UBTI for the plan or IRA; or, if it does produce UBTI, that the purchase and holding of the investment is still consistent with their fiduciary obligations. Stockholders should also satisfy themselves that they will be able to value the assets of the plan annually in accordance with ERISA requirements, and that their investment will not constitute a prohibited transaction under Section 406 of ERISA or Code Section 4975.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.Not Applicable.
ITEM 2. PROPERTIES
As of December 31, 2018,2021, we owned a fee simple interest and a leasehold interest in 27114 and 7 properties, respectively, encompassing approximately 7.329.2 million rentable square feet. See Part IV, Item 15. “Exhibits, Financial Statement Schedules—Schedule III—Real Estate and Accumulated Depreciation and Amortization,” of this Annual Report on Form 10-K for a detailed listing of all our properties. See Note 5, Debt, to our consolidated financial statements included in this Annual Report on Form 10-K for more information about our indebtedness secured by our properties.
Revenue Concentration
No lessee or property, based on Annualized Base Rent as of December 31, 2021, pursuant to the respective in-place leases, was greater than 4.5% as of December 31, 2021.
The percentage of net rent for the 12-month period subsequent toAnnualized Base Rent as of December 31, 2018,2021, by state, based on the respective in-place leases, is as follows (dollars in thousands): | | | | | | | | | | | | | | | | | | | | |
| State | | Annualized Base Rent (unaudited) | | Number of
Properties | | Percentage of Annualized Base Rent |
| Texas | | $ | 41,117 | | | 14 | | | 11.4 | % |
| California | | 39,546 | | | 9 | | | 10.9 | |
| Arizona | | 33,546 | | | 10 | | | 9.3 | |
| Ohio | | 30,258 | | | 12 | | | 8.4 | |
| Georgia | | 24,583 | | | 5 | | | 6.8 | |
| Illinois | | 21,676 | | | 7 | | | 6.0 | |
| New Jersey | | 18,113 | | | 5 | | | 5.0 | |
| North Carolina | | 17,408 | | | 9 | | | 4.8 | |
| Massachusetts | | 16,532 | | | 5 | | | 4.6 | |
| Colorado | | 14,010 | | | 6 | | | 3.9 | |
All Others (1) | | 105,132 | | | 39 | | | 28.9 | |
| Total | | $ | 361,921 | | | 121 | | | 100.0 | % |
|
| | | | | | | | | | |
| State | | Net Rent (unaudited) | | Number of Properties | | Percentage of Net Rent |
| Ohio | | $ | 10,054 |
| | 4 |
| | 12.8 | % |
| Illinois | | 8,862 |
| | 2 |
| | 11.3 |
|
| California | | 8,778 |
| | 3 |
| | 11.2 |
|
| Alabama | | 8,519 |
| | 1 |
| | 10.9 |
|
| New Jersey | | 8,278 |
| | 2 |
| | 10.6 |
|
| Arizona | | 7,527 |
| | 2 |
| | 9.6 |
|
| Nevada | | 6,943 |
| | 2 |
| | 8.9 |
|
| Texas | | 4,176 |
| | 1 |
| | 5.3 |
|
| Oregon | | 3,312 |
| | 1 |
| | 4.2 |
|
| North Carolina | | 2,750 |
| | 2 |
| | 3.5 |
|
All Others (1) | | 9,194 |
| | 7 |
| | 11.7 |
|
| Total | | $ | 78,393 |
| | 27 |
| | 100.0 | % |
| |
(1) | All others account for approximately 3.0% or less of total annualized net rent on an individual basis. |
(1)All others account for less than 3.7% of total Annualized Base Rent on an individual state basis.
The percentage of net rent for the 12-month period subsequent toAnnualized Base Rent as of December 31, 2018,2021, by industry, based on the respective in-place leases, is as follows (dollars in thousands): | | Industry (1) | | Net Rent
(unaudited) | | Number of
Lessees | | Percentage of
Net Rent | Industry (1) | | Annualized Base Rent (unaudited) | | Number of
Lessees | | Percentage of Annualized Base Rent |
| Capital Goods | | Capital Goods | | $ | 45,269 | | | 22 | | | 12.5 | % |
| Health Care Equipment & Services | | Health Care Equipment & Services | | 32,572 | | | 11 | | | 9.0 | |
| Materials | | Materials | | 28,551 | | | 10 | | | 7.9 | |
| Consumer Services | | $ | 13,031 |
| | 4 |
| | 16.6 | % | Consumer Services | | 27,461 | | | 12 | | | 7.6 | |
| Utilities | | 10,462 |
| | 2 |
| | 13.3 |
| |
| Capital Goods | | 10,437 |
| | 6 |
| | 13.3 |
| |
| Insurance | | Insurance | | 26,685 | | | 11 | | | 7.4 | |
| Telecommunication Services | | Telecommunication Services | | 21,724 | | | 6 | | | 6.0 | |
| Diversified Financials | | Diversified Financials | | 19,037 | | | 5 | | | 5.3 | |
| Technology Hardware & Equipment | | 9,821 |
| | 3 |
| | 12.5 |
| Technology Hardware & Equipment | | 18,786 | | | 6 | | | 5.2 | |
| Diversified Financials | | 5,863 |
| | 1 |
| | 7.5 |
| |
| Consumer Durables & Apparel | | Consumer Durables & Apparel | | 18,228 | | | 8 | | | 5.0 | |
| Retailing | | 5,753 |
| | 1 |
| | 7.3 |
| Retailing | | 17,538 | | | 6 | | | 4.8 | |
| Banks | | 5,644 |
| | 2 |
| | 7.2 |
| |
| Energy | | 4,176 |
| | 1 |
| | 5.3 |
| |
| Consumer Durables and Apparel | | 3,312 |
| | 1 |
| | 4.2 |
| |
| Transportation | | 3,203 |
| | 2 |
| | 4.1 |
| |
| Pharmaceuticals, Biotechnology & Life Sciences | | 2,881 |
| | 1 |
| | 3.7 |
| |
All Others (2) | | 3,810 |
| | 3 |
| | 5.0 |
| |
All others (2) | | All others (2) | | 106,070 | | | 37 | | | 29.3 | |
| Total | | $ | 78,393 |
| | 27 |
| | 100.0 | % | Total | | $ | 361,921 | | | 134 | | | 100.0 | % |
| |
(1) | Industry classification based on the Global Industry Classification Standards. |
| |
(2) | All others represent 3.5% or less of total net rent on an individual basis. |
(1) Industry classification based on the Global Industry Classification Standard.
(2) All others account for less than 4.5% of total Annualized Base Rent on an individual industry basis.
The percentage of
net rentAnnualized Base Rent as of December 31, 2021, for the
12-month period subsequent to December 31, 2018, by tenant,top 10 tenants, based on the respective in-place leases, is as follows (dollars in thousands):
|
| | | | | | | |
| Tenant | | Net Rent (unaudited) | | Percentage of Net Rent |
| Southern Company Services, Inc. | | $ | 8,519 |
| | 10.9 | % |
| American Express Travel Related Services Company, Inc. | | 5,863 |
| | 7.5 |
|
| Amazon.com.dedc, LLC | | 5,753 |
| | 7.3 |
|
| Bank of America, N.A. | | 5,644 |
| | 7.2 |
|
| Wyndham Worldwide Operations | | 5,397 |
| | 6.9 |
|
| IGT | | 4,774 |
| | 6.1 |
|
| 3M Company | | 4,544 |
| | 5.8 |
|
| Zebra Technologies Corporation | | 4,318 |
| | 5.5 |
|
| Wood Group Mustang, Inc. | | 4,176 |
| | 5.3 |
|
| Nike | | 3,312 |
| | 4.2 |
|
Other (1) | | 26,093 |
| | 33.3 |
|
| Total | | $ | 78,393 |
| | 100.0 | % |
| |
(1) | All others account for 4.0% or less of total net rent on an individual basis. |
| | | | | | | | | | | | | | |
| Tenant | | Annualized Base Rent (unaudited) | | Percentage of Annualized Base Rent |
| Amazon.com, Inc. | | $ | 16,176 | | | 4.5 | % |
| Keurig Green Mountain, Inc. | | $ | 11,419 | | | 3.2 | % |
| General Electric Company | | $ | 11,221 | | | 3.1 | % |
| Wood Group USA, Inc. | | $ | 9,817 | | | 2.7 | % |
| Cigna Corporation | | $ | 8,902 | | | 2.5 | % |
| Southern Company Services, Inc. | | $ | 8,866 | | | 2.4 | % |
| McKesson Corporation | | $ | 8,841 | | | 2.4 | % |
| LPL Holdings, Inc. | | $ | 8,404 | | | 2.3 | % |
| Freeport Minerals Corporation | | $ | 7,629 | | | 2.1 | % |
| State Farm Mutual Automobile Insurance Company | | $ | 7,507 | | | 2.1 | % |
The tenant lease expirations by year based on net rent for the 12-month period subsequent toAnnualized Base Rent as of December 31, 20182021 are as follows (dollars in thousands): | | | Year of Lease Expiration | | Net Rent
(unaudited) | | Number of
Lessees | | Approx. Square
Feet | | Percentage of
Net Rent | |
| 2019 - 2021 | | $ | 8,956 |
| | 3 |
| | 746,900 |
| | 11.4 | % | |
Year of Lease Expiration (1) | | Year of Lease Expiration (1) | | Annualized Base Rent
(unaudited) | | Number of
Leases | | Approx. Square Feet | | Percentage of Annualized Base Rent |
| 2022 | | 1,204 |
| | 1 |
| | 312,000 |
| | 1.5 |
| 2022 | | $ | 10,652 | | | 9 | | | 871,400 | | | 2.9 | % |
| 2023 | | 6,913 |
| | 2 |
| | 658,600 |
| | 8.8 |
| 2023 | | 27,969 | | | 12 | | | 1,262,300 | | | 7.7 | |
| 2024 | | 9,034 |
| | 4 |
| | 571,500 |
| | 11.5 |
| 2024 | | 47,231 | | | 20 | | | 4,349,400 | | | 13.1 | |
| 2025 | | 7,557 |
| | 5 |
| | 728,800 |
| | 9.6 |
| 2025 | | 40,416 | | | 24 | | | 3,052,100 | | | 11.2 | |
| 2026 | | 9,909 |
| | 3 |
| | 1,331,700 |
| | 12.6 |
| 2026 | | 28,691 | | | 11 | | | 2,425,900 | | | 7.9 | |
| 2027 and beyond | | 34,820 |
| | 9 |
| | 2,991,100 |
| | 44.6 |
| |
| 2027 | | 2027 | | 33,228 | | | 16 | | | 1,614,700 | | | 9.2 | |
| >2028 | | >2028 | | 173,734 | | | 63 | | | 13,961,400 | | | 48.0 | |
| Vacant | | Vacant | | — | | | — | | | 1,604,900 | | | — | |
| Total | | $ | 78,393 |
| | 27 |
| | 7,340,600 |
| | 100.0 | % | Total | | $ | 361,921 | | | 155 | | | 29,142,100 | | | 100.0 | % |
Acquisition Indebtedness(1)Expirations that occur on the last day of the month are shown as expiring in the subsequent month.
For a discussion of our acquisitions and indebtedness, see Note 3, Real Estate, and Note 4, Debt, to the consolidated financial statements.
ITEM 3. LEGAL PROCEEDINGS
(a) From time to time, we may become subject to legal proceedings, claims and litigation arising in the ordinary course of our business. We are not a party to any material legal proceedings, nor are we aware of any pending or threatened litigation that would have a material adverse effect on our business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
(b) Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
As of March 11, 2019,February 25, 2022, we had approximately 227,686 of565,265 Class T shares, 280 of1,801 Class S shares, 19,319 of42,013 Class D shares, 807,373 of1,911,819 Class I shares, 25,785,133 of24,509,573 Class A shares, 49,874,287 of47,592,118 Class AA shares, and 977,245 of926,936 Class AAA shares and 249,088,662 Class E shares of common stock outstanding, including common stock issued pursuant to our DRP and stock distributions held by a total of approximately 16,00059,000 stockholders of record. There is currently no established public trading market for our common stock. Therefore, there is a risk that a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder, or at all.
Additionally, we provide discounts in our Follow-On Offering for certain categories of purchasers, including based on volume discounts. Pursuant to the terms of our charter, certain restrictions are imposed on the ownership and transfer of shares.
NAVAs described in “Item 7. Management’s Discussion and NAV per Share Calculation
InAnalysis of Financial Condition and Results of Operations,” we expect to pay distributions regularly unless our Follow-On Offering, we offeredresults of operations, our general financial condition, general economic conditions, or other factors inhibit us from doing so. Distributions will be authorized at the New Sharesdiscretion of our Board, which will be directed, in substantial part, by its obligation to cause us to comply with NAV-based pricing to the public. The share classes have different selling commissions, dealer manager fees and ongoing distribution fees. Our Board, including a majorityREIT requirements of the independent directors, has adopted valuation procedures that contain a comprehensive set of methodologies to be used in connection with the calculation of the NAV.Code.
As a public company, we are required to issue financial statements generally based on historical cost in accordance with GAAP as applicable to our financial statements. To calculate our NAV for the purpose of establishing a purchase and redemption price for our shares, we have adopted a model, which adjusts the value of certain of our assets from historical cost to fair value. As a result, our NAV may differ from the amount reported as stockholder’s equity on the face of our financial statements prepared in accordance with GAAP. When the fair value of our assets is calculated for the purposes of determining our NAV per share, the calculation is done using the fair value methodologies detailed within the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") under Topic 820, Fair Value Measurements and Disclosures. However, our valuation procedures and our NAV are not subject to GAAP and will not be subject to independent audit. Our NAV may differ from equity reflected on our audited financial statements, even if we are required to adopt a fair value basis of accounting for GAAP financial statement purposes in the future. Furthermore, no rule or regulation requires that we calculate NAV in a certain way. Although we believe our NAV calculation methodologies are consistent with standard industry principles, there is no established practice among public REITs, whether listed or not, for calculating NAV in order to establish a purchase and redemption price. As a result, other public REITs may use different methodologies or assumptions to determine NAV.
Our NAV is calculated for the New Shares and our IPO Shares by ALPS Fund Services, Inc. (the "NAV Accountant"), a third-party firm approved by our Board, including a majority of our independent directors, after the end of each business day that the New York Stock Exchange is open for unrestricted trading. Our Board, including a majority of our independent directors, may replace our NAV Accountant with another party, including our Advisor, if it is deemed appropriate to do so.
At the end of each such trading day, before taking into consideration accrued distributions or class-specific expense accruals, any change in the aggregate company NAV (whether an increase or decrease) is allocated among each class of shares based on each class’s relative percentage of the previous aggregate company NAV plus issuances of shares that were effective the previous trading day. Changes in the aggregate company NAV reflect factors, including, but not limited to, unrealized/realized gains (losses) on the value of our real property portfolio, any applicable organization and offering costs and any expense reimbursements, real estate-related liabilities, and daily accruals for income and expenses (including the allocation/accrual of any performance distribution and accruals for advisory fees and distribution fees) and distributions to investors. Changes in our aggregate company NAV also include material non-recurring events, such as capital expenditures and material property acquisitions and dispositions.
Our most significant source of net income is property income. We accrue estimated income and expenses on a daily basis based on annual budgets as adjusted from time to time to reflect changes in the business throughout the year. For the first month following a property acquisition, we calculate and accrue portfolio income with respect to such property based on the performance of the property before the acquisition and the contractual arrangements in place at the time of the acquisition, as identified and reviewed through our due diligence and underwriting process in connection with the acquisition. For the purpose
of calculating our NAV, all organizational and offering costs reduce NAV as part of our estimated income and expense accrual. On a periodic basis, our income and expense accruals are adjusted based on information derived from actual operating results.
Our liabilities are included as part of our NAV calculation generally based on GAAP. Our liabilities include, without limitation, property-level mortgages, accrued distributions, the fees payable to the Advisor and the dealer manager, accounts payable, accrued company-level operating expenses, any company or portfolio-level financing arrangements and other liabilities.
Following the calculation and allocation of changes in the aggregate company NAV as described above, NAV for each share class is adjusted for accrued distributions and the accrued distribution fee, to determine the current day’s NAV. Selling commissions and dealer manager fees, which are effectively paid by purchasers of Class T and Class S shares in the Follow-On Offering at the time of purchase, because the purchase price of such shares is equal to the applicable NAV per share plus the applicable selling commission and/or dealer manager fee, will generally have no effect on the NAV of any class.
NAV per share for each class is calculated by dividing such class’s NAV at the end of each trading day by the number of shares outstanding for that class on such day.
Under GAAP, we accrue the full cost of the distribution fee as an offering cost for the New Shares up to the 9.0% limit at the time such shares are sold. For purposes of NAV, we recognize the distribution fee as a reduction of NAV on a daily basis as such fee is accrued. We intend to reduce the net amount of distributions paid to stockholders by the portion of the distribution fee accrued for such class of shares, so that the result is that although the obligation to pay future distribution fees is accrued on a daily basis and included in the NAV calculation, it is not expected to impact the NAV of the shares because of the adjustment to distributions.
Set forth below are the components of the daily NAV as of December 31, 2018 and September 30, 2018, calculated in accordance with our valuation procedures (in thousands, except share and per share amounts): |
| | | | | | | | |
| | | As of December 31, 2018 | | As of September 30, 2018 |
| Gross Real Estate Asset Value | | $ | 1,229,797 |
| | $ | 1,225,400 |
|
| Other Assets, net | | 7,131 |
| | 11,567 |
|
| Mortgage Debt | | (490,055 | ) | | (490,055 | ) |
| NAV | | $ | 746,873 |
| | $ | 746,912 |
|
| | | | | |
| Total Shares Outstanding | | 77,669,752 |
| | 77,620,432 |
|
| NAV per share | | $ | 9.62 |
| | $ | 9.62 |
|
Our independent valuation firm utilized a blend of the direct capitalization and discounted cash flow approach for 2 of the 27 properties in our portfolio and the discounted cash flow approach for the remaining 25 properties in our portfolio with a weighted average of approximately 9.3 years remaining on their existing leases. The following summarizes the range of overall capitalization rates for the 27 properties using the cash flow discount rates:
|
| | | | | | |
| | | | Range | | Weighted Average |
| Overall Capitalization Rate (direct capitalization approach) | 5.25% | 6.25% | | 5.36% |
| Terminal Capitalization Rate (discounted cash flow approach) | 5.25% | 9.25% | | 6.40% |
| Cash Flow Discount Rate (discounted cash flow approach) | 6.00% | 11.50% | | 7.14% |
The following table sets forth the quarterly changes to the components of NAV for the Company and the reconciliation of NAV changes for each class of shares:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Share Classes | | | | |
| | | Class T | | Class S | | Class D | | Class I | | IPO | | OP Units | | Total |
| NAV as of September 30, 2018 | | $ | 2,186,326 |
| | $ | 2,672 |
| | $ | 184,665 |
| | $ | 7,750,410 |
| | $ | 735,402,166 |
| | $ | 1,385,707 |
| | $ | 746,911,946 |
|
| Fund Level Changes to NAV | | | | | | | | | | | | | | |
| Realized/unrealized losses on net assets | | 33,223 |
| | 40 |
| | 2,809 |
| | 117,672 |
| | 11,169,582 |
| | 20,947 |
| | 11,344,273 |
|
| Dividend Accrual | | (25,907 | ) | | (32 | ) | | (2,546 | ) | | (111,538 | ) | | (10,648,972 | ) | | (19,932 | ) | | (10,808,927 | ) |
| Class specific changes to NAV | | | | | | | | | | | | | | |
| Stockholder Servicing fees/distribution fees | | (5,508 | ) | | (6 | ) | | (117 | ) | | — |
| | (1,042,990 | ) | | (1,971 | ) | | (1,050,592 | ) |
| NAV as of December 31, 2018 before share/unit sale/redemption activity | | $ | 2,188,134 |
| | $ | 2,674 |
| | $ | 184,811 |
| | $ | 7,756,544 |
| | $ | 734,879,786 |
| | $ | 1,384,751 |
| | $ | 746,396,700 |
|
| Unit sale/redemption activity- Dollars | | | | | | | | | | | | | | |
| Amount sold | | 14,621 |
| | 31 |
| | 1,591 |
| | 42,394 |
| | 5,283,483 |
| | — |
| | 5,342,120 |
|
| Amount redeemed | | — |
| | — |
| | — |
| | — |
| | (4,865,417 | ) | | — |
| | (4,865,417 | ) |
| NAV as of December 31, 2018 | | $ | 2,202,755 |
| | $ | 2,705 |
| | $ | 186,402 |
| | $ | 7,798,938 |
| | $ | 735,297,852 |
| | $ | 1,384,751 |
| | $ | 746,873,403 |
|
Shares/ units outstanding as of September 30, 2018 | | 225,801 |
| | 276 |
| | 19,103 |
| | 801,630 |
| | 76,429,842 |
| | 143,779 |
| | 77,620,431 |
|
| Shares/units sold | | 1,510 |
| | 3 |
| | 165 |
| | 4,384 |
| | 549,223 |
| | — |
| | 555,285 |
|
| Shares/units redeemed | | — |
| | — |
| | — |
| | — |
| | (505,964 | ) | | — |
| | (505,964 | ) |
Shares/units outstanding as of December 31, 2018 | | 227,311 |
| | 279 |
| | 19,268 |
| | 806,014 |
| | 76,473,101 |
| | 143,779 |
| | 77,669,752 |
|
NAV per share/unit as of September 30, 2018 | | $ | 9.68 |
| | $ | 9.68 |
| | $ | 9.67 |
| | $ | 9.67 |
| | $ | 9.62 |
| | | | |
| Change in NAV per share/unit | | 0.01 |
| | 0.01 |
| | — |
| | 0.01 |
| | — |
| | | | |
| NAV per share/unit as of December 31, 2018 | | $ | 9.69 |
| | $ | 9.69 |
| | $ | 9.67 |
| | $ | 9.68 |
| | $ | 9.62 |
| | | | |
Equity Compensation Plans
Information regarding our equity compensation plans and the securities authorized under the plans is included in Item 12 below.
Recent Sales of Unregistered Securities
During the year ended December 31, 2018,2021, there were no sales of unregistered securities.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Share Redemption Program
We had a share redemption program for holders of IPO Shares who held their shares for less than four years (“IPO SRP”), which enabled IPO stockholders to sell their shares back to us in limited circumstances. On June 4, 2018, our Board approvedOctober 1, 2021 the termination ofCompany announced that it suspended the IPO SRP effective as of July 5, 2018.
In connectionbeginning with the Follow-On Offering, our Board adopted the SRP for the New Shares (and IPO Shares that have been held for four years or longer). On June 4, 2018, our Board amended and restated the SRP to allow stockholders of our IPO Shares to utilize the SRP, effective as of July 5, 2018. Under the SRP, we will redeem shares as of the last business day of each quarter. The redemption price will be equal to the NAV per share for the applicable class generally on the 13th of the month prior to quarter end. Redemption requests must be received by 4:00 p.m. (Eastern time) on the second to last business day of the applicable quarter. Redemption requests exceeding the quarterly cap will be filled on a pro rata basis. With respect to any pro rata treatment, redemption requests following the death or qualifying disability of a stockholder will be considered first, as a group, followed by requests where pro rata redemption would result in a stockholder owning less than the minimum balance of $2,500 of shares of our common stock, which will be redeemed in full to the extent there are available funds, with any remaining available funds allocated pro rata among all other redemption requests. All unsatisfied redemption requests must be resubmitted after the start of the next quarter, or upon the recommencement of the SRP, as applicable.
There are several restrictions under the SRP. Stockholders generally have to hold their shares for one year before submitting their shares for redemption under the program; however, we will waive the one-year holding period in the event of
the death or qualifying disability of a stockholder. Shares issued pursuant to the DRP are not subject to the one-year holding period. In addition, the SRP generally imposes a quarterly cap on aggregate redemptions of our shares equal to a value of up to 5% of the aggregate NAV of the outstanding shares as of the last business day of the previous quarter. Our Board has the right to modify or suspend the SRP upon 30 days' notice at any time if it deems such action to be in our best interest. Any such modification or suspension will be communicated to stockholders through our filings with the SEC.
As of December 31, 2018, the quarterly cap was approximately $37.4 million and $4.9 million of common stock was reclassified from common stock to accrued expenses and other liabilities in the consolidated balance sheet as of December 31, 2018.
On December 12, 2018, in connection with the proposed Company Merger, our Board approved the temporary suspension of the SRP. Redemptions submitted for thecycle commencing fourth quarter of 2018 will be honored in accordance with2021. Therefore, during the terms of the SRP, and the SRP was officially suspended as of January 19, 2019. The SRP shall remain suspended until such time, if any, as our Board may approve the resumption of the SRP.
During the three monthsquarter ended December 31, 2018,2021, we redeemed shares as follows: |
| | | | | | | | | | | | |
| For the Month Ended | | Total Number of Shares Redeemed | | Weighted Average Price Paid per Share | | Total Number of Shares Redeemed as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
| October 31, 2018 | | — |
| | $ | — |
| | — |
| | (1) |
| November 30, 2018 | | — |
| | $ | — |
| | — |
| | (1) |
| December 31, 2018 | | 505,977 |
| | $ | 9.62 |
| | 505,977 |
| | (1) |
| |
(1) | A description of the maximum number of shares that may be purchased under our SRP is included in the narrative preceding this table. |
During the year ended December 31, 2017, we redeemed 623,499 shareshad no redemptions of common stock for approximately $5.7 million at a weighted average price per share of $9.21. During the year ended December 31, 2018, we redeemed 2,506,298 shares of common stock for approximately $23.8 million at a weighted average price per share of 9.48. Since our inception, we have honored all redemption requests and have redeemed a total of 3,297,239 shares of common stock for approximately $31.1 million at a weighted average price per share of $9.44.shares.
For information regarding redemptions after December 31, 2018, please see Note 14, Subsequent Events to the consolidated financial statements contained in this report.
Use of Proceeds
As of the quarter ended March 31, 2018, we had raised net proceeds of approximately $714.0 million in our IPO and had applied all such proceeds as of that date as detailed in the Form 10-Q for that period.
ITEM 6. SELECTED FINANCIAL DATA[Reserved]
The following selected financial and operating information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | For the Period from February 11, 2014 (Date of Initial Capitalization) through December 31, |
| | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Operating Data | | | | | | | | | | |
| Total revenue | | $ | 106,394 |
| | $ | 107,381 |
| | $ | 62,812 |
| | $ | 25,149 |
| | $ | — |
|
| Income before other income and (expenses) | | $ | 16,876 |
| | $ | 26,107 |
| | $ | 4,264 |
| | $ | (11,653 | ) | | $ | (439 | ) |
| Net (loss) income | | $ | (3,287 | ) | | $ | 11,119 |
| | $ | (6,107 | ) | | $ | (16,504 | ) | | $ | (495 | ) |
| Net (loss) income attributable to common stockholders | | $ | (3,281 | ) | | $ | 11,116 |
| | $ | (6,104 | ) | | $ | (17,247 | ) | | $ | (437 | ) |
Net (loss) income attributable to common stockholders per share, basic and diluted (1) | | $ | (0.04 | ) | | $ | 0.15 |
| | $ | (0.12 | ) | | $ | (1.19 | ) | | $ | (0.86 | ) |
| Distributions declared per common share | | $ | 0.55 |
| | $ | 0.55 |
| | $ | 0.55 |
| | $ | 0.55 |
| | $ | 0.26 |
|
| Balance Sheet Data | | | | | | | | | | |
| Total assets | | $ | 1,137,335 |
| | $ | 1,179,948 |
|
| $ | 1,184,475 |
| | $ | 536,720 |
| | $ | 10,588 |
|
| Total liabilities | | $ | 583,470 |
| | $ | 584,999 |
|
| $ | 613,090 |
| | $ | 307,213 |
| | $ | 1,057 |
|
| Redeemable common stock | | $ | 37,357 |
| | $ | 32,405 |
| | $ | 16,930 |
| | $ | 4,566 |
| | $ | 51 |
|
| Total stockholders’ equity | | $ | 515,326 |
| | $ | 562,468 |
| | $ | 554,371 |
| | $ | 224,844 |
| | $ | 9,341 |
|
| Total equity | | $ | 516,508 |
| | $ | 562,544 |
| | $ | 554,455 |
| | $ | 224,941 |
| | $ | 9,480 |
|
| Other Data | | | | | | | | | |
|
| Net cash provided by (used in) operating activities | | $ | 40,955 |
| | $ | 39,712 |
| | $ | 16,444 |
| | $ | (2,935 | ) | | $ | 54 |
|
| Net cash used in investing activities | | $ | (2,305 | ) | | $ | (87,207 | ) | | $ | (533,806 | ) | | $ | (486,148 | ) | | $ | (2,000 | ) |
| Net cash (used in) provided by financing activities | | $ | (43,173 | ) | | $ | 29,984 |
| | $ | 563,313 |
| | $ | 500,522 |
| | $ | 7,917 |
|
| |
(1) | Amounts were retroactively adjusted to reflect stock dividends. (See Note 2, Basis of Presentation and Summary of Significant Accounting Policies, for additional detail).
|
ITEM 7. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following “Management’s Discussion and Analysis of Financial Condition and ResultResults of Operations” should be read in conjunction with the Company’s consolidated financial statements and the notes thereto contained in this report.Annual Report on Form 10-K.
Overview
Griffin Realty Trust, Inc. is an internally managed, publicly-registered, non-traded REIT. We are committed to creating exceptional value for all of our stakeholders through the ownership and operation of a diversified portfolio of strategically-located, high-quality, business-essential office and industrial properties that are primarily leased to nationally-recognized single tenants we have determined to be creditworthy.
The GRT platform was founded in 2009 and we have since grown to become one of the largest office and industrial-focused net-lease REITs in the United States. Since our founding, our mission has been consistent – to generate long-term results for our stockholders by combining the durability of high-quality corporate tenants, the stability of our revenue and the power of proactive management. To achieve this mission, we leverage the skills and expertise of our employees, who have experience across a range of disciplines including acquisitions, dispositions, asset management, property management, development, finance, law and accounting. They are led by an experienced senior management team with an average of approximately 30 years of commercial real estate experience.
On July 1, 2021, we changed our name from Griffin Capital Essential Asset REIT, Inc. to Griffin Realty Trust, Inc. and our operating partnership changed its name from Griffin Capital Essential Asset Operating Partnership L.P. to GRT OP, L.P.
On March 1, 2021, we completed our acquisition of Cole Office & Industrial REIT (CCIT II), Inc. (“CCIT II”) for approximately $1.3 billion, including transaction costs, in a stock-for-stock transaction (the “CCIT II Inc., a Maryland corporation, was formed on November 20, 2013 underMerger”). At the MGCL and qualified as a REIT commencing with the year ended December 31, 2015. We were organized primarily with the purpose of acquiring single tenant net lease properties that are considered essential to the occupying tenant, and expect to use a substantial amounteffective time of the net proceeds from our Follow-On Offering to invest in these properties. We have no employeesCCIT II Merger, each issued and are externally advisedoutstanding share of CCIT II Class A common stock and managed by our Advisor. Our year end is December 31.
On September 20, 2017, we commenced a follow-on offeringeach issued and outstanding share of up to $2.2 billion of shares, consisting of up to $2.0 billion of shares in our primary offering and $0.2 billion of shares pursuant to our DRP. We reclassified allCCIT II Class T and Class I shares sold in the IPO as "Class AA" and "Class AAA" shares, respectively, and offered to the public New Shares of common stock with NAV based pricing inwas converted into the primary portion of the Follow-On Offering. See Note 10, Related Party Transactions, for additional details on changes in feesright to affiliates. The DRP offering included all sevenreceive 1.392 shares of our share classes. The share classes have different selling commissions, dealer manager fees and ongoing distribution fees. Our Board, including a majority of the independent directors, has adopted valuation procedures that contain a comprehensive set of methodologies to be used in connection with the calculation of the NAV. On August 16, 2018, our Board approved the temporary suspension of the primary portion of our Follow-On Offering, effective August 17, 2018. On December 12, 2018, we also temporarily suspended our DRP offering and our SRP. Beginning in January 2019, all distributions by us were paid in cash. The SRP was officially suspended as of January 19, 2019. We intend to recommence our SRP once the Mergers are completed. On February 15, 2019, our Board determined it was in the best interests to reinstate the DRP effective with the February distribution to be paid on or aroundClass E common stock.
March 1, 2019. At this time, we intend to recommence our Follow-On Offering, if appropriate and at the appropriate time, once the Mergers are completed.
As of December 31, 2018, our real estate portfolio consisted2021, we owned 121 properties (including one land parcel) in 26 states. Our Annualized Base Rent as of 27 properties (35 buildings) consisting substantially of office, industrial, distribution, and data center facilities with a combined acquisition value of $1.1 billion, including the allocation of the purchase price to above and below-market lease valuation, encompassing approximately 7.3 million square feet. Our annualized net rent for the 12- months period subsequent to December 31, 2018 was2021 is expected to be approximately $78.4$361.9 million with approximately 75.8%67.0% expected to be generated by properties leased to tenants and/or guarantorsguaranteed, directly or whose non-guarantor parentindirectly, by companies we have investment grade or, in management's belief, equivalent ratings. Our rentable square feet under lease asdetermined to be creditworthy. As of December 31, 20182021, our portfolio was 100%approximately 94.5% leased (based on square footage), with a weighted average remaining lease term of 9.3 with a6.25 years, weighted average annual rent increases of approximately 2.4%,2.0%.
COVID-19 and Outlook
We are closely monitoring the continued impact of the COVID-19 pandemic on all aspects of our business and geographies, including how it has impacted, and may continue to impact, our tenants and business partners. We cannot predict when pandemic-related restrictions currently in place will be lifted to some extent or entirely, and to whether or not restrictions though currently lifted, may later be put back in place. As a debtresult, the COVID-19 pandemic has negatively impacted almost every industry, directly or indirectly, including industries in which we and our tenants operate, which could result in a general decline in rents and an increased incidence of defaults under existing leases. The extent to totalwhich federal, state or local governmental authorities grant rent relief or other relief or enact amnesty programs applicable to our tenants in response to the COVID-19 outbreak may exacerbate the negative impacts that a slow down or recession could have on us. Demand for office space nationwide has declined and may continue to decline due to the current economic downturn, bankruptcies, downsizing, layoffs, government regulations and restrictions on travel and permitted businesses operations that may be extended in duration and become recurring, increased usage of teleworking arrangements and cost cutting resulting from the pandemic, which could lead to lower office occupancy.
While we did not incur significant disruptions from the COVID-19 pandemic during the year ended December 31, 2021, we are unable to predict the impact that the COVID-19 pandemic will have on our financial condition, results of operations and
cash flows due to numerous uncertainties. These uncertainties include the continued severity, duration, transmission rate and geographic spread of COVID-19 in the United States, the speed of the vaccine roll-out, effectiveness and willingness of people to take COVID-19 vaccines, the duration of associated immunity and their efficacy against emerging variants and mutations of COVID-19, the extent and effectiveness of other containment measures taken, and the response of the overall economy, the financial markets and the population, particularly in areas in which we operate. If we cannot operate our properties so as to meet our financial expectations, because of these or other risks, we may be prevented from growing the values of our real estate acquisition priceproperties, and our financial condition, including our NAV per share, results of 43.7%.operations, cash flows, performance, or our ability to satisfy our debt obligations and/or to maintain our level of distributions to our stockholders may be adversely impacted or disrupted. We cannot predict the impact that the COVID-19 pandemic will have on our tenants and other business partners; however, any material effect on these parties could adversely impact us. As of February 25, 2022, we have received approximately 100% of our portfolio rent payments for the full year 2021 and January 2022. We are unable to predict the amount of future rent relief inquiries and our prior rent collections and rent relief requests to-date may not be indicative of collections or requests in any future period.
On December 14, 2018, we entered into
While the Merger Agreement with GCEAR in connection with the Mergers. Under the termslong-term impact of the MergerCOVID-19 pandemic on our business is not yet known, our management believes we are well-positioned from a liquidity perspective with $545.1 million of immediate liquidity as of December 31, 2021, consisting of $376.5 million undrawn on our $750.0 million senior unsecured revolving credit facility (the "Revolving Credit Facility") and $168.6 million of cash on hand. Included in these amounts is $125.0 million from our Revolving Credit Facility that we borrowed in April 2020 for potential upcoming capital expenditure requirements and to provide us with a flexible conservative cash management position. Additionally, our Second Amendment to the Second Amended and Restated Credit Agreement each share of common stock of GCEAR issued and outstanding will be converted into the rightincreased our credit facility availability from $1.5 billion to receive 1.04807 shares of our common stock. The Mergers are subject to customary closing conditions, including the receipt of approval of both our and GCEAR’s stockholders, thus, there is no guarantee that the Mergers will be consummated.$1.9 billion. See Part I Item 1."Item 1A. Risk Factors", of this Annual Report on Form 10-K for a discussion about risks that COVID-19 directly or indirectly may pose to our business.
Our primary focus continues to be protecting the health and 1a., Businesswell-being of our employees and Risk Factors, respectively, ensuring that there is limited operational disruption as a result of the COVID-19 pandemic. Some of the primary steps we have taken to accomplish these objectives were: (1) initially instituting elective telework arrangements and then following with mandatory telework arrangements with minor exceptions for additional details.
Inflation
The real estate market has not been affected significantly by inflationcertain “essential” business functions, (2) capital investment in the past several years duetechnology solutions and hardware, as necessary, to the relatively low inflation rate. However,allow for a fully remote workforce, (3) mandatory self-quarantines where necessary, (4) recommendations and FAQs to all employees regarding best practices to avoid infection, as well as steps to take in the event inflation does become a factor, we expectof an infection, (5) temporary prohibition of business travel, other than essential business travel approved by management, and (6) creation of an internal COVID-19 task force that meets to discuss additional safety measures to ensure the safe return of our leases typicallyemployees to the office, which plans will not include provisions that would protect us from the impact of inflation. We will attempt to acquire propertiesbe finalized in accordance with leases that require the tenants to pay, directly or indirectly, all operating expenses and certain capital expenditures, which will protect us from increases in certain expenses, including, but not limited to, material and labor costs. In addition, we will attempt to acquire properties with leases that include rental rate increases, which will act as a potential hedge against inflation.applicable local guidelines, when such guidelines are established.
Summary of SignificantCritical Accounting PoliciesEstimates
We have established accounting policies which conform to GAAP in the United States as contained in the FASB ASC.Financial Accounting Standards Board 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.
The following critical accounting policiesestimates discussion reflects what we believe are the most significant estimates, assumptions, and judgments used in the preparationthat have had or are reasonably likely to have a material impact on our financial condition or our results of our consolidated financial statements.operations. This discussion of our critical accounting policiesestimates is intended to supplement the description of our accounting policies in the footnotes to our consolidated financial statements and to provide additional insight into the information used by management when evaluating significant estimates, assumptions, and judgments. For further discussion ofon our significant accounting policies, see Note 2, Basis of Presentation and Summary of Significant Accounting Policies,, to theour consolidated financial statements included in this report.Annual Report on Form 10-K.
Real Estate - Valuation and Purchase Price Allocation
When we acquire operating properties, we allocate the purchase price on an asset acquisition to the various components of the acquisition based upon the relative fair value of each component. The components typically include land, building and improvements, tenant improvements, intangible assets related to above and below market leases, intangible assets related to in-place leases, debt and other assumed assets and liabilities. Transaction costs are capitalized as a component of the cost of the asset acquisition.
We allocate the purchase price to the relative fair value of the tangible assets of a property by valuing the property as if it were vacant. This “as-if vacant” value is estimated using an income, or discounted cash flow, approach that relies upon Level 3 inputs, which are unobservable inputs based on our assumptions about the assumptions a market participant would use. These Level 3 inputs include discount rates, capitalization rates, market rents and comparable sales data for similar properties. Estimates of future cash flows are based on a number of factors, including historical operating results, known and anticipated trends, and market and economic conditions.
In determining the relative fair value of intangible lease assets or liabilities, we also consider Level 3 inputs. Acquired above- and below-market leases are valued based on the present value of the difference between prevailing market rates and the in-place rates measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases, if applicable. The estimated relative fair value of acquired in-place at-market tenant leases are the costs that would have been incurred to lease the property to the occupancy level of the property at the date of acquisition. Such estimates include the value associated with leasing commissions, legal and other costs, as well as the estimated period necessary to lease such property that would be incurred to lease the property to its occupancy level at the time of its acquisition. Acquisition costs associated with an asset acquisition are capitalized as a component of the transaction.
The difference between the relative fair value and the face value of debt assumed in connection with an acquisition is recorded as a premium or discount and amortized to “interest expense” over the life of the debt assumed. The valuation of assumed liabilities is based on our estimate of the current market rates for similar liabilities in effect at the acquisition date.
For acquisitions that do not meet the accounting criteria to be accounted for asof an asset acquisition, we allocate the cost of the acquisition, which excludes any associated acquisition costs that are expensed when incurred, to the individual assets and liabilities assumed on a fair value basis.as incurred.
Impairment of Real Estate and Related Intangible Assets and Liabilities
We continually monitor events and changes in circumstances that could indicate that the carrying amounts of real estate and related intangible assets may not be recoverable. When indicators of potential impairment are present that indicate that the carrying amounts of real estate and related intangible assets may not be recoverable, management will assess the recoverability of the assets by determining whether the carrying value of the assets will be recovered through the undiscounted future operating cash flows expected from the use of the assets and the eventual disposition. If, based on this analysis, we do not believe that we will be able to recover the carrying value of the asset, we will record an impairment loss to the extent the carrying value exceeds the estimated fair value of the asset.
Projections of expected future undiscounted cash flows require management to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, discount rates, the number of months it takes to re-lease the property and the number of years the property is held for investment. As of December 31, 2018,2021, in connection with the preparation and review of the Company's financial statements, we did not record anyrecorded an impairment chargesprovision related to the building and land on two properties. See Note 3, Real Estate to our real estate assets or intangible assets.consolidated financial statements included in this Annual Report on Form 10-K for details.
Revenue Recognition
Leases associated with the acquisition and contribution of certain real estate assets have net minimum rent payment increases during the term of the lease and are recorded to rental revenue on a straight-line basis, commencing as of the contribution or acquisition date. If a lease provides for contingent rental income, we will defer the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved.
Tenant reimbursement revenue, which is comprised of additional amounts collected from tenants for the recovery of certain operating expenses, including repair and maintenance, property taxes and insurance, and capital expenditures, to the extent allowed pursuant to the lease (collectively, "Recoverable Expenses"), is recognized as revenue when the additional rent is due. Recoverable Expenses to be reimbursed by a tenant are determined based on our 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 least quarterly, we reconcile the amount of additional rent paid by the tenant during the year to the actual amount of the Recoverable Expenses incurred by us 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 we can recover from the tenant such as a cap on certain or all property operating expenses.
Recently Issued Accounting Pronouncements
See Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to theour consolidated financial statements.statements including in this Annual Report on Form 10-K.
Results of Operations
Overview
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 2.9% of our Annualized Base Rent as of December 31, 2021 are scheduled to expire during the period from January 1, 2022 to December 31, 2022. 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 from January 1, 2022 to December 31, 2022, thereby resulting in revenue that may differ from the current in-place rents.Additionally, over the next three years, approximately a quarter of the leases in our portfolio are scheduled to expire including approximately 2.9%, 7.7% and 13.1% of our Annualized Base Rent expiring in 2022, 2023 and 2024, respectively and more than a third of our leases are scheduled to expire in the next four years including 11.2% of our Annualized Base Rent expiring in 2025.
Segment Information
The Company internally evaluates all of the properties and interests therein as one reportable segment.
Recent Developments
The following are significant developments in our business during 2021:
•On March 1, 2021, we completed our previously announced acquisition of CCIT II for approximately $1.3 billion, including transaction costs, in a stock-for-stock transaction;
•Upon the closing of the CCIT II transaction, we amended the terms of our Revolving Credit Facility, which provided for a new $400 million delayed draw term loan and the option, subject to obtaining additional commitments from lenders and certain other customary conditions, to increase the commitments under the Revolving Credit Facility, increase the existing term loans and/or incur new term loans by up to an additional $600.0 million in the aggregate;
•On July 14, 2021, we executed a third amendment to our existing credit agreement, which decreased the applicable interest rate margin for the $150 million 7-year loan (see Liquidity and Capital Resource section);
•On October 1, 2021, we announced that, in light of certain strategic initiatives, we suspended our DRP and our SRP commencing with the fourth quarter of 2021; and
•We disposed of three properties for total proceeds of $11.5 million in April 2021, $10.5 million in June 2021, and $1.8 million in February 2021, respectively.
Same Store Analysis
Comparison of theYears Ended December 31, 2018 and 2017
For the year ended December 31, 2018,2021, our "Same Store" portfolio consisted of 2594 properties, encompassing approximately 24.7 million square feet, with an acquisition value of $1.1 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$4.0 billion and Annualized Base Rent as of the results of operations for 25 properties for the years ended December 31, 2018 and 2017 (dollars in thousands): |
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase/(Decrease) | | Percentage Change |
| | 2018 | | 2017 | |
| Rental income | $ | 84,561 |
| | $ | 87,407 |
| | $ | (2,846 | ) | | (3 | )% |
| Property expense recoveries | 17,828 |
| | 16,969 |
| | 859 |
| | 5 | % |
| Property operating expenses | 7,232 |
| | 6,592 |
| | 640 |
| | 10 | % |
| Property management fees to affiliates | 1,764 |
| | 1,748 |
| | 16 |
| | 1 | % |
| Property tax expense | 9,529 |
| | 9,591 |
| | (62 | ) | | (1 | )% |
| Depreciation and amortization | 42,578 |
| | 42,425 |
| | 153 |
| | — | % |
Rental Income
The decrease in rental income2021 was primarily related to an expiring rent reimbursement at one property.
Property Expense Recoveries
The increase in property expense recoveries for the year ended December 31, 2018 compared to the same period a year ago is primarily the result of higher operating expenses and a prior year common area maintenance reconciliation.
Property Operating Expenses
The increase in property operating expense of $0.6 million for the year ended December 31, 2018 compared to the same period a year ago is primarily the result of higher property expenses at one property due to adverse weather conditions and timing of repair and maintenance costs incurred during the current year.
Same Store Analysis
Comparison of theYears Ended December 31, 2017 and 2016
For the year ended December 31, 2017, our "Same Store" portfolio consisted of 15 properties with an acquisition value of $479.2$288.0 million. Our "Same Store" portfolio includes properties which were held for a full period for all periods presented. The following table provides a comparative summary of the results of operations for 15the 94 properties for the years ended December 31, 20172021 and 20162020 (dollars in thousands): | | | | Year Ended December 31, | | Increase/(Decrease) | | Percentage Change | | Year Ended December 31, | | Increase/(Decrease) | | Percentage
Change |
| | 2017 | | 2016 | | | 2021 | | 2020 | |
| Rental income | $ | 38,879 |
| | $ | 38,903 |
| | $ | (24 | ) | | — | % | Rental income | $ | 380,189 | | | $ | 384,220 | | | $ | (4,031) | | | (1) | % |
| Property management fees to affiliates | 778 |
| | 779 |
| | (1 | ) | | — | % | |
| Property expense recoveries | 9,220 |
| | 8,633 |
| | 587 |
| | 7 | % | |
| Property operating expenses | 3,520 |
| | 3,384 |
| | 136 |
| | 4 | % | |
| Property operating expense | | Property operating expense | 52,465 | | | 52,565 | | | (100) | | | — | |
| Property management fees to non-affiliates | | Property management fees to non-affiliates | 3,409 | | | 3,414 | | | (5) | | | — | |
| Property tax expense | 5,734 |
| | 5,420 |
| | 314 |
| | 6 | % | Property tax expense | 36,479 | | | 36,107 | | | 372 | | | — | |
| Depreciation and amortization | 21,496 |
| | 21,547 |
| | (51 | ) | | — | % | Depreciation and amortization | 160,022 | | | 156,069 | | | 3,953 | | | 3 | % |
Property Expense RecoveriesRental Income
The increase in property expense recoveriesRental income decreased by approximately $4.0 million for the year ended December 31, 2017 was2021 compared to the year ended December 31, 2020 primarily related toas a result of (1) an increaseapproximately $7.3 million decrease in recoverable operating expenses and property tax expenses incurred during 2017.
Property Tax Expense
The increase in property tax expensetermination income for the year ended December 31, 2017 was2021; and (2) approximately $5.3 million in expiring and early terminated leases; offset by (3) an approximately $6.3 million increase in lease commencements and amendments to existing tenant leases during the year ended December 31, 2021; and (4) an approximately $2.1 million increase in common area maintenance recoveries primarily relateddue to a property tax reassessment.$1.0 million in prior year operating expense (“OPEX”) concessions expiring in the current year and $1.0 million in prior year reconciliations and timing of OPEX.
Portfolio Analysis
Comparison of the Years Ended December 31, 20182021 and 20172020
As of December 31, 2017 and 2018, we owned 27 properties. The variances as it relates to advisory fees, performance distribution allocation expenses and asset management fees from our results of operations for the year ended December 31, 2018 compared to the same period in the prior year are primarily a result of our Advisor's new management compensation structure related to our Follow-On Offering with a daily NAV structure.
The following table provides summary information about our results of operations for the yearyears ended December 31, 20182021 and 20172020 (dollars in thousands):
| | | | Year Ended December 31, | | Increase/(Decrease) | | Percentage Change | | | Year Ended December 31, | | Increase/(Decrease) | | Percentage
Change |
| | 2018 | | 2017 | | | | 2021 | | 2020 | |
| Rental income | $ | 87,789 |
| | $ | 89,797 |
| | $ | (2,008 | ) | | (2 | )% | Rental income | | $ | 459,872 | | | $ | 397,452 | | | $ | 62,420 | | | 16 | % |
| Property expense recoveries | 18,605 |
| | 17,584 |
| | 1,021 |
| | 6 | % | |
| Property operating expense | 7,382 |
| | 6,724 |
| | 658 |
| | 10 | % | Property operating expense | | 61,259 | | | 57,461 | | | 3,798 | | | 7 | % |
| Property tax expense | 10,120 |
| | 10,049 |
| | 71 |
| | 1 | % | Property tax expense | | 41,248 | | | 37,590 | | | 3,658 | | | 10 | % |
| Property management fees to affiliates | 1,832 |
| | 1,799 |
| | 33 |
| | 2 | % | |
| Asset management fees to affiliates | — |
| | 8,027 |
| | (8,027 | ) | | (100 | )% | |
| Advisory fees to affiliates | 9,316 |
| | 2,550 |
| | 6,766 |
| | 265 | % | |
| Performance distributions to affiliates | 7,783 |
| | 2,394 |
| | 5,389 |
| | 225 | % | |
| Acquisition fees and expenses to non-affiliates | 1,938 |
| | — |
| | 1,938 |
| | 100 | % | |
| Property management fees to non-affiliates | | Property management fees to non-affiliates | | 4,066 | | | 3,656 | | | 410 | | | 11 | % |
| General and administrative expenses | 3,471 |
| | 3,445 |
| | 26 |
| | 1 | % | General and administrative expenses | | 40,479 | | | 38,633 | | | 1,846 | | | 5 | % |
| Corporate operating expenses to affiliates | 3,011 |
| | 2,336 |
| | 675 |
| | 29 | % | Corporate operating expenses to affiliates | | 2,520 | | | 2,500 | | | 20 | | | 1 | % |
| Depreciation and amortization | 44,665 |
| | 43,950 |
| | 715 |
| | 2 | % | Depreciation and amortization | | 209,638 | | | 161,056 | | | 48,582 | | | 30 | % |
| Impairment provision | | Impairment provision | | 4,242 | | | 23,472 | | | (19,230) | | | (82) | % |
| Interest expense | 20,375 |
| | 15,519 |
| | 4,856 |
| | 31 | % | Interest expense | | 85,087 | | | 79,646 | | | 5,441 | | | 7 | % |
| Gain (loss) from investment in unconsolidated entities | | Gain (loss) from investment in unconsolidated entities | | 8 | | | (6,523) | | | 6,531 | | | (100) | % |
| (Loss) gain from disposition of assets | | (Loss) gain from disposition of assets | | (326) | | | 4,083 | | | (4,409) | | | (108) | % |
Property Expense RecoveriesRental Income
The increase in property expense recoveriesrental income of approximately $1.0$62.4 million forduring the year ended December 31, 20182021 compared to the same period a year ago is primarily the result of higher operating expenses(1) approximately $76.7 million primarily related to the CCIT II Merger during the year; (2) approximately $6.3 million in 2021 leasing activity and aamendments to existing tenant leases; and (3) approximately $2.9 million in prior year operating expense concessions expiring and common area maintenance reconciliation.management reconciliations; offset by (4) approximately $11.4 million in lower termination income, which primarily includes termination income in the current year from tenants: Waste Management of Arizona, Inc. and Intermec Technologies Corp., compared to the same period a year ago; (5) approximately $5.3 million lower base rent income due to expiring leases and terminations; and (6) approximately $7.1 million as a result of the sale of two properties.
Property Operating ExpensesExpense
The increase in property operating expense of $0.7approximately $3.8 million forduring the year ended December 31, 20182021 compared to the same period a year ago is primarily the result of higher property expenses at one property due(1) approximately $7.9 million related to adverse weather conditions and timing of repair and maintenance costs incurredthe CCIT II Merger during the current year.year; offset by (2) approximately $4.0 million as a result of five properties sold.
Acquisition Fees and Expenses to Non-AffiliatesProperty Tax Expense
The increase in acquisition fees and expenses to non-affiliatesproperty operating expense of $1.9approximately $3.7 million forduring the year ended December 31, 20182021 compared to the same period a year ago is primarily the result of costs(1) approximately $5.2 million related to the Company Merger.CCIT II Merger during the year; offset by (2) approximately $1.9 million as a result of five properties sold.
Corporate OperatingProperty Management Fees to Non-Affiliates
The increase in property management fees to non-affiliates of approximately $0.4 million during the year ended December 31, 2021 compared to the same period a year ago is primarily the result of the CCIT II Merger during the year ended December 31, 2021.
General and Administrative Expenses to Affiliates
Corporate operatingGeneral and administrative expenses to affiliates for the year ended December 31, 20182021 increased by approximately $0.7$1.8 million compared to the same period a year ago primarily due to (1) approximately $1.9 million in additional restricted stock expense primarily as a result of the amortization of 2021 restricted stock unit grants including a one-time grant associated with the CCIT Merger; (2) an increase of $2.5 million of professional and transfer agent fees; (3) an approximately $0.9 million in allocated personnelincrease in information technology costs and state taxes; offset by our Advisor.(3) approximately $4.4 million write-off of project costs in the fourth quarter of 2020.
Depreciation and Amortization
Depreciation and amortization for the year ended December 31, 2021 increased by approximately $48.6 million as a result of (1) approximately $48.3 million as a result of the CCIT II Merger during the year ended December 31, 2021; and (2) $3.6 million related to fixed asset additions subsequent to December 31, 2020; offset by (3) approximately $3.5 million related to accelerated amortization due to terminated leases and assets sold in 2020.
Impairment Provision
The decrease in impairment provision of approximately $19.2 million for the year ended December 31, 2021 compared to the same period a year ago is primarily due to the recording of impairments of three properties in 2020: 2200 Channahon Road, Houston Westway I and 2275 Cabot Drive.
Interest Expense
The increase of approximately $5.4 million in interest expense for the year ended December 31, 2018 was primarily related to (1) approximately $7.4 million related to the execution of the BofA/KeyBank loan during the current year; (2) approximately $2.0 million related to the execution of the term loan in the current year; offset by (3) a $4.0 million decrease due to the paydown of principal balance of the Revolving Credit Facility; and (4) approximately $0.9 million as a result of favorable swap positions in the current period.
Comparison of the Years Ended December 31, 2017 and 2016
We owned 27 properties as of December 31, 2017. The variance differences from our results of operations for the year ended December 31, 20172021 compared to the same period in the prior year is primarily the result of (1) approximately $6.6 million of interest and financing expenses related to the $400M 5-Year Term Loan 2025; offset by (2) approximately $0.9 million as a result of current year activity including rental income and property expenses forlower interest rates compared to the same period in the prior year acquisitions and activity for acquisitions subsequent to December 31, 2016.year.
Loss from Investment in Unconsolidated Entities
The
following table provides summary information about our resultsreduction of
operations forapproximately $6.5 million in loss from investment in unconsolidated entities in the year ended December 31,
20172021 as compared to the same period in the prior year is primarily the result of an other-than-temporary impairment loss and
2016 (dollarswinding down of our investments in
thousands):our unconsolidated joint venture in the prior period. |
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase/(Decrease) | | Percentage Change |
| | 2017 | | 2016 | |
| Rental income | $ | 89,797 |
| | $ | 51,403 |
| | $ | 38,394 |
| | 75 | % |
| Property expense recoveries | 17,584 |
| | 11,409 |
| | 6,175 |
| | 54 | % |
| Property operating expense | 6,724 |
| | 4,428 |
| | 2,296 |
| | 52 | % |
| Property tax expense | 10,049 |
| | 7,046 |
| | 3,003 |
| | 43 | % |
| Property management fees to affiliates | 1,799 |
| | 1,052 |
| | 747 |
| | 71 | % |
| Asset management fees to affiliates | 8,027 |
| | 6,413 |
| | 1,614 |
| | 25 | % |
| Advisory fees to affiliates | 2,550 |
| | — |
| | 2,550 |
| | 100 | % |
| Performance distribution allocation to affiliates | 2,394 |
| | — |
| | 2,394 |
| | 100 | % |
| Acquisition fees and expenses to non-affiliates | — |
| | 1,113 |
| | (1,113 | ) | | (100 | )% |
| Acquisition fees and expenses to affiliates | — |
| | 6,176 |
| | (6,176 | ) | | (100 | )% |
| General and administrative expenses | 3,445 |
| | 2,804 |
| | 641 |
| | 23 | % |
| Corporate operating expenses to affiliates | 2,336 |
| | 1,622 |
| | 714 |
| | 44 | % |
| Depreciation and amortization | 43,950 |
| | 27,894 |
| | 16,056 |
| | 58 | % |
| Interest expense | 15,519 |
| | 10,384 |
| | 5,135 |
| | 49 | % |
Asset Management Fees to AffiliatesGain from Disposition of Assets
The increasedecrease in asset and property management fees to affiliates forgain from disposition of assets of approximately $4.4 million in the year ended December 31, 2017 was primarily the result of portfolio growth during 2016 and 2017, offset by changes in the management fee structure attributed to the Follow-On Offering with a daily NAV structure.
Performance Distributions and Advisory Fees to Affiliates
The total increase in performance distributions and advisory fees to affiliates for the year ended December 31, 2017 was a result of changes in the fee structure attributed to the Follow-On Offering with a daily NAV structure.
Acquisition Fees and Expenses to Non-Affiliates and Affiliates
The total decrease in acquisition fees and expenses to non-affiliates and affiliates for the year ended December 31, 20172021 as compared to the same period a year ago was approximately $7.3 million. The decrease was ais primarily the result of an accounting standard, which clarified the definitionsale of Bank of America I property in 2020.
For additional information related to a business combination. Undercomparison of the clarified definition, our two acquisitions throughCompany’s results for the yearyears ended December 31, 2017 did not qualify as a business combination; consequently, we accounted for each transaction as an asset acquisition. Thus, approximately $1.2 million2020 and 2019, please see the information under the caption “Management’s Discussion and Analysis of acquisition expense was capitalized as partFinancial Condition and Results of Operations” contained in the asset acquisition and allocatedCompany’s Annual Report on a relative fair value basis.
General and Administrative Expenses and Corporate Operating Expenses to Affiliates
Interest Expense
The increase in interest expense for the year ended December 31, 2017 was primarily related to draws that totaled $274.2 million from our Revolving Credit Facility to fund six acquisitions subsequent to January 1, 2016.
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.Funds from Operations (“FFO”). FFO is defined as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, adding back asset impairment write-downs, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships, joint ventures and preferred distributions. Because FFO calculations exclude such items as depreciation and amortization of real estate assets and gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), they facilitate comparisons of operating performance between periods and between other REITs. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. It should be noted, however, that other REITs may not define FFO in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently than we do, making comparisons less meaningful.
Additionally, we use AFFOAdjusted Funds from Operations (“AFFO”) as a non-GAAP financial measure to evaluate our operating performance. We previously used Modified FundsAFFO excludes non-routine and certain non-cash items such as revenues in excess of cash received, amortization of stock-based compensation net, deferred rent, amortization of in-place lease valuation, acquisition-related costs, financed termination fee, net of payments received, gain or loss from Operations (as defined by the Instituteextinguishment of debt, unrealized gains (losses) on derivative instruments, write-off transaction costs and other one-time transactions. FFO and AFFO have been revised to include amounts available to both common stockholders and limits partners 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, all periods presented.
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'sour operations. AFFO, however, is not considered an appropriate measure of historical earnings as it excludes certain significant costs that are otherwise included in reported earnings. Further, since the measure is based on historical financial information, AFFO for the period presented may not be indicative of future results or our future ability to pay our dividends. By providing FFO and AFFO, we present information that assists investors in aligning their analysis with management’s analysis of long-term operating activities. As explained below, management’s evaluation of our operating performance excludes items considered in the calculation of AFFO based on the following economic considerations:
Revenues in excess of cash received, net. Most of our leases provide for periodic minimum rent payment increases throughout the term of the lease. In accordance with GAAP, these contractual periodic minimum rent payment increases during the term of a lease are recorded to rental revenue on a straight-line basis in order to reconcile the difference between accrual and cash basis accounting. As straight-line rent is a GAAP non-cash adjustment and is included in historical earnings, FFO is adjusted for the effect of straight-line rent to arrive at AFFO as a means of determining operating results of our portfolio. In addition, when applicable, in conjunction with certain acquisitions, we may enter into a master escrow or lease agreement with a seller, whereby the seller is obligated to pay us rent pertaining to certain spaces impacted by existing rental abatements. In accordance with GAAP, these proceeds are recorded as an adjustment to the allocation of real estate assets at the time of acquisition, and, accordingly, are not included in revenues, net income, or FFO. This application results in income recognition that can differ significantly from current contract terms. By adjusting for this item, we believe AFFO is reflective of the realized economic impact of our leases (including master agreements) that is useful in assessing the sustainability of our operating performance.
Amortization of in-place lease valuation. Acquired in-place leases are valued as above-market or below-market as of the date of acquisition based on the present value of the difference between (a) the contractual amounts to be paid pursuant to the in-place leases and (b) management's estimate of fair market lease rates for the corresponding in-place leases over a period equal to the remaining non-cancelable term of the lease for above-market leases. The above-market and below-market lease values are capitalized as intangible lease assets or liabilities and amortized as an adjustment to rental income over the remaining terms of the respective leases. As amortization of in-place lease valuation is a non-cash adjustment and is included in historical earnings, FFO is adjusted for the effect of the amortization to arrive at AFFO as a means of determining operating results of our portfolio.
Acquisition-related costs. We were organized primarily with the purpose of acquiring or investing in income-producing real property in order to generate operational income and cash flow that will allow us to provide regular cash distributions to our stockholders. In the process, we incur non-reimbursable affiliated and non-affiliated acquisition-related costs, which in accordance with GAAP are capitalized and included as part of the relative fair value when the property acquisition meets the definition of an asset acquisition or are expensed as incurred and are included in the determination of income (loss) from operations and net income (loss), for property acquisitions accounted for as a business combination. By excluding acquisition-related costs, AFFO may not provide an accurate indicator of our operating performance during periods in which acquisitions are made. However, it can provide an indication of our on-going ability to generate cash flow from operations and continue as a going concern after we cease to acquire properties on a frequent and regular basis, which can be compared to the AFFO of other non-listed REITs that have completed their acquisition activity and have similar operating characteristics to ours. Management believes that excluding these costs from AFFO provides investors with supplemental performance information that is consistent with the performance models and analyses used by management.
Gain or loss from the extinguishment of debt. We use debt as a partial source of capital to acquire properties in our portfolio. As a term of obtaining this debt, we will pay financing costs to the respective lender. Financing costs are presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts and amortized into interest expense on a straight-line basis over the term of the debt. We consider the amortization expense to be a component of operations if the debt was used to acquire properties. From time to time, we may cancel certain debt obligations and replace these canceled debt obligations with new debt at more favorable terms to us. In doing so, we are required to write off the remaining capitalized financing costs associated with the canceled debt, which we consider to be a cost, or loss, on extinguishing such debt. Management believes that this loss is
considered an event not associated with our operations, and therefore, deems this write off to be an exclusion from AFFO.
Unrealized gains (losses) on derivative instruments. These adjustments include unrealized gains (losses) from mark-to-market adjustments on interest rate swaps and losses due to hedge ineffectiveness. The change in the fair value of interest rate swaps not designated as a hedge and the change in the fair value of the ineffective portion of interest rate swaps are non-cash adjustments recognized directly in earnings and are included in interest expense. We have excluded these adjustments in our calculation of AFFO to more appropriately reflect the economic impact of our interest rate swap agreements.
Performance distribution allocation. Our Advisor holds a special limited partnership interest in our Operating Partnership that entitles it to receive a special distribution from our Operating Partnership equal to 12.5% of the total return, subject to a 5.5% hurdle amount and a high water mark, with a catch-up. At the election of the advisor, the performance distribution allocation may be paid in cash or Class I units in our Operating Partnership. We believe that the distribution, to the extent it is paid in cash, is appropriately included as a component of corporate operating expenses to affiliates and therefore included in FFO and AFFO. If, however, the special distribution is paid in Class I units, management believes the distribution would be excluded from AFFO to more appropriately reflect the on-going portfolio performance and our ability to sustain the current distribution level.
Dead deal costs. As part of investing in income-producing real property, we incur non-reimbursable affiliated and non-affiliated acquisition-related costs for transactions that fail to close, which in accordance with GAAP, are expensed and are included in the determination of income (loss) from operations and net income (loss). Similar to acquisition-related costs (see above), management believes that excluding these costs from AFFO provides investors with supplemental performance information that is consistent with the performance models and analyses used by management.
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, 20172021, 2020 and 2016 (dollars in thousands)2019 (in thousands, except per share amounts): | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Net income (loss) | $ | 11,570 | | | $ | (5,774) | | | $ | 37,044 | |
| Adjustments: | | | | | |
| Depreciation of building and improvements | 125,388 | | | 93,979 | | | 80,393 | |
| Amortization of leasing costs and intangibles | 84,598 | | | 67,366 | | | 73,084 | |
| Impairment provision | 4,242 | | | 23,472 | | | 30,734 | |
| Equity interest of depreciation of building and improvements - unconsolidated entities | — | | | 1,438 | | | 2,800 | |
| Equity interest of amortization of intangible assets - unconsolidated entities | — | | | 1,751 | | | 4,632 | |
| Loss (Gain) from disposition of assets | 326 | | | (4,083) | | | (29,938) | |
| Equity interest of gain on sale - unconsolidated entities | (8) | | | — | | | (4,128) | |
| Impairment of unconsolidated entities | — | | | 1,906 | | | 6,927 | |
| FFO | $ | 226,116 | | | $ | 180,055 | | | $ | 201,548 | |
| Distributions to redeemable preferred shareholders | (9,698) | | | (8,708) | | | (8,188) | |
| FFO attributable to common stockholders and limited partners | $ | 216,418 | | | $ | 171,347 | | | $ | 193,360 | |
| Reconciliation of FFO to AFFO: | | | | | |
| FFO attributable to common stockholders and limited partners | $ | 216,418 | | | $ | 171,347 | | | $ | 193,360 | |
| Adjustments: | | | | | |
| Non-cash earn-out adjustment | — | | | (2,581) | | | (1,461) | |
| Revenues in excess of cash received, net | (10,780) | | | (25,686) | | | (19,519) | |
| Amortization of share-based compensation | 7,470 | | | 4,108 | | | 2,614 | |
| Deferred rent - ground lease | 2,064 | | | 2,065 | | | 1,353 | |
| Amortization of above/(below) market rent, net | (1,323) | | | (2,292) | | | (3,201) | |
| Amortization of debt premium/(discount), net | 409 | | | 412 | | | 300 | |
| Amortization of below tax benefit amortization | 1,252 | | | — | | | — | |
| Amortization of ground leasehold interests | (350) | | | (290) | | | (52) | |
| Non-cash lease termination income | — | | | — | | | (10,150) | |
| Financed termination fee payments received | — | | | 7,557 | | | 6,065 | |
| Company's share of revenues in excess of cash received (straight-line rents) - unconsolidated entity | — | | | 505 | | | 528 | |
| Unrealized loss (gain) on investments | (15) | | | 31 | | | 307 | |
| Company's share of amortization of above market rent - unconsolidated entity | — | | | 1,419 | | | 3,696 | |
| Performance fee adjustment | — | | | — | | | (2,604) | |
| Unconsolidated joint venture valuation adjustment | — | | | 4,452 | | | — | |
| Employee separation expense | 777 | | | 2,666 | | | — | |
| Write-off of reserve liability | (1,166) | | | — | | | — | |
| Write-off of transaction costs | 65 | | | 4,427 | | | 252 | |
| Transaction expense | 966 | | | — | | | — | |
| AFFO available to common stockholders and limited partners | $ | 215,787 | | | $ | 168,140 | | | $ | 171,488 | |
| FFO per share, basic and diluted | $ | 0.63 | | | $ | 0.65 | | | $ | 0.76 | |
| AFFO per share, basic and diluted | $ | 0.63 | | | $ | 0.64 | | | $ | 0.68 | |
| | | | | |
| Weighted-average common shares outstanding - basic EPS | 309,250,873 | | | 230,042,543 | | | 222,531,173 | |
| Weighted-average OP Units | 31,838,889 | | | 31,919,525 | | | 30,947,370 | |
| Weighted-average common shares and OP Units outstanding - basic FFO/AFFO | 341,089,762 | | | 261,962,068 | | | 253,478,543 | |
|
| | | | | | | | | | | | |
| | | 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 |
|
Liquidity and Capital Resources
Long-Term Liquidity and Capital Resources
On a long-term basis,Property rental income is our principal demands for funds will be for property acquisitions, either directly or through entity interests, for the paymentprimary source of operating cash flow and is dependent on a number of factors including occupancy levels and rental rates, as well as the ability and willingness of our tenants’ to pay rent. Our assets provide a relatively consistent level of cash flow that enables us to pay operating expenses, and distributions, including preferred equity distribution, redemptions, and for the payment of interestdebt service on our outstanding indebtedness, including repayment of our Second Amended and other investments.Restated Credit Agreement, and property secured mortgage loans. Generally, we anticipate that cash needs for items, other than property acquisitions, will be met from funds from operations and our Credit Facility. We anticipate that cash flows from continuing operations and proceeds received from offerings. However, there mayfinancings, together with existing cash balances, will be a delay betweenadequate to fund our business operations, debt amortization, capital expenditures, distributions and other requirements over the sale of our sharesnext 12 months and our purchase of properties that could result in a delay in the benefits to our stockholders, if any, of returns generated from our investment operations. Our Advisor will evaluate potential property acquisitions and engage in negotiations with sellers on our behalf. After a purchase contract is executed that contains specific terms, the property will not be purchased until the successful completion of due diligence, which includes review of the title insurance commitment, an appraisal and an environmental analysis. In some instances, the proposed acquisition will require the negotiation of final binding agreements, which may include financing documents. During this period, we may decide to temporarily invest any unused proceeds from our public offerings in certain investments that could yield lower returns than the properties. These lower returns may affect our ability to make distributions.longer term.
Financing Activities
Offerings
On January 20, 2017, we closed the primary portion of our IPO; however, we continued to offer shares pursuant to our DRP under our IPO registration statement through May 2017. We are currently offering shares pursuant to our DRP as part of our Follow-On Offering. The DRP may be terminated at any time upon 10 days’ prior written notice to stockholders, which may be provided through our filings with the SEC.
On September 20, 2017, we commenced our Follow-On Offering of up to $2.2 billion of shares, consisting of up to $2.0 billion of shares in the primary portion of our Follow-On Offering and $0.2 billion of shares pursuant to the DRP. On September 20, 2017, we reclassified all Class T shares sold in the IPO as "Class AA" shares and all Class I shares sold in the IPO as "Class AAA" shares.
On August 16, 2018, our Board approved the temporary suspension of the primary portion of our Follow-On Offering, effective August 17, 2018. On December 12, 2018, we also temporarily suspended our DRP offering and our SRP. Beginning in January 2019, all distributions by us were paid in cash. The SRP was officially suspended as of January 19, 2019. We intend to recommence our SRP once the Mergers are completed. On February 15, 2019, our Board determined it was in the best interests to reinstate the DRP effective with the February distribution to be paid on or around March 1, 2019. At this time, we intend to recommence our Follow-On Offering, if appropriate and at the appropriate time, once the Mergers are completed.
The following table summarizes shares issued and gross proceeds received for each share class as of December 31, 2018 (dollars in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Class | | |
| | | T | | S | | D | | I | | A | | AA | | AAA | | Total |
| Gross proceeds from primary portion of offerings | | $ | 2,245 |
| | $ | 3 |
| | $ | 182 |
| | $ | 7,538 |
| | $ | 240,780 |
| | $ | 474,858 |
| | $ | 8,381 |
| | $ | 733,987 |
|
| Gross proceeds from DRP | | $ | 26 |
| | $ | — |
| | $ | 3 |
| | $ | 187 |
| | $ | 26,535 |
| | $ | 34,656 |
| | $ | 545 |
| | $ | 61,952 |
|
| Shares issued in primary portion of offerings | | 224,647 |
| | 264 |
| | 18,921 |
| | 786,573 |
| | 24,199,764 |
| | 47,562,870 |
| | 901,225 |
| | 73,694,264 |
|
| DRP shares issued | | 2,664 |
| | 15 |
| | 347 |
| | 19,441 |
| | 2,794,547 |
| | 3,650,017 |
| | 57,433 |
| | 6,524,464 |
|
| Stock distribution shares issued | | — |
| | — |
| | — |
| | — |
| | 263,642 |
| | 300,166 |
| | 4,677 |
| | 568,485 |
|
| Restricted stock units issued | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 36,000 |
| | 36,000 |
|
| Total shares issued prior to redemptions | | 227,311 |
| | 279 |
| | 19,268 |
| | 806,014 |
| | 27,257,953 |
| | 51,513,053 |
| | 999,335 |
| | 80,823,213 |
|
In order to maintain a reasonable level of liquidity for redemptions of our shares, shares are not eligible for redemption for the first year after purchase except upon death or qualifying disability of a stockholder; provided, however, shares issued pursuant to the DRP are not subject to the one-year holding period. In addition, our SRP generally imposes a quarterly cap on aggregate redemptions of our shares equal to a value of up to 5% of the aggregate NAV of the outstanding shares as of the last business day of the previous quarter.
Should redemption requests, in the business judgment of our Board, place an undue burden on our liquidity, adversely affect our operations or risk having an adverse impact on us as a whole, or should we otherwise determine that investing our liquid assets in real properties or other illiquid investments rather than redeeming our shares is in the best interests of us as a whole, we may choose to redeem fewer shares in any particular quarter than have been requested to be redeemed, or none at all. Further, our Board may modify, suspend or terminate our SRP if it deems such action to be in our best interest. Material modifications, including any amendment to the 5% quarterly limitation on redemptions, to and suspensions of the SRP will be promptly disclosed to stockholders in a prospectus supplement (or post-effective amendment if required by the Securities Act) or special or periodic reports filed by us.
Second Amended and Restated Credit Agreement
On June 28, 2018, we, through our Operating Partnership, entered into an amended and restated credit agreement (the "Amended and Restated Credit Agreement") related to a revolving credit facility and a term loan (collectively, the "Unsecured Credit Facility") with a syndicate of lenders, under which KeyBank serves as administrative agent, and various notes related thereto. In addition, we entered into a guaranty agreement.
Pursuant to the Second Amended and Restated Credit Agreement , we, werethrough the GRT OP as the borrower, have been provided with a revolving$1.9 billion credit facility (the "Revolving Credit Facility") in an initial commitment amountconsisting of up to $550.0 million and a term loan (the "Term Loan") in an initial commitment amount of up to $200.0 million, which commitments may be increased under certain circumstances up to a maximum total commitment of $1.25 billion. Any increase in the total commitment will be allocated to the Revolving Credit Facility and/ormaturing in June 2022 with (subject to the satisfaction of certain customary conditions) a one-year extension option, the $200M 5-Year Term Loan, in such amounts as the Operating Partnership and KeyBank may determine.The Revolving Credit Facility may be prepaid and terminated, in whole or in part, at any time without fees or penalty.
The Revolving Credit Facility has an initial term of four years, maturing on June 28, 2022. The Revolving Credit Facility may be extended for a one-year period if certain conditions are met$400M 5-Year Term Loan, the $400M 5-Year Term Loan 2025, and the Operating Partnership pays an extension fee. Payments$150M 7-Year Term Loan.The credit facility also provides the option, subject to obtaining additional commitments from lenders and certain other customary conditions, to increase the commitments under the Revolving Credit Facility, are interest only and are due onincrease the first dayexisting term loans and/or incur new term loans by up to an additional $600 million in the aggregate. As of each quarter. Amounts borrowedDecember 31, 2021, the remaining capacity under the Revolving Credit Facility may be repaid and reborrowed, subject towas $376.5 million.
Based on the terms of the Amended and Restated Credit Agreement.
The Term Loan has an initial term of five years, maturing on June 28, 2023. Payments under the Term Loan are interest only and are due on the first day of each quarter. Amounts borrowed under the Term Loan may not be repaid and reborrowed.
The Unsecured Credit Facility has an interest rate calculated based on London Interbank Offered Rate ("LIBOR") plus the applicable LIBOR margin, as provided in theSecond Amended and Restated Credit Agreement oras of December 31, 2021, the Base Rate plusinterest rate for the applicable base rate margin, as provided in the agreement. The applicable LIBOR margin and base rate margin are dependentCredit Facility varies based on theour consolidated leverage ratio and ranges (a) in the case of the Operating Partnership, us, and our Company's subsidiaries, as disclosedRevolving Credit Facility, from LIBOR plus 1.30% to LIBOR plus 2.20%, (b) in the periodic compliance certificate providedcase of each of the $200M 5-Year Term Loan, the $400M 5-Year Term Loan and the Delayed Draw $400M 5-Year Term Loan, from LIBOR plus 1.25% to LIBOR plus 2.15% and (c) in the administrative agent each quarter.case of the $150M 7-Year Term Loan, from LIBOR plus 1.65% to LIBOR plus 2.50%. If the Operating PartnershipGRT OP obtains an investment grade rating of its senior unsecured long term debt from Standard & Poor's Rating Services, or Moody's Investors Service, Inc., or Fitch, Inc., the applicable LIBOR margin and base rate margin will be dependentvary based on such rating. Asrating and range (i) in the case of December 31, 2018 the Revolving Credit Facility, from LIBOR wasplus 0.825% to LIBOR plus 1.55%, (ii) in the case of each of the $200M 5-Year Term Loan, the $400M 5-Year Term Loan and the Delayed Draw $400M 5-Year Term Loan, from LIBOR plus 0.90% to LIBOR plus 1.75% and (iii) in the case of the $150M 7-Year Term Loan, from LIBOR plus 1.40% to LIBOR plus 2.35%.
The Second Amended and Restated Credit Agreement relating toprovides procedures for determining a replacement reference rate in the Revolving Credit Facility providesevent that LIBOR is discontinued. See Part I "Item 1A. Risk Factors", of this Annual Report on Form 10-K for a discussion about risks that the Operating Partnership must maintain a poolreplacement of real properties (each a "Pool Property"LIBOR with an alternative reference rate may adversely affect interest rates on our current or future indebtedness and collectivelymay otherwise adversely affect our financial condition and results of operations.
On March 1, 2021, we exercised our right to draw on the "Pool Properties") that meet certain requirements contained$400M 5-Year Term Loan 2025 to repay CCIT II's existing debt balance in connection with the Amended and Restated Credit Agreement. The agreement sets forth certain covenants relating toCCIT II Merger.
On July 14, 2021, we, through the Pool Properties, including, without limitation,GRT OP, entered into the following:
• there must be no less than 15 Pool Properties;
• no greater than 15% ofThird Amendment, which amended the aggregate pool value may be contributed by a single Pool Property or tenant;
• no greater than 15% of the aggregate pool value may be contributed by Pool Properties subject to ground leases;
• no greater than 20% of the aggregate pool value may be contributed by Pool Properties which are under development;
• the minimum aggregate leasing percentage of all Pool Properties must be no less than 90%; and
• other limitations as determined by KeyBank upon further due diligence of the Pool Properties.
Borrowing availability under theSecond Amended and Restated Credit Agreement is limited to decrease the lesser of (i) an asset pool leverage ratio of no greater than 60%, or (ii) an asset pool debt service coverage ratio of no less than 1.35:1.00.
As of December 31, 2018, we were in compliance with all applicable covenants. As of December 31, 2018, the remaining capacity pursuant to the Revolving Credit Facility was $221.1 million.
BofA/KeyBank Loan
On April 27, 2018, we, through four special purpose entities owned by our Operating Partnership, entered into the Loan Agreement with Bank of America, N.A. and KeyBank (the "BofA/KeyBank Loan"), in which we borrowed $250.0 million. The BofA/KeyBank Loan is secured by cross-collateralized and cross-defaulted first mortgage liens on four properties. The BofA/KeyBank Loan has a term of 10 years, maturing on May 1, 2028. The BofA/KeyBank Loan bears interest at a rate of 4.32%. The BofA/KeyBank Loan requires monthly payments of interest only.
As of December 31, 2018, there was approximately $250.0 million outstanding pursuant to the BoA/KeyBank Loan.
As of December 31, 2018, we were in compliance with all applicable covenants.
AIG Loan
On October 22, 2015, six special purpose entities that are wholly-owned by our Operating Partnership entered into promissory notes with The Variable Annuity Life Insurance Company, American General Life Insurance Company, and the United States Life Insurance Company (collectively, the "Lenders"), pursuant to which the Lenders provided such special purpose entities with a loan in the aggregate amount of approximately $127.0 million (the "AIG Loan").
The AIG Loan has a term of 10 years, maturing on November 1, 2025. The AIG Loan bears interest at a rate of 4.15%. The AIG Loan requires monthly payments of interest onlymargin for the first five years and fixed monthly payments of principal and interest thereafter. The AIG Loan is secured by cross-collateralized and cross-defaulted first lien deeds of trust and second lien deeds of trust on certain properties. Commencing October 31, 2017, each of the individual promissory notes comprising the AIG Loan may be prepaid but only if such prepayment is made in full, subject to 30 days' prior notice to the holder and payment of a prepayment premium in addition to all unpaid principal and accrued interest to the date of such prepayment.
As of December 31, 2018, there was approximately $127.0 million outstanding pursuant to the AIG$150M 7-Year Term Loan.
As of December 31, 2018, we were in compliance with all applicable covenants.
Derivative Instruments
As discussed in Note 5, 6, Interest Rate Contracts, to the consolidated financial statements, on February 25, 2016, we entered into an interest rate swap agreementagreements to hedge the variable cash flows associated with thecertain existing or forecasted, LIBOR-based variable-rate debt, onincluding our RevolvingSecond Amended and Restated Credit Facility. The interest rate swap is effective for the period from April 1, 2016 to December 12, 2018 with a notional amount of $100.0 million.
Effective as of November 1, 2017, the GCEAR Operating Partnership novated a $100.0 million interest rate swap agreement with an expiration date of June 1, 2018 to our Operating Partnership. We paid approximately nine thousand dollars, which approximated fair value.
On April 30, 2018, we settled the $100.0 million cash flow hedge contract purchased from the GCEAR Operating Partnership, which resulted in us receiving a net settlement of approximately $0.1 million.
Agreement. The effective portion of the changechanges in the fair value of derivatives designated and qualifyingthat qualify as cash flow hedges is initially recorded in accumulated other comprehensive income (loss)("AOCI") and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reportedDerivatives 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 accumulated other comprehensive income (loss) related tothe fair value of the derivatives will be reclassified to interest expense as interest payments and accruals are made on our variable-rate debt.is recognized directly in earnings.
As of December 31, 2018, all of our interest rate swap agreements have matured.
The following table sets forth a summary of the interest rate swaps at December 31, 20182021 and December 31, 20172020 (dollars in thousands): | | | | | | | | | | | | | | | | | | Fair Value (1) | | Current Notional Amount |
| | | Fair value (1) | | Current Effective Notional Amount (2) | | December 31, | | December 31, |
| Derivative Instrument | | Effective Date | | Maturity Date | | Interest Strike Rate | | December 31, 2018 | | December 31, 2017 | | December 31, 2018 | | December 31, 2017 | Derivative Instrument | | Effective Date | | Maturity Date | | Interest Strike Rate | | 2021 | | 2020 | | 2021 | | 2020 |
| Assets/(Liabilities) | | Assets/(Liabilities) | | | | | | | | | | | | | | |
| Interest Rate Swap | | Interest Rate Swap | | 3/10/2020 | | 7/1/2025 | | 0.83% | | $ | 1,648 | | | $ | (2,963) | | | $ | 150,000 | | | $ | 150,000 | |
| Interest Rate Swap | | Interest Rate Swap | | 3/10/2020 | | 7/1/2025 | | 0.84% | | 1,059 | | | (2,023) | | | 100,000 | | | 100,000 | |
| Interest Rate Swap | | Interest Rate Swap | | 3/10/2020 | | 7/1/2025 | | 0.86% | | 749 | | | (1,580) | | | 75,000 | | | 75,000 | |
| Interest Rate Swap | | Interest Rate Swap | | 7/1/2020 | | 7/1/2025 | | 2.82% | | (7,342) | | | (13,896) | | | 125,000 | | | 125,000 | |
| Interest Rate Swap | | Interest Rate Swap | | 7/1/2020 | | 7/1/2025 | | 2.82% | | (5,909) | | | (11,140) | | | 100,000 | | | 100,000 | |
| Interest Rate Swap | | 4/1/2016 | | 12/12/2018 | | 0.74% | | $ | — |
| | $ | 967 |
| | $ | — |
| | $ | 100,000 |
| Interest Rate Swap | | 7/1/2020 | | 7/1/2025 | | 2.83% | | (5,899) | | | (11,148) | | | 100,000 | | | 100,000 | |
Interest Rate Swap | | 11/1/2017 | | 4/30/2018 | | 1.50% | | — |
| | 65 |
| | — |
| | 100,000 |
| Interest Rate Swap | | 7/1/2020 | | 7/1/2025 | | 2.84% | | (5,958) | | | (11,225) | | | 100,000 | | | 100,000 | |
| Total | | $ | — |
| | $ | 1,032 |
| | $ | — |
| | $ | 200,000 |
| Total | | $ | (21,652) | | | $ | (53,975) | | | $ | 750,000 | | | $ | 750,000 | |
| |
(1) |
(1) We record all derivative instruments on a gross basis on a gross basis in the consolidated balance sheets, and accordingly, there are no offsetting amounts that net assets against liabilities. As of December 31, 2018, all our derivatives have matured. |
| |
(2) | Represents the notional amount of our swaps that was effective as of the balance sheet date of December 31, 2018 and December 31, 2017. |
Contractual Commitments and Contingencies
The following is a summary of our contractual obligations as of December 31, 2018 (dollars2021, derivatives where in thousands):an asset or/liability position are included in the line item "Other assets or Interest rate swap liability," respectively, in the consolidated balance sheets at fair value.
Common Equity
Follow-On Offering
On September 20, 2017, we commenced a follow-on offering of up to $2.2 billion of shares, consisting of up to $2.0 billion of shares in our primary offering and $0.2 billion of shares pursuant to our DRP (collectively, the "Follow-On Offering"). Pursuant to the Follow-On Offering, we offered to the public four new classes of shares of our common stock: Class T shares, Class S shares, Class D shares, and Class I shares with NAV-based pricing. The share classes have different selling commissions, dealer manager fees, and ongoing distribution fees and eligibility requirements.
The Follow-On Offering terminated with the expiration of the registration statement on September 20, 2020. Following the termination of the Follow-On Offering, it will no longer be a potential source of liquidity for us.
Distribution Reinvestment Plan
On July 17, 2020, we filed a registration statement on Form S-3 for the registration of up to $100 million in shares pursuant to our DRP (the “DRP Offering”).The DRP Offering may be terminated at any time upon 10 days prior written notice to stockholders.As of December 31, 2021, we had sold 35,519,796 shares for approximately $341.1 million in our DRP Offering.
On October 1, 2021, the Company announced a suspension of our DRP, effective October 11, 2021, which remains in effect as of the date of this filing.
Share Redemption Program
Under parameters established by our Board in 2020 under the SRP, redemptions through September 30, 2021 were limited to those sought upon a stockholder's death, qualifying disability, or determination of incompetence or incapacitation in accordance with the terms of the SRP, and the quarterly cap on aggregate redemptions was equal to the aggregate NAV, as of the last business day of the previous quarter, of the shares issued pursuant to the DRP during such quarter. Settlements of share redemptions are made within the first three business days of the following quarter. During year ended December 31, 2021, we redeemed 2,232,476 shares.
On October 1, 2021, we announced a suspension of our SRP beginning with the next cycle commencing fourth quarter 2021, which suspension remains in effect as of the date of this filing.
|
| | | | | | | | | | | | | | | | | | | |
| | Payments Due During the Years Ending December 31, |
| | Total | | 2019 | | 2020-2021 | | 2022-2023 | | Thereafter |
Outstanding debt obligations (1) (2) | $ | 490,055 |
| | $ | — |
| | $ | 2,178 |
| | $ | 4,637 |
| | $ | 483,240 |
|
Interest on outstanding debt obligations (3) | 159,295 |
| | 20,483 |
| | 41,068 |
| | 39,592 |
| | 58,152 |
|
| Total | $ | 649,350 |
| | $ | 20,483 |
| | $ | 43,246 |
| | $ | 44,229 |
| | $ | 541,392 |
|
| |
(1) | Amount relates to principal payments for the outstanding balance on the Unsecured Credit Facility, BofA/KeyBank Loan and AIG Loan at December 31, 2018. |
| |
(2) | Deferred financing costs are excluded from total contractual obligations above. |
| |
(3) | Projected interest payments are based on the outstanding principal amounts under the Unsecured Credit Facility, BofA/KeyBank Loan and AIG Loan at December 31, 2018. Projected interest payments are based on the interest rate in effect at December 31, 2018. |
Perpetual Convertible Preferred Shares
Other Potential Future SourcesUpon consummation of Capitalthe EA Mergers, we issued 5,000,000 Series A Preferred Shares to the Purchaser (defined below). We assumed the purchase agreement (the "Purchase Agreement") that EA-1 entered into on August 8, 2018 with SHBNPP Global Professional Investment Type Private Real Estate Trust No. 13(H) (acting through Kookmin Bank as trustee) (the "Purchaser") and Shinhan BNP Paribas Asset Management Corporation, as an asset manager of the Purchaser, pursuant to which the Purchaser agreed to purchase an aggregate of 10,000,000 shares of EA-1 Series A Cumulative Perpetual Convertible Preferred Stock at a price of $25.00 per share (the "EA-1 Series A Preferred Shares") in two tranches, each comprising 5,000,000 EA-1 Series A Preferred Shares.
Potential futurePursuant to the Purchase Agreement, the Purchaser has agreed to purchase an additional 5,000,000 Series A Preferred Shares (the "Second Issuance") at a later date (the "Second Issuance Date") for an additional purchase price of $125 million subject to approval by the Purchaser’s internal investment committee and the satisfaction of certain conditions set forth in the Purchase Agreement. Pursuant to the Purchaser is generally restricted from transferring the Series A Preferred Shares or the economic interest in the Series A Preferred Shares for a period of five years from the applicable closing date.
Distributions for Perpetual Convertible Preferred Shares
Subject to the terms of the applicable articles supplementary, the holder of the Series A Preferred Shares are entitled to receive distributions quarterly in arrears at a rate equal to one-fourth (1/4) of the applicable varying rate, as follows:
i.6.55% from and after August 8, 2018 until August 8, 2023, or if the Second Issuance occurs, the five year anniversary of the Second Issuance Date (the "Reset Date"), subject to paragraphs (iii) and (iv) below;
ii.6.75% from and after the Reset Date, subject to paragraphs (iii) and (iv) below;
iii.if a listing of our Class E shares of common stock or the Series A Preferred Shares on a national securities exchange registered under Section 6(a) of the Exchange Act, does not occur by August 1, 2020 (the "First Triggering Event"), 7.55% from and after August 2, 2020 and 7.75% from and after the Reset Date, subject to paragraph (iv) below and certain conditions as set forth in the articles supplementary; or
iv.if such a listing does not occur by August 1, 2021, 8.05% from and after August 2, 2021 until the Reset Date, and 8.25% from and after the Reset Date.
As of December 31, 2021, our annual distribution rate was 8.05% for the Series A Preferred Shares since no listing of either our Class E common stock or the Series A Preferred Shares occurred prior to August 1, 2021.
Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the Series A Preferred Shares will be entitled to be paid out of our assets legally available for distribution to the stockholders, after payment of or provision for our debts and other liabilities, liquidating distributions, in cash or property at its fair market value as determined by the Board, in the amount, for each outstanding Series A Preferred Share equal to $25.00 per Series A Preferred Share (the "Liquidation Preference"), plus an amount equal to any accumulated and unpaid distributions to the date of payment, before any distribution or payment is made to holders of shares of common stock or any other class or series of equity securities ranking junior to the Series A Preferred Shares but subject to the preferential rights of holders of any class or series of equity securities ranking senior to the Series A Preferred Shares. After payment of the full amount of the Liquidation Preference to which they are entitled, plus an amount equal to any accumulated and unpaid distributions to the date of payment, the holders of Series A Preferred Shares will have no right or claim to any of our remaining assets.
Company Redemption Rights
The Series A Preferred Shares may be redeemed by the Company, in whole or in part, at our option, at a per share redemption price in cash equal to $25.00 per Series A Preferred Share (the "Redemption Price"), plus any accumulated and unpaid distributions on the Series A Preferred Shares up to the redemption date, plus, a redemption fee of 1.5% of the Redemption Price in the case of a redemption that occurs on or after the date of the First Triggering Event, but before August 8, 2023.
Holder Redemption Rights
In the event we fail to effect a listing of our shares of common stock or Series A Preferred Shares by August 1, 2023, the holder of any Series A Preferred Shares has the option to request a redemption of such shares on or on any date following August 1, 2023, at the Redemption Price, plus any accumulated and unpaid distributions up to the redemption date (the "Redemption Right"); provided, however, that no holder of the Series A Preferred Shares shall have a Redemption Right if such a listing occurs prior to or on August 1, 2023.
Conversion Rights
Subject to our redemption rights and certain conditions set forth in the articles supplementary, a holder of the Series A Preferred Shares, at his or her option, will have the right to convert such holder's Series A Preferred Shares into shares of our common stock any time after the earlier of (i) August 8, 2023, or if the Second Issuance occurs, five years from the Second Issuance Date or (ii) a Change of Control (as defined in the articles supplementary) at a per share conversion rate equal to the Liquidation Preference divided by the then Common Stock Fair Market Value (as defined in the articles supplementary).
Liquidity Requirements
Our principal liquidity needs for the next 12 months and in the longer term are to fund:
•normal recurring expenses;
•debt service and principal repayment obligations;
•capital expenditures, including tenant improvements and leasing costs;
•redemptions;
•distributions to shareholders, including preferred equity distribution and distributions to holders of GRT OP Units;
•possible acquisitions of properties.
Our long-term liquidity requirements consist primarily of funds necessary to acquire additional properties and repay indebtedness. We expect to meet our long-term liquidity requirements through various sources of capital, include proceeds from our public or private offerings,including proceeds from secured or unsecured financings from banks or other lenders, proceeds from the sale of our properties and undistributed funds from operations. In connection with the Mergers, we expectoperations, and entering into joint venture arrangements to enter into a larger unsecured credit facility.acquire or develop facilities. If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures. To the extent we are not able to secure additional financing in the form of a credit facility, securitization vehicle or other third party source of liquidity, we will be heavily dependent upon the proceeds of our public offeringscurrent financing and income from operations in orderoperations. The success of our business strategy will depend, to a significant degree, on our ability to access these various capital sources.
To qualify as a REIT, we must meet a number of organizational and operational requirements on a continuing basis, including the requirement that we annually distribute at least 90% of our long-term liquidity requirementsREIT taxable income, determined without regard to the dividends paid deduction and excluding net capital gain, to our stockholders. As a result of this requirement, we cannot rely on retained earnings to fund our distributions. business needs to the same extent as other entities that are not REITs. If we do not have sufficient funds available to us from our operations to fund our business needs, we will need to find alternative ways to fund those needs. Such alternatives may include, among other things, divesting ourselves of properties (whether or not the sales price is optimal or otherwise meets our strategic long-term objectives), incurring additional indebtedness or issuing equity securities in public or private transactions, the availability and attractiveness of the terms of which cannot be assured.
Short-Term LiquidityCash Requirements
The Company’s material cash requirements as of as of December 31, 2021 including the following contractual obligations (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Payments Due During the Years Ending December 31, |
| | Total | | 2022 | | | Thereafter |
Outstanding debt obligations (1) | $ | 2,541,515 | | | $ | 9,501 | | | | $ | 2,532,014 | |
Interest on outstanding debt obligations (2) | 274,829 | | | 65,948 | | | | 208,881 | |
Interest rate swaps (3) | 50,962 | | | 14,227 | | | | 36,735 | |
| Ground lease obligations | $ | 300,734 | | | 2,197 | | | | 298,537 | |
| Total | $ | 3,168,040 | | | $ | 91,873 | | | | $ | 3,076,167 | |
(1)Amounts only include principal payments. The payments on our mortgage debt do not include the premium/discount or debt financing costs.
(2)Projected interest payments are based on the outstanding principal amounts at December 31, 2021. Projected interest payments on the Credit Facility and Term Loan are based on the contractual interest rates in effect at December 31, 2021.
(3)The interest rate swaps contractual commitment was calculated based on the swap rate less the LIBOR as of December 31, 2021.
Capital ResourcesExpenditures and Tenant Improvement Commitments
As of December 31, 2021, we had aggregate remaining contractual commitments for repositioning, capital expenditure projects, leasing commissions and tenant improvements of approximately $25.4 million.
Summary of Cash Flows
We expect to meet our short-term operating liquidity requirements from advances from our Advisor and its affiliates, proceeds received from our offerings, andwith operating cash flows generated from our properties and other properties we acquire in the future. Any advancesdraws from our Advisor will be repaid, without interest, as funds are available after meeting our current liquidity requirements, subject to the limitations on reimbursement set forth in the “Management Compensation” section of our prospectus.KeyBank loans.
Our cash, cash equivalents and restricted cash balancesactivity decreased by approximately $4.5$107.2 million during the year ended December 31, 20182021 compared to the same period a year ago and were primarily used in or provided by the following:following (in thousands):
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | |
| 2021 | | 2020 | | Change |
| Net cash provided by operating activities | $ | 204,979 | | | $ | 164,538 | | | $ | 40,441 | |
| Net cash (used in) provided by investing activities | $ | (62,810) | | | $ | (24,971) | | | $ | (37,839) | |
| Net cash provided by (used in) financing activities | $ | (159,335) | | | $ | (49,521) | | | $ | (109,814) | |
Operating Activities.Activities. Cash flows provided by operating activities are primarily dependent on the occupancy level, the rental rates of our leases, the collectability of rent and recovery of operating expenses from our tenants, and the timing of acquisitions. Net cash provided by operating activities forDuring the year ended December 31, 2018 increased to $41.02021, we generated $205.0 million in cash from operating activities compared to cash provided by operating activities of approximately $39.7$164.5 million for the year ended December 31, 2017.2020. Net cash provided by operating activities before changes in operating assets and liabilities for the year ended December 31, 2018 decreased2021 increased by $1.1approximately $67.6 million to $33.6approximately $227.1 million compared to approximately $34.7$159.5 million for the year ended December 31, 2017.
Investing Activities. During the year ended December 31, 2018, we used $2.3 million in cash for investing activities compared to $87.2 million used during the same period in 2017. The $84.9 million decrease in cash utilization in investing activities is2020, primarily related to the following:CCIT II Merger.
$44.2 million decrease in cash used to acquire properties as a result of no acquisitionsInvesting Activities. Cash provided by investing activities for the yearyears ended December 31, 2018 versus two acquisitions2021 and 2020 consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | |
| 2021 | | 2020 | | Increase (decrease) |
| Net cash (used in) provided by investing activities: | | | | | |
| Distributions of capital from investment in unconsolidated entities | $ | 42 | | | $ | 8,531 | | | $ | (8,489) | |
| Proceeds from disposition of properties | 22,408 | | | 51,692 | | | (29,284) | |
| Real estate acquisition deposits | — | | | 1,047 | | | (1,047) | |
| Restricted reserves | 1,078 | | | (1,530) | | | 2,608 | |
| Total sources of cash provided by investing activities | $ | 23,528 | | | $ | 59,740 | | | $ | (36,212) | |
| Uses of cash for investing activities: | | | | | |
| Cash acquired in connection with the Company Merger, net of acquisition costs | $ | (36,746) | | | $ | — | | | $ | (36,746) | |
| Acquisition of properties, net | — | | | (16,584) | | | 16,584 | |
| Payments for construction in progress | (49,260) | | | (58,938) | | | 9,678 | |
| Investment in unconsolidated joint venture | — | | | (8,160) | | | 8,160 | |
| Purchase of investments | (332) | | | (1,029) | | | 697 | |
| Total uses of cash (used in) provided by investing activities | $ | (86,338) | | | $ | (84,711) | | | $ | (1,627) | |
| Net cash (used in) provided by investing activities | $ | (62,810) | | | $ | (24,971) | | | $ | (37,839) | |
Financing Activities. Cash used in 2017; and
$40.6 million decrease in restricted reserves primarily as a result of payments of tenant improvement disbursements infinancing activities for the prior period.
Financing Activities. During the yearyears ended December 31, 2018, we used $43.2 million in financing activities compared to $30.0 million generated during the same period in 2017, a decrease in cash provided by financing activities of $73.2 million which is comprised primarily2021 and 2020 consisted of the following:following (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2021 | | 2020 | | Increase (decrease) |
| Sources of cash provided by financing activities: | | | | | |
| Proceeds from borrowings - Term Loan | $ | 400,000 | | | $ | — | | | $ | 400,000 | |
| Proceeds from borrowings - Revolver/KeyBank Loans | — | | | 215,000 | | | (215,000) | |
| Issuance of common stock, net of discounts and underwriting costs | — | | | 4,698 | | | (4,698) | |
| Total sources of cash provided by financing activities | $ | 400,000 | | | $ | 219,698 | | | $ | 180,302 | |
| Uses of cash (used in) provided by financing activities: | | | | | |
| Principal payoff of indebtedness - CCIT II Credit Facility | $ | (415,500) | | | $ | — | | | $ | (415,500) | |
| Principal payoff of secured indebtedness - Revolver Loan | — | | | (53,000) | | | 53,000 | |
| Principal payoff of secured indebtedness - Mortgage Debt | (1,292) | | | — | | | (1,292) | |
| Principal amortization payments on secured indebtedness | (9,786) | | | (7,362) | | | (2,424) | |
| Repurchase of common shares to satisfy employee tax withholding requirements | (2,874) | | | (751) | | | (2,123) | |
| Repurchase of common stock | (25,517) | | | (107,821) | | | 82,304 | |
| Distributions to common stockholders | (82,976) | | | (72,143) | | | (10,833) | |
| Dividends paid on preferred units subject to redemption | (9,542) | | | (8,396) | | | (1,146) | |
| Distributions to noncontrolling interests | (11,134) | | | (13,290) | | | 2,156 | |
| Deferred financing costs | (567) | | | (4,725) | | | 4,158 | |
| Offering costs | (47) | | | (594) | | | 547 | |
| Repurchase of noncontrolling interest | — | | | (1,137) | | | 1,137 | |
| Financing lease payment | (100) | | | — | | | (100) | |
| Total sources of cash (used in) provided by financing activities | $ | (559,335) | | | $ | (269,219) | | | $ | (290,116) | |
| Net cash (used in) provided by financing activities | $ | (159,335) | | | $ | (49,521) | | | $ | (109,814) | |
$24.3 million decrease in cash provided from borrowings from the Revolving Credit Facility due to the acquisition of the MISO property in May 2017 and a tenant improvement disbursement for the Southern Company property in December 2017;
$357.7 million increase in cash used for principal repayments of the Revolving Credit Facility in the current year provided by the proceeds of the BofA/KeyBank Loan and Term Loan borrowings in the current year;
$28.0 million decrease in cash provided by the issuance of common stock, net of discounts and offering costs due to the closing of the primary portion of our IPO during the first quarter of 2017;
$6.6 million increase in cash used in deferred financing costs related to the BofA/KeyBank Loan in the current year; and
$19.5 million increase in cash used for payments of distributions and repurchases of common stock due to an increase in number of shareholders; offset by
$250.0 million increase in proceeds from borrowings on the BofA/KeyBank Loan. $249.8 million of the proceeds provided by the loan was used to pay down a portion of our Revolving Credit Facility; and
$113.0 million increase in proceeds from borrowings on the Term Loan. $107.9 million of the proceeds provided by the Term Loan was used to pay down a portion of our Revolving Credit Facility.
Distributions and Our Distribution Policy
Distributions will be paid to our stockholders as of the record date selected by our Board. We expect to continue to pay distributions monthly based on daily declaration and record dates so that investors may be entitled to distributions immediately upon purchasing our shares.dates. We expect to regularly pay distributions regularly unless our results of operations, our general financial condition, general economic conditions, or other factors inhibit us from doing so. Distributions will be authorized at the discretion of our Board, which will be directed, in substantial part, by its obligation to cause us to comply with the REIT requirements of the Code. The funds we receive from operations that are available for distribution may be affected by a number of factors, including the following:
the amount of time required for us to invest the funds received in our public offerings;
•our operating and interest expenses;
•the amount of distributions or dividends received by us from our indirect real estate investments, if applicable;investments;
•our ability to keep our properties occupied;
•our ability to maintain or increase rental rates;
•tenant improvements, capital expenditures and reserves for such expenditures;
•the issuance of additional shares; and
•financings and refinancings.
Distributions may be funded with operating cash flow offering proceeds, or a combination thereof.from our properties To the extent that we do not have taxable income, distributions paid will be considered a return of capital to stockholders. The following table shows distributions declared, distributions paid, and cash flowsflow provided by operating activities during the yearsyear ended December 31, 20182021 and 2017, excluding stock distributionsDecember 31, 2020 (dollars in thousands): | | | | Year Ended December 31, 2018 | | | | Year Ended December 31, 2017 | | | | Year Ended December 31, 2021 | | Year Ended December 31, 2020 | |
| Distributions paid in cash — noncontrolling interests | $ | 65 |
| | | | $ | 11 |
| | | Distributions paid in cash — noncontrolling interests | $ | 11,134 | | | $ | 13,290 | | |
| Distributions paid in cash — common stockholders | 20,753 |
| | | | 19,232 |
| | | Distributions paid in cash — common stockholders | 82,976 | | | 72,143 | | |
| Distributions paid in cash — preferred stockholders | | Distributions paid in cash — preferred stockholders | 9,542 | | | 8,396 | | |
| Distributions of DRP | 19,998 |
| | | | 22,208 |
| | | Distributions of DRP | 22,886 | | | 24,497 | | |
| Total distributions | $ | 40,816 |
| (1) | | | $ | 41,451 |
| | | Total distributions | $ | 126,538 | | (1) | | $ | 118,326 | | |
Source of distributions (2) | | | | | | | | Source of distributions (2) | | | | |
| Paid from cash flows provided by operations | $ | 20,818 |
| | 51 | % | | $ | 19,243 |
| | 46 | % | Paid from cash flows provided by operations | $ | 103,652 | | | 82 | % | | $ | 93,829 | | | 79 | % |
| Offering proceeds from issuance of common stock | — |
| | 0 | % | | — |
| | 0 | % | |
| Offering proceeds from issuance of common stock pursuant to the DRP | 19,998 |
| | 49 | % | | 22,208 |
| | 54 | % | Offering proceeds from issuance of common stock pursuant to the DRP | 22,886 | | | 18 | | | 24,497 | | | 21 | |
| Total sources | $ | 40,816 |
| (3) | 100 | % | | $ | 41,451 |
| | 100 | % | Total sources | $ | 126,538 | | (3) | 100 | % | | $ | 118,326 | | | 100 | % |
| | Net cash provided by operating activities | $ | 40,955 |
| | | | $ | 39,712 |
| | | Net cash provided by operating activities | $ | 204,979 | | | $ | 164,538 | | |
| |
(1) | Distributions are paid on a monthly basis in arrears. Distributions for all record dates of a given month are paid on or about the first business day of the following month. Total distributions declared but not paid as of December 31, 2018 were approximately $3.6 million for common stockholders and noncontrolling interests. |
| |
(2) | Percentages were calculated by dividing the respective source amount by the total sources of distributions. |
| |
(3) | Allocation of total sources are calculated on a quarterly basis. |
(1)Distributions are paid on a monthly basis in arrears. Distributions for all record dates of a given month are paid on or about the first business day of the following month. Total cash distributions declared but not paid as of December 31, 2021 were $10.6 million for common stockholders and noncontrolling interests.
(2)Percentages were calculated by dividing the respective source amount by the total sources of distributions.
(3)Allocation of total sources are calculated on a quarterly basis.
For the year ended December 31, 2018,2021, we paid and declared cash distributions of approximately $42.7$108.7 million to common stockholders including shares issued pursuant to the DRP, and approximately $0.07$11.1 million to the limited partners of our Operating Partnership,the GRT OP, as compared to FFO net of noncontrolling interest distributionsattributable to common stockholders and limited partners and AFFO available to common stockholders and limited partners for the year ended December 31, 20182021 of approximately $41.3$216.4 million and $37.0$215.8 million, respectively. The payment of distributions from sources other than FFO or AFFO may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds. From our inception through December 31, 2018,2021, we paid approximately $116.6$967.4 million of cumulative distributions (excluding preferred distributions), including approximately $62.0$341.2 million reinvested through our DRP, as compared to net cash provided by operating activities of approximately $41.0$661.5 million.
Off-Balance Sheet ArrangementsAs of December 31, 2018, we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations.
Subsequent Events
See Note 14, Subsequent Events, to the consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSUREDISCLOSURES ABOUT MARKET RISK
Market risks include risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market-sensitive instruments. In pursuing our business plan, weWe expect that the primary market risk to which we will be exposed is interest rate risk.risk, including the risk of changes in the underlying rates on our variable rate debt. Our current indebtedness consists of the Revolving Credit FacilityKeyBank loans and the AIG Loan. other loans and property secured mortgages as described in Note 5, Debt, to our consolidated financial statements included in this Annual Report on Form 10-K.These instruments were not entered into for other than trading purposes.
Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve our objectives, we may borrow at fixed rates or variable rates. We may also utilize a variety of financial instruments, including interest rate swap agreements, caps, floors, and other interest rate exchange contracts. We will not enter into these financial instruments for speculative purposes. The use of these types of instruments to hedge a portion of our exposure to changes in interest rates carries additional risks, such as counterparty credit risk and the legal enforceability of hedging contracts.
As of December 31, 2018,2021, our debt consisted of approximately $377.0 million in fixed rate debt and approximately $113.1 million in variable rate debt (excluding deferred financing costs of approximately $8.1 million). As of December 31,
2017, our debt consisted of approximately $327.0 million$1.8 billion in fixed rate debt (including the interest rate swap)swaps) and approximately $157.8$773.5 million in variable rate debt (excluding unamortized deferred financing costscost and discounts, net, of approximately $2.9$9.1 million). As of December 31, 2020, our debt consisted of approximately $1.8 billion in fixed rate debt (including the effect of interest rate swaps) and approximately $373.5 million in variable rate debt (excluding unamortized deferred financing cost and discounts, net, of approximately $12.2 million). Changes in interest rates have different impacts on the fixed and variable rate debt. A change in interest rates on fixed rate debt impacts its fair value but has no impacteffect on interest incurred or cash flows. A change in interest rates on variable rate debt could impactaffect the interest incurred and cash flows and its fair value.
Our future earnings and fair values relating to variable rate financial instruments are primarily dependent upon prevalent market rates of interest, such as LIBOR. However, our interest rate swap agreements are intended to reduce the effects of interest rate changes. The effect of an increase of 100 basis points in interest rates, assuming a LIBOR floor of 0%, on our variable ratevariable-rate debt, which currently consists ofincluding our Revolving Credit Facility,KeyBank loans, after consideringconsidering the effect of our interest rate swap agreementagreements, would decrease our future earnings and cash flows by approximately $1.1approximately $7.9 million annually.
Interest rate risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur. Further, in the event of a change of that magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data filed as part of this annual reportAnnual Report on Form 10-K are set forth beginning on page F-1 of this report.Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report,Annual Report on Form 10-K, management, with the participation of our principal executive and principal financial officers, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of the evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this reportAnnual Report on Form 10-K to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and
communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for us. Our management, including our chief executive officer and chief financial officer, evaluated, as of December 31, 2018,2021, the effectiveness of our internal control over financial reporting using the framework inInternal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2018.2021.
There have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 20182021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
68
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
(a) DuringPART III
We expect to file a definitive proxy statement for our 2022 Annual Meeting of Stockholders (the “2022 Proxy Statement”) with the quarter ended December 31, 2018, there was noSEC, pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G(3) to Form 10-K and is incorporated by reference to the 2022 Proxy Statement. Only those sections of the 2022 Proxy Statement that specifically address the items required to be disclosed in a report on Form 8-K which was not disclosed in a report on Form 8-K.set forth herein are incorporated by reference.
(b) During the quarter ended December 31, 2018, there were no material changes to the procedures by which security holders may recommend nominees to our Board.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information Concerning the Executive Officers and Directors
Included below is certainThe information regarding our executive officers and directors. All of our directors, including our three independent directors, have been reelected at the 2018 annual meeting of stockholders. All of our executive officers serve at the pleasure of our Board. Our executive officers are elected annually by our Board and serve at the discretion of our Board. No family relationships exist between any directors or executive officers, as such term is defined in Item 401 of Regulation S-K promulgated under the Exchange Act.
|
| | | |
Name | Age | Position(s) | Period with Company |
Kevin A. Shields | 60 | Chairman of the Board of Directors and Chief Executive Officer | 11/2013 - present |
Michael J. Escalante | 58 | Director and President | 11/2013 - present |
Javier F. Bitar | 57 | Chief Financial Officer and Treasurer | 6/2016 - present |
David C. Rupert | 62 | Executive Vice President | 11/2013 - present |
Mary P. Higgins | 59 | Vice President and General Counsel | 11/2013 - present |
Howard S. Hirsch | 53 | Vice President and Secretary | 6/2014 - present |
Don G. Pescara | 55 | Vice President - Acquisitions | 11/2013 - present |
Julie A. Treinen | 59 | Vice President - Asset Management | 11/2013 - present |
Samuel Tang | 58 | Independent Director | 2/2015 - present |
J. Grayson Sanders | 78 | Independent Director | 3/2016 - present |
Kathleen S. Briscoe | 59 | Independent Director | 3/2016 - present |
Kevin A. Shields, our Chief Executive Officer and the Chairman of our Board, has been an officer and director since our formation. Mr. Shields is also the Chairman, Chief Executive Officer and sole director of GCC, which he founded in 1995 and which indirectly owns our dealer manager. Mr. Shields has been the Chief Executive Officer of our Advisor since its formation in November 2013, and served as the Chief Executive Officer of our dealer manager until June 2017. Mr. Shields also currently serves as Chairman of the Board and as Executive Chairman of GCEAR. Prior to December 14, 2018, Mr. Shields served as Chief Executive Officer of GCEAR, a position he had held since August 2008. Mr. Shields serves as President and trustee of Griffin Institutional Access Real Estate Fund (“GIA Real Estate Fund”), positions he has held since November 2013; and as President and trustee of Griffin Institutional Access Credit Fund (“GIA Credit Fund”), positions he has held since January 2017. He also serves as a non-voting special observer of the board of directors of Griffin-American Healthcare REIT III, Inc. (“GAHR III”), and Griffin-American Healthcare REIT IV, Inc. (“GAHR IV”), both of which are public non-traded REITs co-sponsored by GCC, and as a member of the investment committee of the advisor of GAHR III. Before founding GCC, Mr. Shields was a Senior Vice President and head of the Structured Real Estate Finance Group at Jefferies & Company, Inc. in Los Angeles and a Vice President in the Real Estate Finance Department of Salomon Brothers Inc. in both New York and Los Angeles. Over the course of his 30-year real estate and investment-banking career, Mr. Shields has structured and closed over 200 transactions totaling in excess of $8 billion of real estate acquisitions, financings and dispositions. Mr. Shields graduated from the University of California at Berkeley where he earned a J.D. degree from Boalt Hall School of Law, an M.B.A. from the Haas Graduate School of Business, graduating Summa Cum Laude with Beta Gamma Distinction, and a B.S. from Haas Undergraduate School of Business, graduating with Phi Beta Kappa distinction. Mr. Shields is a licensed securities professional holding Series 7, 63, 24 and 27 licenses, and an inactive member of the California Bar. Mr. Shields is a full member of the Urban Land Institute and frequent guest lecturer at the Haas Graduate School of Business. Mr. Shields is also a member of the Policy Advisory Board for the Fisher Center for Real Estate at the Haas School of Business, the Chair Emeritus of the Board of Directors for the Institute for Portfolio Alternatives and an executive member of the Public Non-Listed REIT Council of the National Association of Real Estate Investment Trusts.
We believe that Mr. Shields’ active participation in the management of our operations and his extensive experience in the real estate and real estate financing industries support his appointment to our Board.
Michael J. Escalante is our President, and has held this position since our formation. Mr. Escalante has been a member of our Board since February 2015. Mr. Escalante has also served as President of our advisor since its initial formation and
served as GCC’s Chief Investment Officer from June 2006 until December 2018. Mr. Escalante currently serves as Chief Executive Officer (since December 14, 2018) and President of GCEAR, a position he has held since June 2015. Prior to his appointment as Chief Executive Officer, he served as Chief Investment Officer of GCEAR, a position he had held since August 2008. He also serves as a member of the investment committee of the respective advisors of GAHR III, GAHR IV and GIA Real Estate Fund. With more than 30 years of real estate related investment experience, he has been responsible for completing in excess of $8.2 billion of commercial real estate transactions throughout the United States. Prior to joining GCC in June 2006, Mr. Escalante founded Escalante Property Ventures in March 2005, a real estate investment management company, to invest in value-added and development-oriented infill properties within California and other western states. From 1997 to March 2005, Mr. Escalante served at Trizec Properties, Inc., one of the largest publicly-traded U.S. office REITs, with his final position being Executive Vice President - Capital Transactions and Portfolio Management. While at Trizec, Mr. Escalante was directly responsible for all capital transaction activity for the Western U.S., which included the acquisition of several prominent office projects. Mr. Escalante’s work experience at Trizec also included significant hands-on operations experience as the firm’s Western U.S. Regional Director with bottom-line responsibility for asset and portfolio management of a 4.6 million square foot office/retail portfolio (11 projects/23 buildings) and associated administrative support personnel (110 total/65 company employees). Prior to joining Trizec, from 1987 to 1997, Mr. Escalante held various acquisitions, asset management and portfolio management positions with The Yarmouth Group, an international investment advisor. Mr. Escalante holds an M.B.A. from the University of California, Los Angeles, and a B.S. in Commerce from Santa Clara University. Mr. Escalante is a full member of the Urban Land Institute and active in many civic organizations.
We believe that Mr. Escalante’s broad experience in the real estate industry and his years of service at our GCC and its affiliates support his appointment to our Board.
Javier F. Bitar is our Chief Financial Officer and Treasurer, and has served in that capacity since June 2016. Mr. Bitar also currently serves as Chief Financial Officer and Treasurer of GCEAR, positions he has held since June 2016. Mr. Bitar has over 33 years of commercial real estate related accounting and financial experience, including over 20 years of senior management-level experience. Mr. Bitar has been involved in over $11 billion of real estate transactions. Prior to joining us, from July 2014 to May 2016, Mr. Bitar served as the Chief Financial Officer of New Pacific Realty Corporation, a real estate investment and development company. From January 2014 to July 2014, Mr. Bitar served as the Proprietor of JB Realty Advisors, a real estate consulting and advisory company. From July 2008 to December 2013, Mr. Bitar served as the Chief Operating Officer of Maguire Investments, where he was responsible for overseeing operating and financial matters for the company’s real estate investment and development portfolio. Mr. Bitar also served as Senior Investment Officer at Maguire Properties, Inc. from 2003 to 2008 and as Partner and Senior Financial Officer at Maguire Partners from 1987 to 2003. Mr. Bitar graduated Magna Cum Laude from California State University, Los Angeles, with a Bachelor of Business Administration degree and is a Certified Public Accountant in the State of California.
David C. Rupert has been our Executive Vice President since our initial formation. Mr. Rupert also serves as Executive Vice President of our advisor, a position he has held since our advisor’s initial formation. In addition, Mr. Rupert served as Executive Vice President of GCEAR from June 2015 to December 2018; and currently serves as President of GCC, having re-joined GCC in September 2010. Mr. Rupert previously served as President of GCEAR from July 2012 through June 2015. Mr. Rupert’s 35 years of commercial real estate and finance experience includes over $9 billion of transactions executed on four continents: North America, Europe, Asia and Australia. From July 2009 to August 2010, Mr. Rupert co-headed an opportunistic hotel fund in partnership with The Olympia Companies, a hotel owner-operator with more than 800 employees, headquartered in Portland, Maine. From March 2008 through June 2009 Mr. Rupert was a partner in a private equity firm focused on Eastern Europe, in particular extended stay hotel and multifamily residential development, and large-scale agribusiness in Ukraine. Mr. Rupert previously served as Chief Operating Officer of GCC from August 1999 through February 2008. From 1999 to 2000, Mr. Rupert served as President of CB5, a real estate and restaurant development company that worked closely with the W Hotel division of Starwood Hotels. From 1997 to 1998 Mr. Rupert provided consulting services in the U.S. and UK to Lowe Enterprises, a Los Angeles-headquartered institutional real estate management firm. From 1986 to 1996, Mr. Rupert was employed at Salomon Brothers in New York, where he served in various capacities, including the head of REIT underwriting, and provided advice, raised debt and equity capital and provided brokerage and other services for leading public and private real estate institutions and entrepreneurs. Since 1984, Mr. Rupert has served on the Advisory Board to Cornell University’s Endowment for Real Estate Investments, and in August 2010 Mr. Rupert was appointed Co-Chairman of that Advisory Board. For more than 15 years, Mr. Rupert has lectured in graduate-
level real estate and real estate finance courses in Cornell’s masters-level Program in Real Estate, where he is a founding Board Member. Mr. Rupert received his B.A. degree from Cornell in 1979 and his M.B.A. from Harvard in 1986.
Mary P. Higgins is our Vice President and our General Counsel, and has held these positions since our formation. Ms. Higgins is also the Vice President, General Counsel and Secretary of our advisor and GCC. From our inception through June 2014, Ms. Higgins served as our Secretary. Ms. Higgins previously served as Vice President, General Counsel and Secretary of GCEAR from August 2008 to December 2018. Prior to joining GCC in August 2004, Ms. Higgins was a partner at the law firm of Wildman, Harrold, Allen & Dixon LLP in Chicago, Illinois. Ms. Higgins has been GCC’s primary real estate transaction counsel for more than 10 years and has worked together with GCC’s principals on nearly all of their acquisition, due diligence, leasing, financing and disposition activities during that time period. Ms. Higgins has over 20 years of experience representing both public and private real estate owners, tenants and investors in commercial real estate matters, including development, leasing, acquisitions, dispositions, and securitized and non-securitized financings. Representative transactions include sales and dispositions of regional malls, including some of the premier regional malls in the nation; sale of a golf course in an UPREIT structure; a $38 million credit tenant loan transaction; acquisition of various Florida office properties for a $150 million office property equity fund; representation of the ground lessor in a subordinated tenant development ground lease and a $350 million property roll up. Ms. Higgins additionally has extensive commercial leasing experience. Ms. Higgins earned her undergraduate degree in Law Firm Administration from Mallinckrodt College (now part of Loyola University) and her J.D. degree from DePaul University College of Law, both of which are located in Illinois.
Howard S. Hirsch is our Vice President and Secretary, and has held these positions since June 2014. Mr. Hirsch previously served as Vice President and General Counsel - Securities of GCC from June 2014 to December 2018. Mr. Hirsch serves as Vice President and Secretary of our advisor, positions he has held since November 2014. In addition, Mr. Hirsch serves as Chief Legal Officer and Secretary of GCEAR, positions he has held since December 2018. He previously served as Vice President and Assistant Secretary of GCEAR from January 2015 to December 2018. He also serves as Vice President and Assistant Secretary of GIA Real Estate Fund, positions he has held since January 2015; and as Vice President and Assistant Secretary of GIA Credit Fund, positions he has held since January 2017. He also serves as a member of the investment committee of the advisor of GIA Credit Fund. Prior to joining GCC in June 2014, Mr. Hirsch was a shareholder at the law firm of Baker, Donelson, Bearman, Caldwell & Berkowitz, PC in Atlanta, Georgia. From July 2007 through the time he joined Baker Donelson in April 2009, Mr. Hirsch was counsel at the law firm of Bryan Cave LLP in Atlanta, Georgia. Prior to joining Bryan Cave LLP, Mr. Hirsch was a partner at the law firm of Holland and Knight LLP. Mr. Hirsch has approximately 20 years of experience in public securities offerings, SEC reporting, corporate and securities compliance matters, and private placements. He previously handled securities, transactional and general corporate matters for various publicly-traded and non-traded REITs. Mr. Hirsch’s experience also includes registrations under the Securities Act and the 1940 Act, reporting under the Exchange Act, and advising boards of directors and the various committees of public companies. He has counseled public companies on corporate governance best practices and compliance matters, and has represented issuers on SEC, Financial Industry Regulatory Authority, Inc. (“FINRA”), and “Blue Sky” regulatory matters in connection with registrations of public offerings of non-traded REITs and real estate partnerships. He also has experience representing broker dealers on various FINRA compliance matters. Mr. Hirsch earned his B.S. degree from Indiana University and his J.D. degree from The John Marshall Law School in Chicago, Illinois.
Don G. Pescara is our Vice President - Acquisitions, and has held that position since our formation. Mr. Pescara has also served as Vice President - Acquisitions for GCEAR since August 2008. Mr. Pescara is responsible for our sponsor’s activities in the Midwestern U.S. and is based in the firm’s Chicago office. Prior to joining GCC in January 1997, Mr. Pescara was a Director at Cohen Financial in the Capital Markets Unit, responsible for all types of real estate financing including private placements of both debt and equity, asset dispositions, and acquisitions on behalf of Cohen’s merchant banking group. Prior to joining Cohen, Mr. Pescara was a Director at CB Commercial Mortgage Banking Group. During his more than 25-year career, Mr. Pescara has been responsible for many innovative financing programs, including structuring corporate sale/leaseback transactions utilizing synthetic and structured lease bond financing. Formerly Co-Chairman of the Asian Real Estate Association, Mr. Pescara was responsible for creating a forum for idea exchange between Pacific Rim realty investors and their United States counterparts. An active member of the Urban Land Institute, Mortgage Bankers Association and the International Council of Shopping Centers, Mr. Pescara is a graduate of the University of Illinois at Urbana-Champaign with a B.A. in Economics and a minor in Finance and is a licensed Illinois Real Estate Broker.
Julie A. Treinen is our Vice President - Asset Management, and has held that position since our formation. Ms. Treinen also currently serves as Vice President - Asset Management for GCEAR, a position she has held since August 2008. Before joining GCC in September 2004, Ms. Treinen was a Vice President at Cornerstone Real Estate Advisers, Inc., a Hartford-based, SEC-registered real estate investment and advisory firm with $4.6 billion of assets under management. During her five years at Cornerstone, Ms. Treinen managed the acquisition diligence of approximately 1.2 million square feet of existing assets totaling $238 million, the development of five apartment joint venture projects totaling $152 million, and the disposition of five properties totaling $125 million. Ms. Treinen was also the senior asset manager for a $400 million portfolio of office, industrial and apartment investments. Prior to joining Cornerstone, from 1996 to 1999, Ms. Treinen was Director, Field Production at Northwestern Mutual Life in Newport Beach where she initiated, negotiated, and closed three development projects totaling over $100 million and three mortgage originations totaling over $100 million, and acquired four existing assets totaling over $50 million. Prior to joining Northwestern, from 1989 to 1996, Ms. Treinen was a Vice President at Prudential Realty Group in Los Angeles. Over the course of her seven-year tenure at Prudential, Ms. Treinen originated over $235 million in new commercial mortgage loans, structured and negotiated problem loan workouts, note sale and foreclosures totaling over $140 million and managed a portfolio of office, industrial and apartment investments totaling approximately $500 million. Prior to joining the real estate industry, Ms. Treinen spent several years in finance and as a certified public accountant. Ms. Treinen holds an M.B.A. degree from the University of California at Berkeley and a B.A. degree in Economics from the University of California at Los Angeles.
Samuel Tang is one of our independent directors and is the chairperson of our audit committee and a member of our nominating and corporate governance committee and compensation committee. Mr. Tang has over 25 years of experience in private equity and real estate investing. From 2008 to the present, Mr. Tang has been a Managing Partner of TriGuard Management LLC, an entity which he co-founded and which acquires private equity fund-of-funds in the secondary market and serves as a platform for other private equity investment businesses. He is also a co-founder and Managing Partner of Montauk TriGuard Management Inc. since 2004 to the present, where he is responsible for sourcing, analyzing, structuring, and closing the acquisition of private equity funds in the secondary market. From 1999 to 2004, Mr. Tang was Managing Director, Equities, of Pacific Life Insurance Company, where he co-chaired the workout committee to maximize recovery on bond investments and worked on various strategic and direct equity investments. Before joining Pacific Life Insurance Company, from 1989 to 1999, he was a Managing Partner at The Shidler Group, a specialized private equity firm focused on finance, insurance and real estate companies. Mr. Tang was also previously a Manager in Real Estate Consulting with KPMG Peat Marwick Main and a Senior, CPA with Arthur Young. Mr. Tang has an M.B.A. in Finance from University of California, Los Angeles and a B.S. in Accounting from University of Southern California. Mr. Tang also currently serves in leadership positions, including as a member of the board of directors with several private equity fund advisory, corporate and charitable entities.
We believe that Mr. Tang’s extensive experience in the private equity and real estate industries support his appointment to our Board.
J. Grayson Sanders is one of our independent directors and is the chairperson of our compensation committee and a member of our audit committee and nominating and corporate governance committee. He has been one of our independent directors since March 2016. Mr. Sanders also serves as an independent director on the board of directors of GAHR III, a position he has held since February 2014. Since March 2013, Mr. Sanders has served as the Co-Founder, President and Chief Investment Officer of PREDEX Capital Management, a registered investment adviser. Mr. Sanders has also served as the Co-Founder and Chief Executive Officer of Mission Realty Advisors, the majority owner of PREDEX Capital Management and provider of advisory and equity capital raising services to institutional quality real estate operators, since February 2011. From March 2009 to March 2010, Mr. Sanders served as Chief Executive Officer of Steadfast Capital Markets Group, where he managed the development and registration of Steadfast Income REIT, a non-traded REIT, and oversaw the development of that company’s FINRA registered managing broker-dealer. From November 2004 to March 2009, Mr. Sanders served as President of CNL Fund Advisors Company in Orlando, where he created and managed a global REIT mutual fund, and served as President of CNL Capital Markets, which focused on wholesale distribution of non-traded REITs and private placements plus ongoing servicing of thousands of investors. Prior to joining CNL, Mr. Sanders served from 2000 to 2004 as a Managing Director with AIG Global Real Estate Investment Corp. in New York, where he managed product development and capital formation for several international real estate funds for large institutional investors investing in Europe, Asia and Mexico. From 1997 to 2000, Mr. Sanders was the Executive Managing Director for CB Richard Ellis Investors where he was involved in product development and placement with institutional investors. From 1991 to 1996, Mr. Sanders served as the
Director of Real Estate Investments for Ameritech Pension Trust, where he managed a $1.5 billion real estate portfolio within the $13 billion defined benefit plan. Mr. Sanders has also previously served on the board of directors of both the Pension Real Estate Association and the National Association of Real Estate Investment Trusts, where he was Co-Chairman of its Institutional Investor Committee. He has also served on the board of directors of several non-profits. Mr. Sanders has been a frequent speaker at trade association events and other forums over his entire career. Mr. Sanders received a B.A. in History from the University of Virginia and an M.B.A. from Stanford Business School. He attended Officer Candidate School and served for over four years in the Navy, attaining the rank of Lieutenant.
We believe that Mr. Sanders’ decades of experience in the real estate industry, including as a director of a non-traded REIT, and his significant experience raising equity capital support his appointment to our Board.
Kathleen S. Briscoe is one of our independent directors and is the chairperson of our nominating and corporate governance committee and a member of our audit committee and compensation committee. She has been one of our independent directors since March 2016. Since March 2018, Ms. Briscoe has served as a Partner and Chief Capital Officer at Dermody Properties. She has also served as an advisor to Arixa Capital since November 2017. From March 2016 to March 2017, Ms. Briscoe served as a consultant at Cordia Capital Management, LLC, a privately owned real estate investment management company, where from November 2013 to March 2016, she held the positions of Chief Operating Officer and Chief Investment Officer for real estate, overseeing approximately $100 million of commercial real estate investments per year throughout the Western United States. From November 2011 to November 2013, Ms. Briscoe was a real estate consultant with Institutional Real Estate, Inc. and Crosswater Realty Advisors. From 2009 to 2011, Ms. Briscoe was the Chief Investment Officer for the IDS Real Estate Group in Los Angeles, California, where she managed two joint ventures with CalSTRS. From 2008 to 2009, Ms. Briscoe was a real estate consultant with Crosswater Realty Advisors, where she worked with CalPERS analyzing its real estate fund managers. From 2007 to 2008, she was a Managing Director and the head of the Los Angeles office for Buchanan Street Partners, a real estate investment management company. From 1987 to 2007, Ms. Briscoe was a Shareholder at Lowe Enterprises, a real estate investment, asset management, and development company, where she managed the firm’s investment clients, was a key member of a value-add private REIT, managed a portfolio, and served on the Executive Committee and as a voting member of the Investment Committee. Ms. Briscoe received a B.A. from Dartmouth College and an M.B.A. from Harvard Business School. Ms. Briscoe is an independent director of the Resmark Companies, a national private equity firm focused on real estate. Ms. Briscoe is a council member of the Urban Land Institute, an advisory board member for Institutional Real Estate, Inc., has been an executive member of the National Association of Real Estate Investment Managers, and is active in a number of other real estate organizations.
We believe Ms. Briscoe’s years of experience in real estate investing and investment management experience, as well as her background in the commercial real estate industry generally, support her appointment to our Board.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires each director, officer, and individual beneficially owning more than 10% of a registered security (collectively, the "Reporting Persons") to file with the SEC, within specified time frames, initial statements of beneficial ownership (Form 3) and statements of changes in beneficial ownership (Forms 4 and 5). Reporting Persons are required to furnish us with copies of all Section 16(a) forms filed with the SEC. Based solely on a review of the copies of such forms furnished to us during and with respect to the fiscal year ended December 31, 2018 or written representations that no additional forms were required, to the best of our knowledge, all Reporting Persons complied with the applicable requirements of Section 16(a) of the Exchange Act. There are no known failures to file a required Form 3, Form 4 or Form 5.
Code of Ethics
Our Board adopted a Code of Ethics and Business Conduct on July 21, 2014, which was amended and restated on November 2, 2016 (the “Code of Ethics”) and which contains general guidelines applicable to our executive officers, including our principal executive officer, principal financial officer and principal accounting officer, our directors, and employees and officers of our advisor and its affiliates, who perform material functions for us. We make sure that each individual subject to the Code of Ethics acknowledges reviewing and receipt thereof. We adopted our Code of Ethics with the purpose of promoting the following: (1) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;(2) full, fair, accurate, timely and understandable disclosure in reports and documents that we file with or submit to the SEC and in other public communications made by us; (3) compliance with applicable laws and governmental rules and regulations; (4) the prompt internal reporting of violations of the Code of Ethics to our Code of Ethics Compliance Officer; and (5) accountability for adherence to the Code of Ethics. A copy of the Code of Ethics is available in the “Corporate Governance” section of our website, www.griffincapital.com. We intend to satisfy the disclosure requirement regarding any amendment to, or waiver of, a provision of the Code of Ethics applicable to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions by posting such information on our website.
Director Nominations
During the year ended December 31, 2018, we made no material changes to the procedures by which stockholders may recommend nominees to our board of directors, as described in our most recent proxy statement.
Audit Committee
Our Board has an audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act, which assists the Board in fulfilling its responsibilities to stockholders concerning our financial reporting and internal controls and facilitates open communication among the audit committee, the Board, outside auditors and management. Our audit committee adopted a charter on July 21, 2014, which was most recently amended and restated on March 2, 2016 (the “Audit Committee Charter”), and was ratified by our Board. A copy of our Audit Committee Charter is available in the “Corporate Governance” section of our website, www.griffincapital.com. The audit committee assists our Board by: (1) selecting an independent registered public accounting firm to audit our annual financial statements; (2) reviewing with the independent registered public accounting firm the plans and results of the audit engagement; (3) approving the audit and non-audit services provided by the independent registered public accounting firm; (4) reviewing the independence of the independent registered public accounting firm; (5) considering the range of audit and non-audit fees; and (6) reviewing the adequacy of our internal accounting controls. The audit committee fulfills these responsibilities primarily by carrying out the activities enumerated in the Audit Committee Charter and in accordance with current laws, rules and regulations.
The members of the audit committee are our three independent directors, Samuel Tang, Kathleen S. Briscoe, and J. Grayson Sanders, each of whom is also independent as defined in Rule 10A-3 under the Exchange Act, with Mr. Tang serving as Chairperson of the audit committee. Our Board has determined that Mr. Tang satisfies the requirements for an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K and has designated Mr. Tang as the audit committee financial expert in accordance with applicable SEC rules. The audit committee held four meetings during 2018.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis - Executive Compensation
We do not compensate our executive officers for services rendered to us. If the proposed Mergers are consummated, we plan to compensate our executive officers directly; however until such time we do not intend to pay any compensation directly to our executive officers. As a result, we do not have, and our compensation committee has not considered, a compensation policy or program for our executive officers. If we determine to compensate our executive officers directly in the future (due to the proposed Mergers or otherwise), the compensation committee will review all forms of compensation and approve all equity-based awards. If we compensated our executive officers directly, the following executive officers
would be considered our "Named Executive Officers" as defined in Item 402 of Regulation S-K for the fiscal year ended December 31, 2018:
Kevin A. Shields, Chief Executive Officer;
Javier F. Bitar, Chief Financial Officer;
Michael J. Escalante, President;
David C. Rupert, Executive Vice President; and
Howard S. Hirsch, Vice President and Secretary.
Our executive officers also are officers of our Advisor and its affiliates, and are compensated by such entities for their services to us. We pay these entities fees and reimburse expenses pursuant to our advisory agreement. Certain of these reimbursements to our Advisor include reimbursements of a portion of the compensation paid by our Advisor and its affiliates to our Named Executive Officers for services provided to us, for which we do not pay our Advisor a fee. For the year ended December 31, 2018, these reimbursements to our Advisor totaled approximately $0.92 million. Of this amount, $0.50 million was attributed to Mr. Bitar, $0.05 million was attributed to Mr. Rupert and $0.27 million was attributed to Mr. Hirsch. No reimbursements were attributed to Mr. Shields or Mr. Escalante. The reimbursable expenses include components of salaries, bonuses, benefits and other overhead charges and are based on the percentage of time each such Named Executive Officer spends on our affairs. Our compensation committee does not determine these amounts, but does review with management the allocations of time to us and determines that such allocations are fair and reasonable to us. Our Named Executive Officers receive significant additional compensation from our Advisor and its affiliates that we do not reimburse.
Compensation Report
The compensation committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the compensation committee has determined that the Compensation Discussion and Analysis - Executive Compensation be included in this Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
J. Grayson Sanders (Chairperson)
Samuel Tang
Kathleen S. Briscoe
March 13, 2019
The preceding Compensation Report to stockholdersitem is not soliciting material and is not deemed filed with the SEC and is not to be incorporated by reference in any of our filings underto the Securities Act or the Exchange Act, whether made before or2022 Proxy Statement to be filed within 120 days after the date hereof and irrespective of any general incorporation language in any such filing.
Director Compensation
Summary Compensation Table
The following table provides a summary of the compensation earned by our directors for the year ended December 31, 2018: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Fees Earned or Paid in Cash | | Stock Awards | | Option Awards | | Non-Equity Incentive Plan Compensation | | Change in Pension Value and Nonqualified Deferred Compensation Earnings | | All other Compensation | | Total |
| Kevin A. Shields | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Michael J. Escalante | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Samuel Tang | | 62,500 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 62,500 |
|
| J. Grayson Sanders | | 60,000 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 60,000 |
|
| Kathleen S. Briscoe | | 61,500 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 61,500 |
|
| Total | | $ | 184,000 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 184,000 |
|
We believe that our director compensation program is competitive with those of similarly situated companies in our industry, and further aligns the interests of our directors with those of our stockholders. In establishing our director compensation, we have taken note of and considered compensation paid by similarly situated companies in our industry, but we have not performed systematic reviews of such compensation nor engaged in benchmarking. Consequently, information about other companies’ specific compensation policies has not been a primary consideration in forming our director compensation policies and decisions. Like many other companies, we issue restricted stock awards to our directors, in addition to providing for an annual retainer. We have found that the value of these compensation components may be difficult to measure, and therefore believe that comparing them in an objective way to similar arrangements developed by other companies may be of limited value.
Our compensation committee fulfills all of the responsibilities with respect to employee, officer and director compensation. We do not have any employees and our executive officers currently do not receive any compensation directly from us, so these responsibilities are limited to setting director compensation and administering our Employee and Director Long Term Incentive Plan (the "Plan"). At the time we begin having employees, our compensation committee will begin overseeing such compensation. Our non-director officers have no role in determining or recommending director compensation. Directors who are also our officers do not receive any special or additional remuneration for service on our Board or any of its committees. Each non-employee independent director received compensation for services on our Board and its committees as provided below.
On March 7, 2017, our Board adopted a Director Compensation Plan (the "Director Compensation Plan"). The Director Compensation Plan governs cash and equity compensation to the independent directors.
Cash Compensation to Directors
Pursuant to our Director Compensation Plan, for the year ended December 31, 2018, we paid each of our independent directors a retainer of $40,000, plus $1,000 for each board of directors or committee meeting the independent director attended in person or by telephone ($2,000 for attendance by the Chairperson of the audit committee at each meeting of the audit committee and $1,500 for attendance by the Chairperson of any other committee at each of such committee's meetings). In the event there were multiple meetings of our board of directors and one or more committees in a single day, the fees were limited to $3,000 per day ($3,500 for the Chairperson of the audit committee if there was a meeting of such committee).
All directors receive reimbursement of reasonable out-of-pocket expenses incurred in connection with attendance at meetings of our Board.
Employee and Director Long-Term Incentive Plan Awards to Independent Directors
The Plan was approved and adopted on April 22, 2014, prior to the commencement of our IPO in order to (1) provide incentives to individuals who are granted awards because of their ability to improve our operations and increase profits; (2) encourage selected persons to accept or continue employment with us or with our Advisor or its affiliates that we deem
important to our long-term success; and (3) increase the interest of our independent directors in our success through their participation in the growth in value of our stock. Pursuant to the Plan, we may issue options, stock appreciation rights and other equity-based awards, including, but not limited to, restricted stock. Asend of the year ended December 31, 2018, we had issued 36,000 shares pursuant2021.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the Plan.
Pursuant2022 Proxy Statement to be filed with the Director Compensation Plan, we issued 5,000 sharesSEC within 120 days after the end of restricted stock to each independent director on January 18, 2017, which are fully vested (the "Initial Restricted Stock Awards") and 7,000 shares of restricted stock to each independent director on each of June 14, 2017 and March 14, 2019 upon each of their respective re-elections to our board of directors, which vested 50% at the time of grant and 50% upon the first anniversary of the grant date, subject to the independent director's continued service as a director during such vesting period (the "Annual Restricted Stock Awards"). Such Annual Restricted Stock Award consists of 1,000 shares of restricted stock under Section 7.4 of the Plan and an additional 6,000 shares of restricted stock. The Annual Restricted Stock Awards would have immediately vested in the event of certain liquidation events, as defined in the Annual Restricted Stock Awards. Both the Initial Restricted Stock Awards and the Annual Restricted Stock Awards are subject to a number of other conditions set forth in such awards.
Compensation Committee Interlocks and Insider Participation
The directors who served as members of our compensation committee during the year ended December 31, 2018 were Messrs. Tang and Sanders and Ms. Briscoe, our independent directors. No member of the compensation committee was an officer or employee of the Company while serving on the compensation committee. During the year ended December 31, 2018, Mr. Shields also served as a director of GCEAR, one of whose executive officers, Mr. Escalante, served on our Board.2021.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of February 28, 2019,information required by this item is incorporated by reference to the amount of each class of our common stock beneficially owned by: (1) any person who is known by us2022 Proxy Statement to be filed with the beneficial owner of more than 5%SEC within 120 days after the end of the outstanding shares of such class of our common stock; (2) each of our directors; (3) each of our Named Executive Officers; and (4) all of our current directors and executive officers as a group. The percentage of beneficial ownership is calculated based on 77,691,364 shares of common stock outstanding as of February 28, 2019. |
| | | | | |
| Common Stock Beneficially Owned(2)
|
Name and Address of Beneficial Owner(1)
| Amount and Nature of Beneficial Ownership | | Percent of Class |
Kevin A. Shields, Chairman of the Board of Directors and Chief Executive Officer | 280 |
| Class T | (3)
| * |
| 280 |
| Class S | (3)
| * |
| 283 |
| Class D | (3)
| * |
| 283,016 |
| Class I | (3)
| * |
| 287,323 |
| Class A | (3)
| * |
Michael J. Escalante, Director and President | | | | — |
Javier F. Bitar, Chief Financial Officer and Treasurer | | | | — |
David C. Rupert, Executive Vice President | | | | — |
Howard S. Hirsch, Vice President and Secretary | | | | — |
Samuel Tang, independent director | 12,021 |
| Class AAA | (4)
| * |
J. Grayson Sanders, independent director | 12,021 |
| Class AAA | (4)
| * |
Kathleen S. Briscoe, independent director | 12,021 |
| Class AAA | (4)
| * |
All directors and current executive officers as a group (11 persons) | 607,245 |
| | (3)
| * |
* Represents less than 1% of our outstanding common stock as of February 28, 2019.
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(1) | The address of each beneficial owner listed is Griffin Capital Plaza, 1520 E. Grand Avenue, El Segundo, California 90245. |
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(2) | Beneficial ownership is determined in accordance with SEC rules and generally includes voting or investment power with respect to securities and shares issuable pursuant to options, warrants and similar rights held by the respective person or group that may be exercised within 60 days following
|
February 28, 2019. Except as otherwise indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.
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(3) | Consists of shares owned by Griffin Capital Vertical Partners, L.P., which is indirectly owned by Mr. Shields. |
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(4) | Each independent director was awarded 5,000 shares of restricted stock on January 18, 2017, which are fully vested and 7,000 shares of restricted stock on June 14, 2017, which are fully vested. Our 2018 Annual Meeting was not held until March 13, 2019, at which time the 2018 grants of restricted stock were awarded. |
Equity Compensation Plan Information
On April 22, 2014, our Board adopted the Plan in order to: (1) provide incentives to individuals who are granted awards because of their ability to improve our operations and increase profits; (2) encourage selected persons to accept or continue employment with us or with our Advisor or its affiliates that we deem important to our long-term success; and (3) increase the interest of our independent directors in our success through their participation in the growth in value of our stock. Pursuant to the Plan, we may issue stock-based awards to our directors and full-time employees (should we ever have employees), executive officers and full-time employees of our Advisor and its affiliates that provide services to us and who do not have any beneficial ownership of our Advisor and its affiliates, entities and full-time employees of entities that provide services to us, and certain consultants to us, our Advisor and its affiliates that provide services to us.
The term of the Plan is 10 years and the total number of shares of common stock reserved for issuance under the Plan is 10% of the outstanding shares of stock at any time, not to exceed 10,000,000 shares in the aggregate. As of February 28, 2019, approximately 7,769,136 shares were available for future issuance under the Plan. Awards granted under the Plan may consist of stock options, restricted stock, stock appreciation rights and other equity-based awards. The stock-based payment will be measured at fair value and recognized as compensation expense over the vesting period. As ofyear ended December 31, 2018, awards totaling 36,000 shares of restricted stock have been granted to our independent directors under the Plan.2021.
In the event of an “equity restructuring” (meaning a nonreciprocal transaction between us and our stockholders that causes the per-share fair market value of the shares of stock underlying an award to change, such as a stock dividend, stock split, spinoff, rights offering, or recapitalization through a large, nonrecurring cash dividend), then the number of shares of stock and the class(es) of stock subject to the Plan and each outstanding award and the exercise price (if applicable) of each outstanding award shall be proportionately adjusted. Upon our reorganization, merger or consolidation with one or more corporations as a result of which we are not the surviving corporation, or upon sale of all or substantially all of our assets, that, in each case, is not an equity restructuring, appropriate adjustments as to the number and kind of shares and exercise prices will be made either by our compensation committee or by such surviving entity. Such adjustment may provide for the substitution of such awards with new awards of the successor entity or the assumption of such awards by such successor entity. Alternatively, rather than providing for the adjustment, substitution or assumption of awards, the compensation committee may either (1) shorten the period during which awards are exercisable, or (2) cancel an award upon payment to the participant of an amount in cash that the compensation committee determines is equivalent to the amount of the fair market value of the consideration that the participant would have received if the participant exercised the award immediately prior to the effective time of the transaction.
In the event that the compensation committee determines that any distribution, recapitalization, stock split, reorganization, merger, liquidation, dissolution or sale, transfer, exchange or other disposition of all or substantially all of our assets, or other similar corporate transaction or event, affects the stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to an award, then the compensation committee shall, in such manner as it may deem equitable, adjust the number and kind of shares or the exercise price with respect to any award.
The following table provides information about the common stock that may be issued under the Plan as of December 31, 2018: |
| | | | | | | | |
Plan Category | Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
| | Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights
| | Number of Securities
Remaining for Future
Issuance Under Equity
Compensation Plans (1)
|
Equity Compensation Plans Approved by Security Holders | — |
| | — |
| | 7,752,597 |
|
Equity Compensation Plans Not Approved by Security Holders | — |
| | — |
| | — |
|
Total | — |
| | — |
| | 7,752,597 |
|
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(1) | The total number of shares of our common stock (or common stock equivalents) reserved for issuance under the Plan is equal to 10% of our outstanding shares of stock at any time, but not to exceed 10,000,000 shares in the aggregate. As of December 31, 2018, we had 77,525,973 outstanding shares of common stock, including shares issued pursuant to the DRP and our stock distributions. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Certain RelationshipsThe information required by this item is incorporated by reference to the 2022 Proxy Statement to be filed with the SEC within 120 days after the end of the year ended December 31, 2021.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference to the 2022 Proxy Statement to be filed with the SEC within 120 days after the end of the year ended December 31, 2021.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) List of Documents Filed.
1. The list of the financial statements contained herein is set forth on page F-1 hereof.
2. Schedule III — Real Estate and Accumulated Depreciation is set forth beginning on page S-1 hereof. All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are not applicable and therefore have been omitted.
3. The Exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index below.
(b) See (a) 3 above.
(c) See (a) 2 above.
EXHIBIT INDEX
The following exhibits are included in this Annual Report on Form 10-K for the year ended December 31, 2021 (and are numbered in accordance with Item 601 of Regulation S-K).
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| Exhibit No. | Description |
| Agreement and Plan of Merger, dated as of October 29, 2020, by and among Griffin Capital Essential Asset REIT, Inc., GRT (Cardinal REIT Merger Sub), LLC, Griffin Capital Essential Asset Operating Partnership, L.P., GRT OP (Cardinal New GP Sub), LLC, GRT OP (Cardinal LP Merger Sub), LLC, GRT OP (Cardinal OP Merger Sub), LLC, Cole Office & Industrial REIT (CCIT II), Inc., Cole Corporate Income Operating Partnership II, LP and CRI CCIT II LLC (incorporated by reference to Annex A to the Proxy Statement/Prospectus that is part of the Registration Statement on Form S-4, filed on November 25, 2020, SEC File No. 333-250962) |
| Agreement and Plan of Merger, dated as of December 14, 2018, by and among Griffin Capital Essential Asset REIT II, Inc., Griffin Capital Essential Asset Operating Partnership II, L.P., Globe Merger Sub, LLC, Griffin Capital Essential Asset REIT, Inc. and Griffin Capital Essential Asset Operating Partnership, L.P., incorporated by reference to Exhibit 2.1 to the Registrant's Current on Form 8-K, filed on December 20, 2018, SEC File No. 000-55605 |
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| First Amendment to Second Amended and Restated Credit Agreement dated October 1, 2020, by and among Griffin Capital Essential Asset Operating Partnership, L.P., the lending institutions party thereto as lenders and KeyBank, National Association, as administrative agent, incorporated by reference to Exhibit 10.1 the Registrant’s Quarterly Report on Form 10-Q, filed on November 9, 2020, SEC File No. 000-55605 |
| Second Amendment to Second Amended and Restated Credit Agreement dated December 18, 2020, by and among Griffin Capital Essential Asset Operating Partnership, L.P., the lending institutions party thereto as lenders and KeyBank, National Association, as administrative agent, incorporated by reference to Exhibit10.1 the Registrant’s Current Report on Form 8-K, filed on December 23, 2020, SEC File No. 000-55605 |
| Third Amendment to Second Amendment and Restated Credit Agreement dated July 14, 2021, by and among Griffin Realty Trust, Inc., GRT OP, L.P., and the subsidiary guarantors party thereto, the lending institutions party thereto as lenders and KeyBank National Association, as administrative agent, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on July 16, 2021, SEC File No. 000-555605 |
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| Administrative Services Agreement dated December 14, 2018, by and among EA-1, the EA-1 Operating Partnership, Griffin Capital Company, LLC, Griffin Capital, LLC, Griffin Capital Essential Asset TRS, Inc., and Griffin Capital Real Estate Company, LLC, incorporated by reference to Exhibit 10.35 to EA-1's Annual Report on Form 10-K, filed on March 15, 2019, SEC File No. 000-54377 |
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| 101* | The following Griffin Realty Trust, Inc. financial information for the period ended
December 31, 2021 formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated
Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of
Comprehensive (Loss) Income, (iv) Consolidated Statements of Equity, (v) Consolidated Statements of Cash Flows and (vi)Notes to Consolidated Financial Statements. |
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
| * | Filed herewith. |
| ** | Furnished herewith. |
| + | Management contract, compensatory plan or arrangement filed in response to Item 15(a)(3) of Form 10-K. |
ITEM 16. FORM 10-K SUMMARY
Not Applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of El Segundo, State of California, on February 28, 2022.
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| GRIFFIN REALTY TRUST, INC. |
| | |
| By: | | /s/ Michael J. Escalante |
| | | Michael J. Escalante |
| | | Chief Executive Officer and President |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
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| Signature | | Title | | Date |
| | |
| /s/ Michael J. Escalante | | Chief Executive Officer and President and Director (Principal Executive Officer) | | February 28, 2022 |
| Michael J. Escalante |
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| /s/ Javier F. Bitar | | Chief Financial Officer and Treasurer (Principal Financial Officer) | | February 28, 2022 |
| Javier F. Bitar |
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| /s/ Bryan K. Yamasawa | | Chief Accounting Officer (Principal Accounting Officer) | | February 28, 2022 |
| Bryan K. Yamasawa |
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| /s/ Kevin A. Shields | | Executive Chairman and Chairman of the Board of Directors | | February 28, 2022 |
| Kevin A. Shields |
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| /s/ Gregory M. Cazel | | Independent Director | | February 28, 2022 |
| Gregory M. Cazel |
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| /s/Ranjit M. Kripalani | | Independent Director | | February 28, 2022 |
| Ranjit M. Kripalani |
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| /s/ Kathleen S. Briscoe | | Independent Director | | February 28, 2022 |
| Kathleen S. Briscoe |
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| /s/ J. Grayson Sanders | | Independent Director | | February 28, 2022 |
J. Grayson Sanders
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| /s/ Samuel Tang | | Independent Director | | February 28, 2022 |
| Samuel Tang |
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| /s/ James. F. Risoleo | | Independent Director | | February 28, 2022 |
| James F. Risoleo | | |
Griffin Realty Trust, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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| Consolidated Financial Statements | |
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| Financial Statement Schedule | |
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Griffin Realty Trust, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Griffin Realty Trust, Inc. (the Company) as of December 31, 2021 and 2020, and the related consolidated statements of operations, comprehensive (loss) income, equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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| Real estate - valuation and purchase price allocation |
| Description of the Matter | As discussed in Notes 2 and 3 to the consolidated financial statements, the Company completed the acquisition of CCIT II properties for a total purchase price of $1.3 billion during the year ended December 31, 2021. The merger was accounted for as an asset acquisition, and the purchase price was allocated to components based on the relative fair values of the assets acquired and liabilities assumed. These components primarily include land, buildings and improvements, tenant origination and absorption costs, other intangibles and in-place lease valuation – above/(below) market. The fair value of tangible and intangible assets and liabilities is based on available comparable sales data for similar properties, and estimated cash flow projections that utilize market rental rates, rental growth rates, discount rates, and other variables. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions.
Auditing the fair value of acquired tangible and intangible assets and liabilities involves significant estimation uncertainty due to the judgment used by management in selecting key assumptions based on recent comparable sales data or market information, and the sensitivity of the estimates to changes in assumptions. The allocation of purchase price to the components of properties acquired could have a material effect on the Company’s net income due to the differing depreciable and amortizable lives applicable to each component and the recognition and classification of the related depreciation or amortization expense in the Company’s consolidated statements of operations.
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| How we Addressed the Matter in Our Audit | To test the allocation of the acquisition-date fair values, we performed audit procedures that included, among others, evaluating the appropriateness of the valuation methods used to allocate the purchase price. We performed procedures to assess the key data inputs and assumptions used by management described above, including the completeness and accuracy of the underlying information. We also used our valuation specialists to assist us in evaluating the valuation methods used by management and whether the assumptions utilized were supported by observable market data. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2008.
Los Angeles, California
February 28, 2022
GRIFFIN REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except units and share amounts)
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| ASSETS | | | |
| Cash and cash equivalents | $ | 168,618 | | | $ | 168,954 | |
| Restricted cash | 17,522 | | | 34,352 | |
| Real estate: | | | |
| Land | 584,291 | | | 445,674 | |
| Building and improvements | 4,104,782 | | | 3,112,253 | |
| Tenant origination and absorption cost | 876,324 | | | 740,489 | |
| Construction in progress | 4,763 | | | 11,886 | |
| Total real estate | 5,570,160 | | | 4,310,302 | |
| Less: accumulated depreciation and amortization | (993,323) | | | (817,773) | |
| Total real estate, net | 4,576,837 | | | 3,492,529 | |
| Intangible assets, net | 43,100 | | | 10,035 | |
| Deferred rent receivable | 108,896 | | | 98,116 | |
| Deferred leasing costs, net | 44,505 | | | 45,966 | |
| Goodwill | 229,948 | | | 229,948 | |
| Due from affiliates | 271 | | | 1,411 | |
| Right of use assets | 39,482 | | | 39,935 | |
| Other assets | 43,838 | | | 30,604 | |
| Total assets | $ | 5,273,017 | | | $ | 4,151,850 | |
| LIABILITIES AND EQUITY | | | |
| Debt, net | $ | 2,532,377 | | | $ | 2,140,427 | |
| Restricted reserves | 8,644 | | | 12,071 | |
| Interest rate swap liability | 25,108 | | | 53,975 | |
| Redemptions payable | — | | | 5,345 | |
| Distributions payable | 12,396 | | | 9,430 | |
| Due to affiliates | 2,418 | | | 3,272 | |
| Intangible liabilities, net | 30,626 | | | 27,333 | |
| Lease liability | 50,896 | | | 45,646 | |
| Accrued expenses and other liabilities | 109,121 | | | 114,434 | |
| Total liabilities | 2,771,586 | | | 2,411,933 | |
| Commitments and contingencies (Note 13) | 0 | | 0 |
| Perpetual convertible preferred shares | 125,000 | | | 125,000 | |
| Common stock subject to redemption | — | | | 2,038 | |
| Noncontrolling interests subject to redemption; 556,099 and 556,099 units as of December 31, 2021 and December 31, 2020, respectively | 4,768 | | | 4,610 | |
| Stockholders’ equity: | | | |
Common stock, $0.001 par value; 800,000,000 shares authorized; 324,638,112 and 230,320,668 shares outstanding in the aggregate as of December 31, 2021 and December 31, 2020, respectively(1) | 325 | | | 230 | |
| Additional paid-in-capital | 2,951,972 | | | 2,103,028 | |
| Cumulative distributions | (922,562) | | | (813,892) | |
| Accumulated earnings | 141,983 | | | 140,354 | |
| Accumulated other comprehensive loss | (18,708) | | | (48,001) | |
| Total stockholders’ equity | 2,153,010 | | | 1,381,719 | |
| Noncontrolling interests | 218,653 | | | 226,550 | |
| Total equity | 2,371,663 | | | 1,608,269 | |
| Total liabilities and equity | $ | 5,273,017 | | | $ | 4,151,850 | |
(1) See Note 9, Equity, for the number of shares outstanding of each class of common stock as of December 31, 2021.
See accompanying notes.
GRIFFIN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Revenue: | | | | | |
| Rental income | $ | 459,872 | | | $ | 397,452 | | | $ | 387,108 | |
| Expenses: | | | | | |
| Property operating expense | 61,259 | | | 57,461 | | | 55,301 | |
| Property tax expense | 41,248 | | | 37,590 | | | 37,035 | |
| Property management fees to non-affiliates | 4,066 | | | 3,656 | | | 3,528 | |
| General and administrative expenses | 40,479 | | | 38,633 | | | 26,078 | |
| Corporate operating expenses to affiliates | 2,520 | | | 2,500 | | | 2,745 | |
| Impairment provision | 4,242 | | | 23,472 | | | 30,734 | |
| Depreciation and amortization | 209,638 | | | 161,056 | | | 153,425 | |
| Total expenses | 363,452 | | | 324,368 | | | 308,846 | |
| Income before other income (expenses) | 96,420 | | | 73,084 | | | 78,262 | |
| Other income (expenses): | | | | | |
| Interest expense | (85,087) | | | (79,646) | | | (73,557) | |
| Management fee income from affiliates | — | | | — | | | 6,368 | |
| Other income, net | 1,521 | | | 3,228 | | | 1,340 | |
| Gain (loss) from investment in unconsolidated entities | 8 | | | (6,523) | | | (5,307) | |
| (Loss) gain from disposition of assets | (326) | | | 4,083 | | | 29,938 | |
| Transaction expense | (966) | | | — | | | — | |
| Net income (loss) | 11,570 | | | (5,774) | | | 37,044 | |
| Distributions to redeemable preferred shareholders | (9,698) | | | (8,708) | | | (8,188) | |
| Net (income) loss attributable to noncontrolling interests | (66) | | | 1,732 | | | (3,749) | |
| Net income (loss) attributable to controlling interest | 1,806 | | | (12,750) | | | 25,107 | |
| Distributions to redeemable noncontrolling interests attributable to common stockholders | (177) | | | (208) | | | (320) | |
| Net income (loss) attributable to common stockholders | $ | 1,629 | | | $ | (12,958) | | | $ | 24,787 | |
| Net income (loss) attributable to common stockholders per share, basic and diluted | $ | — | | | $ | (0.06) | | | $ | 0.11 | |
| Weighted average number of common shares outstanding - basic and diluted | 309,250,873 | | | 230,042,543 | | | 222,531,173 | |
See accompanying notes.
GRIFFIN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Net income (loss) | $ | 11,570 | | | $ | (5,774) | | | $ | 37,044 | |
| Other comprehensive income (loss): | | | | | |
| Equity in other comprehensive (loss) income of unconsolidated joint venture | — | | | — | | | (217) | |
| Change in fair value of swap agreements | 32,449 | | | (29,704) | | | (22,303) | |
| Total comprehensive income (loss) | 44,019 | | | (35,478) | | | 14,524 | |
| Distributions to redeemable preferred shareholders | (9,698) | | | (8,708) | | | (8,188) | |
| Distributions to redeemable noncontrolling interests attributable to common stockholders | (177) | | | (208) | | | (320) | |
| Comprehensive (income) loss attributable to noncontrolling interests | (3,222) | | | 5,310 | | | (695) | |
| Comprehensive income (loss) attributable to common stockholders | $ | 30,922 | | | $ | (39,084) | | | $ | 5,321 | |
See accompanying notes.
GRIFFIN REALTY TRUST INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share amounts)
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| | Common Stock | | Additional Paid-In Capital | | Cumulative Distributions | | Accumulated Earnings | | Accumulated Other Comprehensive (Loss) Income | | Total Stockholders’ Equity | | Non-controlling Interests | | Total Equity |
| | Shares | | Amount | | | | | | | |
| Balance December 31, 2018 | 174,278,341 | | | $ | 174 | | | $ | 1,556,770 | | | $ | (570,977) | | | $ | 128,525 | | | $ | (2,409) | | | $ | 1,112,083 | | | $ | 232,203 | | | $ | 1,344,286 | |
| Gross proceeds from issuance of common stock | 973,490 | | | — | | | 9,383 | | | — | | | — | | | — | | | 9,383 | | | — | | | 9,383 | |
| Deferred equity compensation | 260,039 | | | — | | | 2,623 | | | — | | | — | | | — | | | 2,623 | | | — | | | 2,623 | |
| Cash distributions to common stockholders | — | | | — | | | — | | | (89,836) | | | — | | | — | | | (89,836) | | | — | | | (89,836) | |
| Issuance of shares for distribution reinvestment plan | 4,298,420 | | | 4 | | | 41,056 | | | (40,840) | | | — | | | — | | | 220 | | | — | | | 220 | |
| Repurchase of common stock | (31,290,588) | | | (30) | | | (296,629) | | | — | | | — | | | — | | | (296,659) | | | — | | | (296,659) | |
| Reclassification of common stock subject to redemption | — | | | — | | | (9,042) | | | — | | | — | | | — | | | (9,042) | | | — | | | (9,042) | |
| Issuance of limited partnership units | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 25,000 | | | 25,000 | |
| Issuance of stock dividend for noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,861 | | | 1,861 | |
| Issuance of stock dividends | 1,279,084 | | | 2 | | | 12,189 | | | (14,139) | | | — | | | — | | | (1,948) | | | — | | | (1,948) | |
| EA Merger | 78,054,934 | | | 78 | | | 746,160 | | | — | | | — | | | — | | | 746,238 | | | 5,039 | | | 751,277 | |
| Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (19,716) | | | (19,716) | |
| Distributions to noncontrolling interests subject to redemption | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (45) | | | (45) | |
| Offering costs | — | | | — | | | (1,906) | | | — | | | — | | | — | | | (1,906) | | | — | | | (1,906) | |
| Reclass of noncontrolling interest subject to redemption | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 3 | | | 3 | |
| Net income | — | | | — | | | — | | | — | | | 24,787 | | | — | | | 24,787 | | | 3,749 | | | 28,536 | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (19,466) | | | (19,466) | | | (3,054) | | | (22,520) | |
| Balance December 31, 2019 | 227,853,720 | | | $ | 228 | | | $ | 2,060,604 | | | $ | (715,792) | | | $ | 153,312 | | | $ | (21,875) | | | $ | 1,476,477 | | | $ | 245,040 | | | $ | 1,721,517 | |
See accompanying notes
.
GRIFFIN REALTY TRUST INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Cumulative Distributions | | Accumulated Earnings | | Accumulated Other Comprehensive (Loss) Income | | Total Stockholders’ Equity | | Non-controlling Interests | | Total Equity |
| | Shares | | Amount | | | | | | | |
| Balance December 31, 2019 | 227,853,720 | | | $ | 228 | | | $ | 2,060,604 | | | $ | (715,792) | | | $ | 153,312 | | | $ | (21,875) | | | $ | 1,476,477 | | | $ | 245,040 | | | $ | 1,721,517 | |
| Gross proceeds from issuance of common stock | 433,328 | | | — | | | 4,141 | | | — | | | — | | | — | | | 4,141 | | | — | | | 4,141 | |
| Deferred equity compensation | 436,704 | | | — | | | 4,106 | | | — | | | — | | | — | | | 4,106 | | | — | | | 4,106 | |
| Shares acquired to satisfy employee tax withholding requirements on vesting restricted stock | (78,849) | | | — | | | (751) | | | — | | | — | | | — | | | (751) | | | — | | | (751) | |
| Cash distributions to common stockholders | — | | | — | | | — | | | (69,532) | | | — | | | — | | | (69,532) | | | — | | | (69,532) | |
| Issuance of shares for distribution reinvestment plan | 2,693,560 | | | 3 | | | 24,494 | | | (22,820) | | | — | | | — | | | 1,677 | | | — | | | 1,677 | |
| Repurchase of common stock | (1,841,887) | | | (2) | | | (16,517) | | | — | | | — | | | — | | | (16,519) | | | — | | | (16,519) | |
| Reclass of noncontrolling interest subject to redemption | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 224 | | | 224 | |
| Repurchase of noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,137) | | | (1,137) | |
| Reclass of common stock subject to redemption | — | | | — | | | 18,528 | | | — | | | — | | | — | | | 18,528 | | | — | | | 18,528 | |
| Issuance of stock dividend for noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,068 | | | 1,068 | |
| Issuance of stock dividends | 824,092 | | | 1 | | | 7,688 | | | (5,748) | | | — | | | — | | | 1,941 | | | — | | | 1,941 | |
| Distributions to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (13,306) | | | (13,306) | |
| Distributions to noncontrolling interests subject to redemption | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (29) | | | (29) | |
| Offering costs | — | | | — | | | 735 | | | — | | | — | | | — | | | 735 | | | — | | | 735 | |
| Net loss | — | | | — | | | — | | | — | | | (12,958) | | | — | | | (12,958) | | | (1,732) | | | (14,690) | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (26,126) | | | (26,126) | | | (3,578) | | | (29,704) | |
| Balance December 31, 2020 | 230,320,668 | | | $ | 230 | | | $ | 2,103,028 | | | $ | (813,892) | | | $ | 140,354 | | | $ | (48,001) | | | $ | 1,381,719 | | | $ | 226,550 | | | $ | 1,608,269 | |
GRIFFIN REALTY TRUST INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Cumulative Distributions | | Accumulated Earnings | | Accumulated Other Comprehensive (Loss) Income | | Total Stockholders’ Equity | | Non-controlling Interests | | Total Equity |
| | Shares | | Amount | | | | | | | |
| Balance December 31, 2020 | 230,320,668 | | | $ | 230 | | | $ | 2,103,028 | | | $ | (813,892) | | | $ | 140,354 | | | $ | (48,001) | | | $ | 1,381,719 | | | $ | 226,550 | | | $ | 1,608,269 | |
| | | | | | | | | | | | | | | | | |
| Deferred equity compensation | 868,759 | | | 1 | | | 8,889 | | | — | | | — | | | — | | | 8,890 | | | — | | | 8,890 | |
| Shares acquired to satisfy employee tax withholding requirements on vesting restricted stock | (316,798) | | | — | | | (2,874) | | | — | | | — | | | — | | | (2,874) | | | — | | | (2,874) | |
| Cash distributions to common stockholders | — | | | — | | | — | | | (88,262) | | | — | | | — | | | (88,262) | | | — | | | (88,262) | |
| Issuance of shares for distribution reinvestment plan | 2,541,250 | | | 3 | | | 22,883 | | | (20,408) | | | — | | | — | | | 2,478 | | | — | | | 2,478 | |
| Repurchase of common stock | (2,233,435) | | | (2) | | | (20,170) | | | — | | | — | | | — | | | (20,172) | | | — | | | (20,172) | |
| Reclass of noncontrolling interest subject to redemption | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (159) | | | (159) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Reclass of common stock subject to redemption | — | | | — | | | 2,038 | | | — | | | — | | | — | | | 2,038 | | | — | | | 2,038 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Issuance of stock related to the CCIT II Merger | 93,457,668 | | | 93 | | | 838,222 | | | — | | | — | | | — | | | 838,315 | | | — | | | 838,315 | |
| Distributions to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (10,942) | | | (10,942) | |
| Distributions to noncontrolling interests subject to redemption | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (18) | | | (18) | |
| Offering costs | — | | | — | | | (44) | | | — | | | — | | | — | | | (44) | | | — | | | (44) | |
| | | | | | | | | | | | | | | | | |
| Net income | — | | | — | | | — | | | — | | | 1,629 | | | — | | | 1,629 | | | 66 | | | 1,695 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | — | | | 29,293 | | | 29,293 | | | 3,156 | | | 32,449 | |
| Balance December 31, 2021 | 324,638,112 | | | $ | 325 | | | $ | 2,951,972 | | | $ | (922,562) | | | $ | 141,983 | | | $ | (18,708) | | | $ | 2,153,010 | | | $ | 218,653 | | | $ | 2,371,663 | |
GRIFFIN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Operating Activities: | | | | | |
| Net income (loss) | $ | 11,570 | | | $ | (5,774) | | | $ | 37,044 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation of building and building improvements | 125,388 | | | 93,980 | | | 80,394 | |
| Amortization of leasing costs and intangibles, including ground leasehold interests and leasing costs | 85,502 | | | 67,076 | | | 73,031 | |
| Amortization of below market leases, net | (1,323) | | | (2,292) | | | (3,201) | |
| Amortization of deferred financing costs and debt premium | 3,593 | | | 2,607 | | | 5,562 | |
| Amortization of swap interest | 126 | | | 126 | | | 126 | |
| Deferred rent | (8,718) | | | (25,687) | | | (19,519) | |
| Deferred rent, ground lease | — | | | 2,065 | | | 1,640 | |
| Termination fee revenue - receivable from tenant, net | — | | | — | | | (6,000) | |
| Write-off reserves | (1,166) | | | — | | | — | |
| (Gain)/loss from sale of depreciable operating property | 326 | | | (4,083) | | | (29,940) | |
| Gain on fair value of earn-out | (65) | | | (2,657) | | | (1,461) | |
| | | | | |
| (Income) loss from investment in unconsolidated entities | (8) | | | 2,071 | | | 5,307 | |
| Investment in unconsolidated entities valuation adjustment | — | | | 4,453 | | | — | |
| Loss from investments | 125 | | | 31 | | | 307 | |
| Impairment provision | 4,242 | | | 23,472 | | | 30,734 | |
| Performance distribution allocation (non-cash) | — | | | — | | | (2,604) | |
| Stock-based compensation | 7,469 | | | 4,107 | | | 2,623 | |
| Change in operating assets and liabilities: | | | | | |
| Deferred leasing costs and other assets | (13,938) | | | 4,383 | | | (7,775) | |
| Restricted reserves | (490) | | | 27 | | | 14 | |
| Accrued expenses and other liabilities | (8,003) | | | 4,203 | | | (9,505) | |
| Due to affiliates, net | 349 | | | (3,570) | | | 4,072 | |
| Net cash provided by operating activities | 204,979 | | | 164,538 | | | 160,849 | |
| Investing Activities: | | | | | |
| Cash acquired in connection with the Company Merger, net of acquisition costs | (36,746) | | | — | | | 25,320 | |
| Acquisition of properties, net | — | | | (16,584) | | | (38,775) | |
| Proceeds from disposition of properties | 22,408 | | | 51,692 | | | 139,446 | |
| Restricted reserves | 1,078 | | | (1,530) | | | — | |
| Real estate acquisition deposits | — | | | 1,047 | | | (1,047) | |
| Reserves for tenant improvements | — | | | — | | | 1,039 | |
| Payments for construction in progress | (49,260) | | | (58,938) | | | (46,346) | |
| Investment in unconsolidated joint venture | — | | | (8,160) | | | — | |
| Distributions of capital from investment in unconsolidated entities | 42 | | | 8,531 | | | 14,603 | |
| Purchase of investments | (332) | | | (1,029) | | | (8,422) | |
| Net cash (used in) provided by investing activities | (62,810) | | | (24,971) | | | 85,818 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Financing Activities: | | | | | |
| Proceeds from borrowings - KeyBank Loans | — | | | — | | | 627,000 | |
| Proceeds from borrowings - Revolver/KeyBank Loans | — | | | 215,000 | | | 315,854 | |
| Proceeds from borrowings - Term Loan | 400,000 | | | — | | | — | |
| Principal payoff of indebtedness - CCIT II Credit Facility | (415,500) | | | — | | | — | |
| Principal payoff of secured indebtedness - Revolver Loan | — | | | (53,000) | | | (104,439) | |
| Principal payoff of secured indebtedness - Mortgage Debt | (1,292) | | | — | | | — | |
| Principal payoff of Unsecured Credit Facility - EA-1 | — | | | — | | | (715,000) | |
| Principal amortization payments on secured indebtedness | (9,786) | | | (7,362) | | | (6,577) | |
| Deferred financing costs | (567) | | | (4,725) | | | (5,737) | |
| Offering costs | (47) | | | (594) | | | (2,384) | |
| | | | | |
| Repurchase of common stock | (25,517) | | | (107,821) | | | (200,013) | |
| Repurchase of noncontrolling interest | — | | | (1,137) | | | (53) | |
| Issuance of common stock, net of discounts and underwriting costs | — | | | 4,698 | | | 8,826 | |
| Repurchase of common shares to satisfy employee tax withholding requirements | (2,874) | | | (751) | | | — | |
| Dividends paid on preferred units subject to redemption | (9,542) | | | (8,396) | | | (8,188) | |
| Distributions to noncontrolling interests | (11,134) | | | (13,290) | | | (16,865) | |
| Distributions to common stockholders | (82,976) | | | (72,143) | | | (90,116) | |
| Financing lease payment | (100) | | | — | | | — | |
| Net cash used in financing activities | (159,335) | | | (49,521) | | | (197,692) | |
| Net (decrease) increase in cash, cash equivalents and restricted cash | (17,166) | | | 90,046 | | | 48,975 | |
| Cash, cash equivalents and restricted cash at the beginning of the period | 203,306 | | | 113,260 | | | 64,285 | |
| Cash, cash equivalents and restricted cash at the end of the period | $ | 186,140 | | | $ | 203,306 | | | $ | 113,260 | |
| | | | | |
| Supplemental disclosure of cash flow information: | | | | | |
| Cash paid for interest | $ | 80,958 | | | $ | 80,155 | | | 65,040 | |
| Supplemental disclosures of non-cash investing and financing transactions: | | | | | |
| Distributions payable to common stockholders | $ | 9,672 | | | $ | 6,864 | | | $ | 13,035 | |
| Distributions payable to noncontrolling interests | $ | 946 | | | $ | 943 | | | $ | 1,758 | |
| Common stock issued pursuant to the distribution reinvestment plan | $ | 22,886 | | | $ | 24,497 | | | $ | 41,060 | |
| Common stock redemptions funded subsequent to period-end | $ | — | | | $ | 5,345 | | | $ | 96,648 | |
| Issuance of stock dividends | $ | — | | | $ | 5,747 | | | $ | 14,139 | |
| Mortgage debt assumed in conjunction with the acquisition of real estate assets plus a premium | $ | — | | | $ | 18,884 | | | $ | — | |
| Accrued for construction in progress | $ | 1,114 | | | $ | 472 | | | $ | — | |
| Accrued tenant obligations | $ | 10,123 | | | $ | 30,011 | | | $ | 11,802 | |
| Limited partnership units issued in exchange for net assets acquired in Self Administration Transaction | $ | — | | | $ | — | | | $ | 25,000 | |
| | | | | |
| | | | | |
| Change in fair value swap agreement | $ | 32,449 | | | $ | (29,704) | | | $ | (22,303) | |
| Decrease in stockholder servicing fee payable | $ | — | | | $ | (1,388) | | | $ | — | |
| Net assets acquired in Mergers in exchange for common shares | $ | — | | | $ | — | | | $ | 751,277 | |
| Implied common stock and operating partnership units issued in exchange for net assets acquired in Mergers | $ | — | | | $ | — | | | $ | 751,277 | |
| Operating lease right-of-use assets obtained in exchange for lease liabilities upon adoption of ASC 842 on January 1, 2019 | $ | — | | | $ | — | | | $ | 25,521 | |
| Operating lease right-of-use assets obtained in exchange for lease liabilities upon adoption of ASC 842 subsequent to January 1, 2019 | $ | — | | | $ | — | | | $ | 16,919 | |
| Net assets acquired in CCIT II Merger in exchange for common shares | $ | 838,315 | | | $ | — | | | $ | — | |
| | | | | |
| Capitalized transaction costs paid in prior period | $ | 2,170 | | | $ | — | | | $ | — | |
| | | | | |
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
1. Organization
Griffin Realty Trust, Inc. (formerly known as Griffin Capital Essential Asset REIT, Inc.) (“GRT” or the “Company”) is an internally managed, publicly registered non-traded real estate investment trust (“REIT”) that owns and operates a geographically diversified portfolio of corporate office and industrial properties that are primarily net-leased. GRT’s fiscal year-end is December 31.
On December 14, 2018, GRT, Griffin Capital Essential Asset Operating Partnership II, L.P. (the “GCEAR II Operating Partnership”), GRT’s wholly-owned subsidiary Globe Merger Sub, LLC (“EA Merger Sub”), the entity formerly known as Griffin Capital Essential Asset REIT, Inc. (“EA-1”), and GRT OP, L.P. (formerly known as Griffin Capital Essential Asset Operating Partnership, L.P.) (the “GRT OP”) entered into an Agreement and Plan of Merger (the “EA Merger Agreement”). On April 30, 2019, pursuant to the EA Merger Agreement, (i) EA-1 merged with and into EA Merger Sub, with EA Merger Sub surviving as GRT’s direct, wholly-owned subsidiary (the “EA Company Merger”) and (ii) the GCEAR II Operating Partnership merged with and into the GRT OP (the “EA Partnership Merger” and, together with the EA Company Merger, the “EA Mergers”), with the GRT OP surviving the EA Partnership Merger. In addition, on April 30, 2019, following the EA Mergers, EA Merger Sub merged into GRT.
On March 1, 2021, the Company completed its acquisition of Cole Office & Industrial REIT (CCIT II), Inc. (“CCIT II”) for approximately $1.3 billion, including transaction costs, in a stock-for-stock transaction (the “CCIT II Merger”). At the effective time of the CCIT II Merger, each issued and outstanding share of CCIT II Class A common stock and each issued and outstanding share of CCIT II Class T common stock were converted into the right to receive 1.392 shares of the Company's Class E common stock.
On July 1, 2021, the Company changed its name from Griffin Capital Essential Asset REIT, Inc. to Griffin Realty Trust, Inc. and the GRT OP changed its name from Griffin Capital Essential Asset Operating Partnership, L.P. to GRT OP, L.P.
The GRT OP owns, directly or indirectly, all of the properties that the Company has acquired. As of December 31, 2021, (i) the Company owned approximately 91.0% of the outstanding common limited partnership units of the GRT OP ("GRT OP Units"), (ii) the former sponsor and certain of its affiliates owned approximately 7.8% of the limited partnership units of the GRT OP, including approximately 2.4 million units owned by the Company’s Executive Chairman and Chairman of the Company's Board of Directors (the "Board"), Kevin A. Shields, a result of the contribution of 5 properties to the Company and the self-administration transaction, and (iii) the remaining approximately 1.2% GRT OP Units are owned by unaffiliated third parties. The GRT OP may conduct certain activities through one or more of the Company’s taxable REIT subsidiaries, which are wholly-owned subsidiaries of the GRT OP.
As of December 31, 2021, the Company had issued 287,136,969 shares (approximately $2.8 billion) of common stock since November 9, 2009 in various private offerings, public offerings, distribution reinvestment plan ("DRP") offerings and mergers (includes EA-1 offerings and EA-1 merger with Signature Office REIT, Inc. and the CCIT II Merger). There were 324,638,112 shares of common stock outstanding as of December 31, 2021, including shares issued pursuant to the DRP, less shares redeemed pursuant to the share redemption program ("SRP") and a self-tender offer. As of December 31, 2021 and 2020, the Company had issued approximately $341.1 million and $318.2 million in shares pursuant to the DRP, respectively.
2. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying 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”) as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), and in conjunction with rules and regulations of the SEC. The 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 years ended December 31, 2021 and 2020.
The consolidated financial statements of the Company include all accounts of the Company, the GRT OP, and its subsidiaries. Intercompany transactions are not shown on the consolidated statements. However, each property owning entity is a wholly-owned subsidiary which is a special purpose entity ("SPE"), whose assets and credit are not available to satisfy the
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
debts or obligations of any other entity, except to the extent required with respect to any co-borrower or guarantor under the same credit facility.
Principles of Consolidation
The Company's financial statements, and the financial statements of the GRT OP, including its wholly-owned subsidiaries, are consolidated in the accompanying consolidated financial statements. The portion of these entities not wholly-owned by the Company is presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated in consolidation.
Consolidation Considerations
Current accounting guidance provides a framework for identifying a variable interest entity (“VIE”) and determining when a company should include the assets, liabilities, noncontrolling interests, and results of activities of a VIE in its consolidated financial statements. In general, a VIE is an entity or other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations. Generally, a VIE should be consolidated if a party with an ownership, contractual, or other financial interest in the VIE (a variable interest holder) has the power to direct the VIE’s most significant activities and the obligation to absorb losses or right to receive benefits of the VIE that could be significant to the VIE. A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the VIE’s assets, liabilities, and noncontrolling interests at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest. See Note 4, Investments in Unconsolidated Entities, for more detail.
The Company has determined that the GRT OP is a variable interest entity because the holders of limited partnership interests do not have substantive kick-out rights or participation rights. Furthermore, the Company is the primary beneficiary of the GRT OP because the Company has the obligation to absorb losses and the right to receive benefits from the GRT OP and the exclusive power to direct the activities of the GRT OP. As of December 31, 2021 and 2020, the assets and liabilities of the Company and the GRT OP are substantially the same, as the Company does not have any significant assets other than its investment in the GRT OP.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments that are readily convertible to cash with a maturity of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents may include cash and short-term investments. Short-term investments are stated at cost, which approximates fair value. There were no cash equivalents, nor were there restrictions on the use of the Company’s cash balance as of December 31, 2021 and 2020.
The Company maintains its cash accounts with major financial institutions. The cash balances consist of business checking accounts. These accounts are insured by the Federal Deposit Insurance Corporation up to $250,000 at each institution. The Company has not experienced any losses with respect to cash balances in excess of government provided insurance. Management believes there was no significant concentration of credit risk with respect to these cash balances as of December 31, 2021.
Restricted Cash
In conjunction with acquisitions of certain assets, as required by certain lease provisions or certain lenders in conjunction with an acquisition or debt financing, or credits received by the seller of certain assets, the Company assumed or funded reserves for specific property improvements and deferred maintenance, re-leasing costs, and taxes and insurance, which are included on the consolidated balance sheets as restricted cash.
Real Estate Purchase Price Allocation
The Company applies the provisions in ASC 805-10, Business Combinations ("ASC 805-10"), to account for the acquisition of real estate, or real estate related assets, in which a lease, or other contract, is in place representing an active
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
revenue stream, as an asset acquisition (or when applicable, a business combination). In accordance with the provisions of ASC 805-10 (on an asset acquisition), the Company recognizes the assets acquired, the liabilities assumed and any noncontrolling interest in the acquired entity at their relative fair values. The accounting provisions have also established that transaction costs associated with an asset acquisition are capitalized.
Acquired in-place leases are valued as above-market or below-market as of the date of acquisition. The valuation is measured based on the present value (using an interest rate, which reflects the risks associated with the leases acquired) of the difference between (a) the contractual amounts to be paid pursuant to the in-place leases and (b) management’s estimate of fair market lease rates for the corresponding in-place leases over a period equal to the remaining non-cancelable term of the lease for above-market leases, taking into consideration below-market extension options for below-market leases. In addition, renewal options are considered and will be included in the valuation of in-place leases if (1) it is likely that the tenant will exercise the option, and (2) the renewal rent is considered to be sufficiently below a fair market rental rate at the time of renewal. The above-market and below-market lease values are capitalized as intangible lease assets or liabilities and amortized as an adjustment to rental income over the remaining terms of the respective leases.
The aggregate relative fair value of in-place leases includes direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals, which are avoided by acquiring an in-place lease, and tenant relationships. Direct costs associated with obtaining a new tenant include commissions, tenant improvements, and other direct costs, and are estimated using methods similar to those used in independent appraisals and management’s consideration of current market costs to execute a similar lease. These direct costs are considered intangible lease assets and are included with real estate assets on the consolidated balance sheets. The intangible lease assets are amortized to expense over the remaining terms of the respective leases. The value of opportunity costs is calculated using the contractual amounts to be paid, including real estate taxes, insurance, and other operating expenses, pursuant to the in-place leases over a market lease-up period for a similar lease. Customer relationships are valued based on management’s evaluation of certain characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics management will consider in allocating these values include the nature and extent of the Company’s existing business relationships with tenants, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors. These intangibles will be included in intangible lease assets on the consolidated balance sheets and are amortized to expense over the remaining term of the respective leases.
The determination of the relative fair values of the assets and liabilities acquired requires the use of significant assumptions about current market rental rates, rental growth rates, discount rates and other variables.
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/extend the remaining useful life of the unamortized lease-related costs.
Impairment of Real Estate and Related TransactionsIntangible Assets
General
Currently, certainIn accordance with the provisions of the Impairment or Disposal of Long-Lived Assets Subsections of ASC 360, the Company assesses the carrying values of our executive officersrespective long-lived assets, whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable.
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and twoexcluding per share amounts)
Recoverability of our directors are officersreal estate assets is measured by comparison of our Advisor, our property manager,the carrying amount of the asset to the estimated future undiscounted cash flows. To review real estate assets for recoverability, the Company considers current market conditions as well as the Company's intent with respect to holding or disposing of the asset. The intent with regard to the underlying assets might change as market conditions and other affiliated entities,factors change. Fair value is determined through various valuation techniques, including discounted cash flow models, applying a capitalization rate to estimated net operating income of a property, quoted market values and onethird party appraisals, where considered necessary. The use of our directors holds ownership interestsprojected future cash flows is based on assumptions that are consistent with estimates of future expectations and the strategic plan used to manage the Company's underlying business. If the Company analysis indicates that the carrying value of the real estate asset is not recoverable on an undiscounted cash flow basis, the Company will recognize an impairment charge for the amount by which the carrying value exceeds the current estimated fair value of the real estate property.
Projections of expected future undiscounted cash flows require management to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, discount and cap rates, the number of months it takes to re-lease the property and the number of years the property is held for investment.
Revenue Recognition
Leases associated with the acquisition and contribution of certain real estate assets have net minimum rent payment increases during the term of the lease and are recorded to rental revenue on a straight-line basis, commencing as of the contribution or acquisition date. If a lease provides for contingent rental income, the Company will defer the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved.
Tenant reimbursement revenue, which is comprised of additional amounts collected from tenants for the recovery of certain operating expenses, including repair and maintenance, property taxes (excluding taxes paid by a lessee directly to a third party on behalf of the lessor) 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 our former sponsor.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 the 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.
In a situation in which a lease associated with a significant tenant has been, or is expected to be, terminated early, or extended, the Company evaluates the remaining useful life of amortizable assets in the asset group related to the lease that will be terminated (i.e., above- and below-market lease intangibles, in-place lease value and deferred leasing costs). Based upon consideration of the facts and circumstances surrounding the termination or extension, the Company may write-off or accelerate the amortization associated with the asset group. Such amounts are included within rental and other income for above- and below-market lease intangibles and amortization for the remaining lease related asset groups in the consolidated statements of operations.
Lease Accounting
On January 1, 2019, the Company adopted ASC 842 using the modified retrospective approach and elected to apply the provisions as of the date of adoption on a prospective basis. Upon adoption of ASC 842, the Company elected the “package of practical expedients,” which allowed the Company to not reassess (a) whether expired or existing contracts as of January 1, 2019 are or contain leases, (b) the lease classification for any expired or existing leases as of January 1, 2019, and (c) the treatment of initial direct costs relating to any existing leases as of January 1, 2019. The package of practical expedients was made as a single election and was consistently applied to all leases that commenced before January 1, 2019.
Lessor
ASC 842 requires lessors to account for leases using an approach that is substantially equivalent to ASC 840 for sales-type leases, direct financing leases, and operating leases. As the Company elected the package of practical expedients, the Company's existing leases as of January 1, 2019 continue to be accounted for as operating leases.
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
Upon adoption of ASC 842, the Company elected the practical expedient permitting lessors to elect by class of underlying asset to not separate nonlease components (for example, maintenance services, including common area maintenance) from associated lease components (the “non-separation practical expedient”) if both of the following criteria are met: (1) the timing and pattern of transfer of the lease and non-lease component(s) are the same and (2) the lease component would be classified as an operating lease if it were accounted for separately. If both criteria are met, the combined component is accounted for in accordance with ASC 842 if the lease component is the predominant component of the combined component; otherwise, the combined component is accounted for in accordance with the revenue recognition standard. The Company assessed the criteria above with respect to the Company's operating leases and determined that they qualify for the non-separation practical expedient. As a result, the Company accounted for and presented all rental income earned pursuant to operating leases, including property expense recovery, as a single line item, “Rental income,” in the consolidated statement of operations for all periods presented. Prior to the adoption of ASC 842, the Company presented rental income, property expense recovery and other income related to leases separately in the Company's consolidated statements of operations.
Under ASC 842, lessors are required to record revenues and expenses on a gross basis for lessor costs (which include real estate taxes) when these individuals owe fiduciary dutiescosts are reimbursed by a lessee. Conversely, lessors are required to record revenues and expenses on a net basis for lessor costs when they are paid by a lessee directly to a third party on behalf of the lessor. Prior to the adoption of ASC 842, the Company recorded revenues and expenses on a gross basis for real estate taxes whether they were reimbursed to the Company by a tenant or paid directly by a tenant to the taxing authorities on the Company's behalf. Effective January 1, 2019, the Company is recording these costs in accordance with ASC 842.
Lessee
ASC 842 requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset (“ROU asset”), which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASC 842 also requires lessees to classify leases as either finance or operating leases based on whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification is used to evaluate whether the lease expense should be recognized based on an effective interest method or on a straight-line basis over the term of the lease.
On January 1, 2019, the Company was the lessee on 2 ground leases, which were classified as operating leases under ASC 840. As the Company elected the packages of practical expedients, the Company is not required to reassess the classification of these existing leases and, as such, these leases continue to be accounted for as operating leases.
On January 1, 2019, the Company recognized ROU assets and lease liabilities for these leases on the Company's consolidated balance sheets, and on a go-forward basis, lease expense will be recognized on a straight-line basis over the remaining term of the lease. On January 1, 2019, the Company recorded a ROU asset of $25.5 million and a corresponding liability of approximately $27.6 million relating to the Company's existing ground lease arrangements. These operating leases were recognized based on the present value of the future minimum lease payments over the lease term. As these leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available in determining the present value of future payments. The discount rate used to determine the present value of these operating leases’ future payments was 5.36%. There was no impact to beginning equity as a result of the adoption related to the lessee accounting as the difference between the asset and liability is attributed to derecognition of pre-existing straight-line rent balances.
Upon adoption of ASC 842, the Company also elected the practical expedient to not separate non-lease components, such as common area maintenance, from associated lease components for the Company's ground and office space leases.
Derivative Instruments and Hedging Activities
ASC 815, Derivatives and Hedging ("ASC 815") provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, ASC 815 requires qualitative disclosures regarding the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by ASC 815, the Company recorded all derivatives on the consolidated balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, and whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. See Note 6, Interest Rate Contracts, for more detail.
Income Taxes
The Company has elected to be taxed as a REIT under the Internal Revenue Code ("Code"). To qualify as a REIT, the Company must meet certain organizational and operational requirements. The Company intends to adhere to these other entitiesrequirements and their owners,maintain its REIT status for the current year and subsequent years. As a REIT, the Company generally will not be subject to federal income taxes on taxable income that is distributed to stockholders. However, the Company may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed taxable income, if any. If the Company fails to qualify as a REIT in any taxable year, the Company will then be subject to federal income taxes on the taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which fiduciary dutiesqualification is lost unless the Internal Revenue Service ("IRS") grants the Company relief under certain statutory provisions. Such an event could materially adversely affect net income and net cash available for distribution to stockholders. As of December 31, 2021, the Company satisfied the REIT requirements and distributed all of its taxable income.
Pursuant to the Code, the Company has elected to treat its corporate subsidiary as a TRS. In general, the TRS may conflictperform non-customary services for the Company’s tenants and may engage in any real estate or non-real estate-related business. The TRS will be subject to corporate federal and state income tax.
Goodwill
Goodwill represents the excess of consideration paid over the fair value of underlying identifiable net assets of business acquired. The Company's goodwill has an indeterminate life and is not amortized, but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company takes a qualitative approach to consider whether an impairment of goodwill exists prior to quantitatively determining the fair value of the reporting unit in step one of the impairment test. The Company performs its annual assessment on October 1st.
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 unaudited consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.
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. Unvested RSUs that contain non-forfeitable rights to dividends are participating securities and are included in the computation of earnings per share pursuant to the two-class method. The effect of including unvested restricted stock using the treasury stock method was excluded from our calculation of weighted average shares of common stock outstanding – diluted, as the inclusion would have been anti-dilutive for the years ended December 31, 2021, 2020 and 2019. Total excluded shares were 1,350,335, 453,335, and 101,375 for the years ended December 31, 2021, 2020, and 2019, respectively.
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
Segment Information
ASC 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 1 reportable segment.
Unaudited Data
Any references to the number of buildings, square footage, number of leases, occupancy, and any amounts derived from these values in the notes to the consolidated financial statements are unaudited and outside the scope of the Company's independent registered public accounting firm's audit of its consolidated financial statements in accordance with the dutiesstandards of the Public Company Accounting Oversight Board ("PCAOB").
Recently Issued Accounting Pronouncements
Changes to GAAP are established by the FASB in the form of ASUs to the FASB’s Accounting Standards Codification. The Company considers the applicability and impact of all ASUs. Other than the ASUs discussed below, the FASB has not recently issued any other ASUs that they owethe Company expects to our stockholdersbe applicable and us. Their loyaltieshave a material impact on the Company's financial statements.
Adoption of New Accounting Pronouncements
During the first quarter of 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other entities could resultelections as applicable as additional changes in actions or inactions that are detrimental to our business, which could harm the implementationmarket occur.
3. Real Estate
As of our investment objectives. ConflictsDecember 31, 2021, the Company’s real estate portfolio consisted of 121 properties (including one land parcel held for future development), in 26 states consisting substantially of office, industrial, and manufacturing facilities with our business and interests are most likely to arise from involvement in activities related to: (1)a combined acquisition value of approximately $5.3 billion, including the allocation of new investmentsthe purchase price to above and below-market lease valuation.
Depreciation expense for buildings and improvements for the years ended December 31, 2021, 2020, and 2019 was $125.4 million, $94.0 million, and $80.4 million, respectively. Amortization expense for intangibles, including but not limited to, tenant origination and absorption costs for the years ended December 31, 2021, 2020, and 2019 was $84.2 million, $67.1 million and $73.0 million respectively.
2021 Acquisitions
CCIT II Merger
The CCIT II Merger was accounted for as an asset acquisition under ASC 805, with the Company treated as the accounting acquirer. The total purchase price was allocated to the individual assets acquired and liabilities assumed based upon their relative fair values. Intangible assets were recognized at their relative fair values in accordance with ASC 350, Intangibles. Based on an evaluation of the relevant factors and the guidance in ASC 805 requiring significant management judgment, the entity considered the acquirer for accounting purposes is also the legal acquirer. In order to make this consideration, various factors have been analyzed including which entity issued its equity interests, relative voting rights, existence of minority interests (if any), control of the Board, management composition, existence of a premium as it applies to the exchange ratio, relative size, transaction initiation, operational structure, relative composition of employees, surviving brand and name, and other factors. The strongest factor identified was the relative size of the Company as compared to CCIT II. Based on financial
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
measures, the Company was a significantly larger entity than CCIT II and its stockholders hold the majority of the voting shares of the Company.
The assets (including identifiable intangible assets) and liabilities (including executory contracts and other commitments) of CCIT II as of the effective time of the CCIT II Merger were recorded at their respective relative fair values and added to those of the Company. Transaction costs incurred by the Company were capitalized in the period in which the costs were incurred and services between us andwere received. Intangible assets were recognized at their relative fair values in accordance with ASC 805. Upon the other entities; (2) our purchase of properties from, or sale of properties to, affiliated entities; (3) the timing and termseffective time of the investmentCCIT II Merger on March 1, 2021, each of CCIT II's 67.1 million issued and outstanding shares of common stock were converted into the right to receive 1.392 newly issued shares of the Class E common stock of the Company (approximately 93.5 million shares). Total consideration transferred is calculated as such:
| | | | | |
| As of March 1, 2021 |
| CCIT II's common stock shares prior to conversion | 67,139,129 | |
| Exchange ratio | 1.392 |
| Implied GRT common stock issued as consideration | 93,457,668 | |
| GRT's Class E NAV per share in effect at March 1, 2021 | $ | 8.97 | |
| Total consideration | $ | 838,315 | |
The following table summarizes the final purchase price allocation based on a valuation report prepared by the Company's third-party valuation specialist that was subject to management's review and approval: | | | | | |
| March 1, 2021 |
| Assets: | |
| Cash assumed | $ | 2,721 | |
| Land | 143,724 | |
| Building and improvements | 992,779 | |
| Tenant origination and absorption cost | 152,793 | |
| In-place lease valuation (above market) | 11,591 | |
| Intangibles | 27,788 | |
| Other assets | 1,690 | |
| Total assets | $ | 1,333,086 | |
| Liabilities: | |
| Debt | $ | 415,926 | |
| In-place lease valuation (below market) | 10,026 | |
| Lease liability | 4,616 | |
| Accounts payable and other liabilities | 20,604 | |
| Total liabilities | $ | 451,172 | |
| Fair value of net assets acquired | 881,914 | |
| Less: GRT's CCIT II Merger expenses | 43,599 | |
| Fair value of net assets acquired, less GRT's CCIT II Merger expenses | $ | 838,315 | |
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
Merger-Related Expenses
In connection with the CCIT II Merger, the Company incurred various transaction and administrative costs. These costs included advisory fees, legal, tax, accounting, valuation fees, and other costs. These costs were capitalized as a component of the cost of the assets acquired.
The following is a breakdown of the Company's costs incurred related to the CCIT II Merger: | | | | | |
| Amount |
| Termination fee of the CCIT II advisory agreement | $ | 28,439 | |
| Advisory and valuation fees | 4,699 | |
| Legal, accounting and tax fees | 5,115 | |
| Other fees | 5,346 | |
| Total CCIT II Merger-related fees | $ | 43,599 | |
Real Estate - Valuation and Purchase Price Allocation
The Company allocates the purchase price to the relative fair value of the tangible assets of a property by valuing the property as if it were vacant. This “as-if vacant” value is estimated using an income, or salediscounted cash flow, approach that relies upon Level 3 inputs, which are unobservable inputs based on the Company's review of an asset; (4) developmentthe assumptions a market participant would use. These Level 3 inputs include discount rates, capitalization rates, market rents and comparable sales data for similar properties. Estimates of our properties by affiliates; (5) investments with affiliates of our Advisor; (6) compensation to our Advisor; and (7) our relationship with our property manager.
Our nominating and corporate governance committee will consider and actfuture cash flows are based on any conflicts-related matter required by our charter or otherwise permitted by MGCL where the exercise of independent judgment by any of our directors (who is not an independent director) could reasonably be compromised, including approval of any transaction involving our Advisor and its affiliates. In addition, our charter contains a number of restrictions relating to: (1) transactions we enter into with our Advisorfactors including historical operating results, known and its affiliates; (2) certain future offerings;anticipated trends, and (3) allocation of investment opportunities among affiliated entities.
Our independent directors reviewedmarket and economic conditions. In calculating the material transactions between us and our affiliates“as-if vacant” value for the properties acquired during the year ended December 31, 2018. As described in more detail below, we2021, the Company used a discount rate of 5.75% to 8.75%.
In determining the fair value of intangible lease assets or liabilities, the Company also considers Level 3 inputs. Acquired above and below-market leases are currently a party to four types of agreements giving rise to material transactions between us and our affiliates: our advisory agreement, our operating partnership agreement, our property management agreements, and our dealer manager agreement. Set forth below is a descriptionvalued based on the present value of the relevant transactions with our affiliates, which we believedifference between prevailing market rates and the in-place rates measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases, if applicable. The estimated fair value of acquired in-place at-market tenant leases are the costs that would have been executed on terms that are fairincurred to us.
Advisory Agreement
Our Advisor was formed in Delaware in November 2013 and is now owned by our new sponsor, GRECO. Some of our officers and directors are also officers of our Advisor. Our Advisor has contractual responsibility to us and our stockholders pursuantlease the property to the Amendedoccupancy level of the property at the date of acquisition. Such estimates include the value associated with leasing commissions, legal and Restated Advisory Agreement dated September 20, 2017,other costs, as renewed (the "Advisory Agreement").well as the estimated period necessary to lease such properties that would be incurred to lease the property to its occupancy level at the time of its acquisition. Acquisition costs associated with asset acquisitions are capitalized during the period they are incurred.
Our Advisor manages our day-to-day activities pursuantThe following table summarizes the purchase price allocation of the properties acquired during the year ended December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Acquisition | | Land | | | Building | | Improvements | | Tenant origination and absorption costs | | Other Intangibles | In-place lease valuation - above/(below) market | | Financing Leases | | Total (1) |
| CCIT II Properties | | $143,724 | (2) | | $958,166 | | $34,613 | | $152,793 | | $27,788 | $1,565 | | $(3,681) | | $1,314,968 |
(1)The allocations noted above are based on a determination of the relative fair value of the total consideration provided and represent the amount paid including capitalized acquisition costs.
(2)Approximately $5.6 million includes land allocation related to our Advisory Agreement. Pursuant to our Advisory Agreement, we are obligated to reimburse our Advisor for certain services and payments, including payments made by our Advisor to third parties, including in connection with potential acquisitions. Under our Advisory Agreement, our Advisor has undertaken to use its commercially reasonable efforts to present to us investment opportunities consistent with our investmentthe Company's finance leases.
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
Intangibles
policies
The Company allocated a portion of the acquired and objectivescontributed real estate asset value to in-place lease valuation, tenant origination and absorption cost, and other intangibles, net of the write-off of intangibles for the years ended December 31, 2021 and 2020:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| In-place lease valuation (above market) | $ | 49,578 | | | $ | 43,576 | |
| In-place lease valuation (above market) - accumulated amortization | (35,049) | | | (35,604) | |
| In-place lease valuation (above market), net | 14,529 | | | 7,972 | |
| | | |
| Ground leasehold interest (below market) | 2,254 | | | 2,254 | |
| Ground leasehold interest (below market) - accumulated amortization | (219) | | | (191) | |
| Ground leasehold interest (below market), net | 2,035 | | | 2,063 | |
| | | |
| Intangibles - other | 32,028 | | | 4,240 | |
| Intangibles - other - accumulated amortization | (5,492) | | | (4,240) | |
| Intangibles - other, net | 26,536 | | | — | |
| Intangible assets, net | $ | 43,100 | | | $ | 10,035 | |
| | | |
| In-place lease valuation (below market) | $ | (77,859) | | | $ | (68,334) | |
| Land leasehold interest (above market) | (3,072) | | | (3,072) | |
| In-place lease valuation & land leasehold interest - accumulated amortization | 50,634 | | | 44,073 | |
| Intangibles - other (above market) | (329) | | | — | |
| Intangible liabilities, net | $ | (30,626) | | | $ | (27,333) | |
| | | |
| Tenant origination and absorption cost | $ | 876,324 | | | $ | 740,489 | |
| Tenant origination and absorption cost - accumulated amortization | (473,893) | | | (412,462) | |
| Tenant origination and absorption cost, net | $ | 402,431 | | | $ | 328,027 | |
The intangible assets are amortized over the remaining lease term of each property, which on a weighted-average basis, was approximately 6.25 years and 6.83 years as adopted by our Board. In its performance of this undertaking, our Advisor, either directly or indirectly by engagingDecember 31, 2021 and 2020, respectively. The amortization of the intangible assets and other leasing costs for the respective periods is as follows: | | | | | | | | | | | | | | | | | |
| | Amortization (income) expense for the year ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Above and below market leases, net | $ | (1,323) | | | $ | (2,292) | | | $ | (3,201) | |
| Tenant origination and absorption cost | $ | 78,389 | | | $ | 62,459 | | | $ | 69,502 | |
| Ground leasehold amortization (below market) | $ | (349) | | | $ | (291) | | | $ | (52) | |
| Other leasing costs amortization | $ | 6,209 | | | $ | 4,908 | | | $ | 3,581 | |
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
The following table sets forth the estimated annual amortization (income) expense for in-place lease valuation, net, tenant origination and absorption costs, ground leasehold interest, and other leasing costs as of December 31, 2021 for the next five years:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year | | In-place lease valuation, net | | Tenant origination and absorption costs | | Ground leasehold interest | | Other leasing costs |
| 2022 | | $ | (1,954) | | | $ | 76,375 | | | $ | (290) | | | $ | 6,123 | |
| 2023 | | $ | (2,618) | | | $ | 68,638 | | | $ | (290) | | | $ | 6,197 | |
| 2024 | | $ | (1,768) | | | $ | 54,990 | | | $ | (291) | | | $ | 6,060 | |
| 2025 | | $ | (1,297) | | | $ | 43,368 | | | $ | (290) | | | $ | 6,007 | |
| 2026 | | $ | (1,151) | | | $ | 38,702 | | | $ | (290) | | | $ | 5,290 | |
Sale of Properties
On February 18, 2021, the Company sold the 2275 Cabot Drive property located in Lisle, Illinois for a total proceeds of $1.8 million, less closing costs and other closing credits. The property sold for an affiliate, shall, among other duties and subjectapproximate amount equal to the authoritycarrying value.
On April 12, 2021, the Company sold the 2200 Channahon Road property located in Joliet, Illinois for total proceeds of our Board:$11.5 million, less closing costs and other closing credits. The property sold for an approximate amount equal to the carrying value.
find, evaluate, presentOn June 8, 2021, the Company sold the Houston Westway I property located in Houston, Texas for total proceeds of $10.5 million, less closing costs and recommendother closing credits. The property sold for an approximate amount equal to us investment opportunities consistent with our investment policiesthe carrying value.
Impairments
2200 Channahon Road and objectives;Houston Westway I
serveDuring the year ended December 31, 2021, the Company recorded an impairment provision of approximately $4.2 million as our investment and financial advisor and provide research and economic and statistical data in connection with our assets and our investment policies;
perform due diligence and prepare and obtain reports regarding prospective investments;
provide supporting documentation and recommendations necessary forit was determined that the our Board to evaluate proposed investments;
acquire properties and make investments on our behalf in compliance with our investment objectives and policies;
structure and negotiatecarrying value of the terms and conditions of our real estate acquisitions, sales or joint ventures;
monitor applicable markets, obtain reportswould not be recoverable on 2 properties. This impairment resulted from changes in longer absorption periods, lower market rents and evaluateshorter anticipated hold periods. In determining the performance andfair value of our investments;property, the Company considered Level 3 inputs. See Note 8,Fair Value Measurements, for details.
implement and coordinate the processes with respect to the calculation of NAV and obtain appraisals performed by independent third-party appraisal firms concerning the value of properties;Restricted Cash
supervise our independent valuation firm and monitor its valuation process to ensure that it complies with our valuation procedures;
review and analyze each property’s operating and capital budget;
arrange, structure and negotiate financing and refinancing of properties;
perform all operational functions for the maintenance and administration of our assets, including the servicing of mortgages;
consult with our officers and Board and assist the Board in formulating and implementing our financial policies, operational planning services and portfolio management functions;
prepare and review on our behalf,In conjunction with the participationacquisition of one designated principal executive officer and principal financial officer, all reports and returnscertain assets, as required by certain lease provisions or certain lenders in conjunction with an acquisition or debt financing, or credits received by the SEC, IRSseller of certain assets, the Company assumed or funded reserves for specific property improvements and other state or federal governmental agencies;deferred maintenance, re-leasing costs, and taxes and insurance, which are included on the consolidated balance sheets as restricted cash. Additionally, an ongoing replacement reserve is funded by certain tenants pursuant to each tenant’s respective lease as follows:
provide the daily management | | | | | | | | | | | |
| Balance as of December 31, |
| 2021 | | 2020 |
| Cash reserves | $ | 15,234 | | | $ | 20,385 | |
| Restricted lockbox | 2,288 | | | 13,967 | |
| Total | $ | 17,522 | | | $ | 34,352 | |
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and perform and supervise the various administrative functions reasonably necessary for our management and operations; andexcluding per share amounts)
investigate, select, and, on our behalf, engage and conduct business with such third parties as our Advisor deems necessary to the proper performance of its obligations under the Advisory Agreement.4.Investments in Unconsolidated Entities
The terminterests discussed below are deemed to be variable interests in VIEs and, based on an evaluation of our Advisory Agreement is one year and will end on September 19, 2019, but may be renewed for an unlimited number of successive one-year periods. However, a majority of our independent directors must approve the Advisory Agreement and the fees thereunder annually prior to any renewal, andvariable interests against the criteria for consolidation, the Company determined that it is not the primary beneficiary of the investments, as the Company does not have power to direct the activities of the entities that most significantly affect their performance. As such, renewal shall be set forththe interest in the applicable meeting minutes. The independent directors will determine at least annually that our total fees and expenses are reasonable in lightVIEs is recorded using the equity method of our investment performance, our net income, and the fees and expenses of other comparable unaffiliated REITs. Each such determination shall be reflectedaccounting in the applicable meeting minutes. Additionally, any party may terminateaccompanying consolidated financial statements. Under the Advisory Agreement without causeequity method, the investments in the unconsolidated entities are stated at cost and adjusted for the Company’s share of net earnings or penaltylosses and reduced by distributions. Equity in earnings of real estate ventures is generally recognized based on the allocation of cash distributions upon 60 days’ written notice. If we elect to terminate the Advisory Agreement, we will be required to obtain the approval of a majority of our independent directors. In the event of
the termination of our Advisory Agreement, our Advisor will be required to cooperate with us and take all reasonable steps requested by us to assist our Board in making an orderly transitionliquidation of the advisory function.investment at book value in accordance with the operating agreements. The Company's maximum exposure to losses associated with its unconsolidated investments is primarily limited to its carrying value in the investments.
Our Advisor and its officers, employees and affiliates expect to engageDigital Realty Trust, Inc.
In September 2014, the Company, through an SPE wholly-owned by the GRT OP, acquired an 80% interest in other business ventures and, as a result, their resources will not be dedicated exclusively to our business. However, pursuant to the Advisory Agreement, our Advisor will be required to devote sufficient resources to our administration to discharge its obligations. Our Advisor has the right to assign the Advisory Agreement tojoint venture with an affiliate subject to approval by our independent directors. We have the right to assign the Advisory Agreement to any successor to all of our assets, rights and obligations. Our Board shall determine whether any successor advisor possesses sufficient qualifications to perform the advisory functionDigital Realty Trust, Inc. ("Digital") for us and whether the compensation provided for in its advisory agreement$68.4 million, which was funded with us is justified. Our independent directors will base their determination on the general facts and circumstances that they deem applicable, including the overall experience and specific industry experience of the successor advisor and its management. Other factors that will be considered are the compensation to be paid to the successor advisor and any potential conflicts of interest that may occur.
Under the terms of our Advisory Agreement, our Advisor is entitled to receive an advisory fee that will be payable in arrears on a monthly basis and accrues daily in an amount equal to 1/365th of 1.25% of the NAV for each class of common stock for each day. We will not pay the Advisor any acquisition, financing or other similar fees fromequity proceeds raised in the Follow-On OfferingCompany'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 "Digital Property").
In September 2014, the joint venture entered into a secured term loan (the "Digital Loan") in the amount of approximately $102.0 million. The Digital Loan had an original maturity date of September 9, 2019 and included 2 extension options of 12 additional months each beyond the original maturity date. On March 29, 2019, the joint venture executed the first 12-month loan extension. Based on the executed extension, the new loan maturity date was September 9, 2020. The extension did not change the loan amount, rate or other substantive terms. The members were also required to issue a $10.2 million stand-by letter of credit, of which the Company's portion was $8.2 million.
Since the tenant did not execute a long term extension or sign a new lease with the joint venture, the joint venture elected not to accept the loan extension terms offered by the lender and subsequent discussions did not result in an additional loan extension in 2020. As a result, on September 9, 2020, the lender provided a notice of default for non-payment of the unpaid balance of the non-recourse Digital Loan and exercised its right to draw on the stand-by letter of credit. The Company funded the $8.2 million stand-by letter of credit with cash.
As part of the wind up of the joint venture, the Company had recorded a receivable from the Digital managing member of $4.1 million. The $4.1 million payment was received in April 2021 and the Company has written off its remaining investment in the venture. In April 2021, the lender sold the Digital Loan and concurrently, the Digital-GCEAR 1 (Ashburn) joint venture executed a deed in lieu thereby extinguishing any further obligations. The Company is not exposed to any future funding obligations and there are no other future losses expected to arise from this investment.
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
5. Debt
As of December 31, 2021 and 2020, the Company’s debt consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | | Contractual Interest Rate (1) | | Loan Maturity (4) | | Effective Interest Rate (2) |
| 2021 | | 2020 | | | |
| HealthSpring Mortgage Loan | $ | 19,669 | | | $ | 20,208 | | | 4.18% | | April 2023 | | 4.63% |
| Midland Mortgage Loan | 95,792 | | | 98,155 | | | 3.94% | | April 2023 | | 4.12% |
| Emporia Partners Mortgage Loan | — | | | 1,627 | | | —% | | — | | —% |
| Samsonite Loan | 19,114 | | | 20,165 | | | 6.08% | | September 2023 | | 5.03% |
| Highway 94 Loan | 13,732 | | | 14,689 | | | 3.75% | | August 2024 | | 4.87% |
| Pepsi Bottling Ventures Loan | 18,218 | | | 18,587 | | | 3.69% | | October 2024 | | 3.92% |
| AIG Loan II | 124,606 | | | 126,792 | | | 4.15% | | November 2025 | | 4.94% |
| BOA Loan | 375,000 | | | 375,000 | | | 3.77% | | October 2027 | | 3.91% |
| BOA/KeyBank Loan | 250,000 | | | 250,000 | | | 4.32% | | May 2028 | | 4.14% |
| AIG Loan | 101,884 | | | 103,870 | | | 4.96% | | February 2029 | | 5.07% |
| Total Mortgage Debt | 1,018,015 | | | 1,029,093 | | | | | | | |
Revolving Credit Facility (3) | 373,500 | | | 373,500 | | | LIBO Rate + 1.45% | | June 2023 | | 1.67% |
| 2023 Term Loan | 200,000 | | | 200,000 | | | LIBO Rate + 1.40% | | June 2023 | | 1.59% |
| 2024 Term Loan | 400,000 | | | 400,000 | | | LIBO Rate + 1.40% | | April 2024 | | 1.58% |
| 2025 Term Loan | 400,000 | | | — | | | LIBO Rate + 1.40% | | December 2025 | | 1.82% |
| 2026 Term Loan | 150,000 | | | 150,000 | | | LIBO Rate + 1.40% | | April 2026 | | 1.55% |
| Total Debt | 2,541,515 | | | 2,152,593 | | | | | | | |
| Unamortized Deferred Financing Costs and Discounts, net | (9,138) | | | (12,166) | | | | | | | |
| Total Debt, net | $ | 2,532,377 | | | $ | 2,140,427 | | | | | | | |
(1)Including the effect of the interest rate swap agreements with a total notional amount of $750.0 million the weighted average interest rate as of December 31, 2021 was 3.18% for both the Company’s fixed-rate and variable-rate debt combined and 3.86% for the Company’s fixed-rate debt only.
(2)Reflects the effective interest rate as of December 31, 2021 and includes the effect of amortization of discounts/premiums and deferred financing costs.
(3)The LIBO rate as of December 1, 2021 (effective date) was 0.10%. The Revolving Credit Facility has an initial term of approximately six months, maturing on June 28, 2022, and may be extended for a one-year period if certain conditions are met and upon payment of an extension fee. See discussion below.
(4)Reflects the loan maturity as of December 31, 2021.
Second Amended and Restated Credit Agreement
Pursuant to the Second Amended and Restated Credit Agreement dated as of April 30, 2019 (as amended by the First Amendment to the Second Amended and Restated Credit Agreement dated as of October 1, 2020, the Second Amendment to the Second Amended and Restated Credit Agreement dated as of December 18, 2020, and the Third Amendment to the Second Amended and Restated Credit Agreement dated as of July 14, 2021 (the “Third Amendment”), the “Second Amended and Restated Credit Agreement”), with KeyBank National Association (“KeyBank”) as administrative agent, and a syndicate of lenders, we, through the GRT OP, as the borrower, have been provided with a $1.9 billion credit facility consisting of a $750 million senior unsecured revolving credit facility (the “Revolving Credit Facility”) maturing in June 2022 with (subject to the satisfaction of certain customary conditions) a one-year extension option, a $200 million senior unsecured term loan maturing in June 2023 (the “$200M 5-Year Term Loan”), a $400 million senior unsecured term loan maturing in April 2024 (the “$400M 5-Year Term Loan”), a $400 million senior unsecured term loan maturing in December 2025 (the $400M 5-Year Term Loan) (collectively, the “KeyBank Loans”), and a $150 million senior unsecured term loan maturing in April 2026 (the “$150M 7-Year Term Loan”).The credit facility also provides the option, subject to obtaining additional commitments from lenders and certain other customary conditions, to increase the commitments under the Revolving Credit Facility, increase the existing term loans and/or incur new term loans by up to an additional $600 million in the aggregate. As of December 31, 2021, the remaining capacity under the Revolving Credit Facility was $376.5 million.
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
Based on the terms as of December 31, 2021, the interest rate for the credit facility varies based on the consolidated leverage ratio of the GRT OP, us, and our subsidiaries and ranges (a) in the case of the Revolving Credit Facility, from LIBOR plus 1.30% to LIBOR plus 2.20%, (b) in the case of each of the $200M 5-Year Term Loan, the $400M 5-Year Term Loan $400M 5-Year Term Loan, 2025, and the $150M 7-Year Term Loan, from LIBOR plus 1.25% to LIBOR plus 2.15%.If the GRT OP obtains an investment grade rating of its senior unsecured long term debt from Standard & Poor's Rating Services, Moody's Investors Service, Inc., or Fitch, Inc., the applicable LIBOR margin and base rate margin will vary based on such rating and range (i) in the case of the Revolving Credit Facility, from LIBOR plus 0.825% to LIBOR plus 1.55%, (ii) in the case of each of the $200M 5-Year Term Loan, the $400M 5-Year Term Loan and the $400M 5-Year Term Loan 2025, and the $150M 7-Year Term Loan, from LIBOR plus 1.90% to LIBOR plus 1.75%.
On March 1, 2021, the Company exercised its right to draw on the $400M 5-Year Term Loan 2025 to repay CCIT II's existing debt balance in connection with making investments.the CCIT II Merger.
Generally, weThe Second Amended and Restated Credit Agreement provides that the GRT OP must maintain a pool of unencumbered real properties (each a "Pool Property" and collectively the "Pool Properties") that meet certain requirements contained in the Second Amended and Restated Credit Agreement. The agreement sets forth certain covenants relating to the Pool Properties, including, without limitation, the following:
•there must be no less than 15 Pool Properties at any time;
•no greater than 15% of the aggregate pool value may be contributed by a single Pool Property or tenant;
•no greater than 15% of the aggregate pool value may be contributed by Pool Properties subject to ground leases;
•no greater than 20% of the aggregate pool value may be contributed by Pool Properties which are requiredunder development or assets under renovation;
•the minimum aggregate leasing percentage of all Pool Properties must be no less than 90%; and
•other limitations as determined by KeyBank upon further due diligence of the Pool Properties.
Borrowing availability under the AdvisorySecond Amended and Restated Credit Agreement is limited to the lesser of the maximum amount of all loans outstanding that would result in (i) an unsecured leverage ratio of no greater than 60%, or (ii) an unsecured interest coverage ratio of no less than 2.00:1.00.
Guarantors of the KeyBank Loans include the Company, each special purpose entity that owns a Pool Property, and each of the GRT OP's other subsidiaries which owns a direct or indirect equity interest in a SPE that owns a Pool Property.
In addition to customary representations, warranties, covenants, and indemnities, the KeyBank Loans require the GRT OP to comply with the following at all times, which will be tested on a quarterly basis:
•a maximum consolidated leverage ratio of 60%, or, the ratio may increase to 65% for up to 4 consecutive quarters after a material acquisition;
•a minimum consolidated tangible net worth of 75% of the Company's consolidated tangible net worth at closing of the Revolving Credit Facility, or approximately $2.0 billion, plus 75% of net future equity issuances (including GRT OP Units), minus 75% of the amount of any payments used to redeem the Company's stock or GRT OP Units, minus any amounts paid for the redemption or retirement of or any accrued return on the preferred equity issued under the preferred equity investment made in EA-1 in August 2018 by SHBNPP Global Professional Investment Type Private Real Estate Trust No. 13 (H);
•upon consummation, if ever, of an initial public offering, a minimum consolidated tangible net worth of 75% of the Company's consolidated tangible net worth at the time of such initial public offering plus 75% of net future equity issuances (including GRT OP Units) should the Company publicly list its shares;
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
•a minimum consolidated fixed charge coverage ratio of not less than 1.50:1.00;
•a maximum total secured debt ratio of not greater than 40%, which ratio will increase by 5 percentage points for 4 quarters after closing of a material acquisition that is financed with secured debt;
•a minimum unsecured interest coverage ratio of 2.00:1.00;
•a maximum total secured recourse debt ratio, excluding recourse obligations associated with interest rate hedges, of 10% of our total asset value; and
•aggregate maximum unhedged variable rate debt of not greater than 30% of the Company's total asset value.
Furthermore, the activities of the GRT OP, the Company, and the Company's subsidiaries must be focused principally on the ownership, development, operation and management of office, industrial, manufacturing, warehouse, distribution or educational properties (or mixed uses thereof) and businesses reasonably related or ancillary thereto.
Third Amendment to Second Amended and Restated Credit Agreement
On July 14, 2021, the Company, through the GRT OP, entered into the Third Amendment. The Third Amendment amended the Second Amended and Restated Credit Agreement to reimburse our Advisordecrease the applicable interest rate margin for organizationthe $150M 7-Year Term Loan. After giving effect to the Third Amendment, the $150M 7-Year Term Loan accrues interest, at the GRT OP's election, at a per annum rate equal to either (i) the LIBOR plus an applicable margin ranging from 1.25% to 2.15% or (ii) a base rate plus an applicable margin ranging from 0.25% to 1.15%, in each case such applicable margin to be based on the Company's consolidated leverage ratio. Prior to the Third Amendment, the applicable margin for LIBOR based loans was 1.65% to 2.50% and offering costsfor base rate loans was 0.65% to 1.50%, in each case based on the Company's consolidated leverage ratio. All other terms of the Second Amended and Restated Credit Agreement were unchanged. No new term loan borrowings were incurred under the Third Amendment. The applicable rate for the $150M 7-Year Term Loan decreased 35 basis points from 1.75% to 1.40%.
Debt Covenant Compliance
Pursuant to the terms of the Company's mortgage loans and the KeyBank Loans, the GRT OP, 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 December 31, 2021.
The following summarizes the future scheduled principal repayments of all loans as of December 31, 2021 per the loan terms discussed above:
| | | | | |
| As of December 31, 2021 |
| 2022 | $ | 9,501 | |
| 2023 | 336,814 | |
| 2024 | 433,929 | |
| 2025 | 519,901 | |
| 2026 | 152,546 | |
| Thereafter | 1,088,824 | |
| Total principal | 2,541,515 | |
| Unamortized debt premium/(discount) | (166) | |
| Unamortized deferred loan costs | (8,972) | |
| Total | $ | 2,532,377 | |
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and when incurred. Our Advisor may waiveexcluding per share amounts)
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 enters 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 values 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 deferspeculative purposes.
Derivative Instruments
The Company has entered into interest rate swap agreements to hedge the variable cash flows associated with certain existing or forecasted LIBOR based variable-rate debt, including the Company's KeyBank Loans. The change in the fair value of derivatives designated and qualifying as cash flow hedges is initially recorded in accumulated other comprehensive income ("AOCI") and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt.
The following table sets forth a summary of the interest rate swaps at December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Fair Value (1) | | Current Notional Amounts |
| | | | | | | | December 31, | | December 31, |
| Derivative Instrument | | Effective Date | | Maturity Date | | Interest Strike Rate | | 2021 | | 2020 | | 2021 | | 2020 |
| Assets/(Liabilities) | | | | | | | | | | | | | | |
| Interest Rate Swap | | 3/10/2020 | | 7/1/2025 | | 0.83% | | $ | 1,648 | | | $ | (2,963) | | | $ | 150,000 | | | $ | 150,000 | |
| Interest Rate Swap | | 3/10/2020 | | 7/1/2025 | | 0.84% | | 1,059 | | | (2,023) | | | 100,000 | | | 100,000 | |
| Interest Rate Swap | | 3/10/2020 | | 7/1/2025 | | 0.86% | | 749 | | | (1,580) | | | 75,000 | | | 75,000 | |
| Interest Rate Swap | | 7/1/2020 | | 7/1/2025 | | 2.82% | | (7,342) | | | (13,896) | | | 125,000 | | | 125,000 | |
| Interest Rate Swap | | 7/1/2020 | | 7/1/2025 | | 2.82% | | (5,909) | | | (11,140) | | | 100,000 | | | 100,000 | |
| Interest Rate Swap | | 7/1/2020 | | 7/1/2025 | | 2.83% | | (5,899) | | | (11,148) | | | 100,000 | | | 100,000 | |
| Interest Rate Swap | | 7/1/2020 | | 7/1/2025 | | 2.84% | | (5,958) | | | (11,225) | | | 100,000 | | | 100,000 | |
| Total | | | | | | | | $ | (21,652) | | | $ | (53,975) | | | $ | 750,000 | | | $ | 750,000 | |
(1)The Company records all derivative instruments on a gross basis in the consolidated balance sheets, and accordingly there are no offsetting amounts that net assets against liabilities. As of December 31, 2021, derivatives in a liability position are included in an asset or liability position are included in the line item "Other assets or Interest rate swap liability," respectively, in the consolidated balance sheets at fair value. The LIBO rate as of December 31, 2021 (effective date) was 0.10%.
The following table sets forth the impact of the interest rate swaps on the consolidated statements of operations for the periods presented:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
| Interest Rate Swap in Cash Flow Hedging Relationship: | | | |
| Amount of (loss) gain recognized in AOCI on derivatives | $ | (18,165) | | | $ | (38,319) | |
| Amount of (gain) loss reclassified from AOCI into earnings under “Interest expense” | $ | (14,284) | | | $ | 8,615 | |
| Total interest expense presented in the consolidated statement of operations in which the effects of cash flow hedges are recorded | $ | 85,087 | | | $ | 79,646 | |
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
During the twelve months subsequent to December 31, 2021, the Company estimates that an additional $11.4 million of its expense will be recognized from AOCI into earnings.
Certain agreements with the derivative counterparties contain a portionprovision that if the Company defaults on any of its indebtedness, including a 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 December 31, 2021 and 2020, the fair value of interest rate swaps that were in a liability position, which excludes any adjustment for nonperformance risk related to these reimbursementsagreements, was approximately $25.1 million and $54.0 million, respectively. As of December 31, 2021 and December 31, 2020, 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 December 31, 2021 and 2020:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Prepaid tenant rent | $ | 26,477 | | | $ | 20,780 | |
| Real estate taxes payable | 14,751 | | | 15,380 | |
| Property operating expense payable | 11,126 | | | 8,473 | |
| Accrued tenant improvements | 10,123 | | | 30,011 | |
| Deferred compensation | 10,119 | | | 10,599 | |
| Interest payable | 9,683 | | | 9,147 | |
| Other liabilities | 26,842 | | | 20,044 | |
| Total | $ | 109,121 | | | $ | 114,434 | |
8. Fair Value Measurements
The Company is required to disclose fair value information about all financial instruments, whether or electnot recognized in the consolidated balance sheets, for which it is practicable to receive Class I sharesestimate 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 Class I unitsliabilities, (ii) "significant other observable inputs," and (iii) "significant unobservable inputs." "Significant other observable inputs" can include quoted prices for similar assets or liabilities in our Operating Partnershipactive 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 lieuwhich the determination of these reimbursements at any time andthe fair value measurement is based on inputs from timedifferent 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 time,the fair value measurement in its sole discretion.entirety. The Advisory Agreement also requires our Advisor to reimburse us within 60 days after the endCompany's assessment of the month in whichsignificance of a public offering terminates,particular input to the extent that organizationfair value measurement in its entirety requires judgment and offering expenses, including sales commissions, dealer manager fees, distribution fees,considers factors specific to the asset or liability. There were no transfers between the levels in the fair value hierarchy during the years ended December 31, 2021 and any additional underwriting compensation, are in excess of 15.0% of gross proceeds from the public offering.2020.
The Advisory Agreement provides for reimbursementfollowing table sets 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 our Advisor’s directDecember 31, 2021 and indirect costs2020:
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and management services to us. Our operating expenses shall (in the absence of a satisfactory showing to the contrary) be deemed to be excessive, and our Advisor must reimburse us in the event our total operating expenses for the 12 months then ended exceed the greater of 2.0% of our average invested assets or 25.0% of our net income, unless a majority of our independent directors has determined that such excess expenses were justified based on unusual and non-recurring factors. excluding per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Assets/(Liabilities) | | Total Fair Value | | Quoted Prices in Active Markets for Identical Assets and Liabilities | | Significant Other Observable Inputs | | Significant Unobservable Inputs |
| December 31, 2021 | | | | | | | | |
| Interest Rate Swap Asset | | $ | 3,456 | | | $ | — | | | $ | 3,456 | | | $ | — | |
| Interest Rate Swap Liability | | $ | (25,108) | | | $ | — | | | $ | (25,108) | | | $ | — | |
| Corporate Owned Life Insurance Asset | | $ | 6,875 | | | $ | — | | | $ | 6,875 | | | $ | — | |
| Mutual Funds Asset | | $ | 5,543 | | | $ | 5,543 | | | $ | — | | | $ | — | |
| | | | | | | | |
| December 31, 2020 | | | | | | | | |
| Interest Rate Swap Liability | | $ | (53,975) | | | $ | — | | | $ | (53,975) | | | $ | — | |
| Corporate Owned Life Insurance Asset | | $ | 4,454 | | | $ | — | | | $ | 4,454 | | | $ | — | |
| Mutual Funds Asset | | $ | 6,643 | | | $ | 6,643 | | | $ | — | | | $ | — | |
Real Estate
For the year ended December 31, 2018,2021, the Company determined that 2 of the Company's properties were impaired based on expected hold period and selling price. The Company considered these inputs as Level 3 measurements within the fair value hierarchy. The following table is a summary of the quantitative information related to the non-recurring fair value measurement for the impairment of the Company's real estate properties for the year-ended December 31, 2021:
| | | | | | | | | | | | | | | | | |
| | Range of Inputs or Inputs |
| Unobservable Inputs: | | 2200 Channahon Road | | Houston Westway I | |
| | | | | |
| | | | | |
| Expected selling price per square foot | | $8.30 | | $72.90 | |
| Estimated hold period | | Less than one year | | Less than one year | |
Financial Instruments Disclosed at Fair Value
Financial instruments as of December 31, 2021 and December 31, 2020 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 December 31, 2021 and 2020. The fair value of the 10 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.
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| | 2021 | | 2020 |
| | Fair Value | | Carrying Value (1) | | Fair Value | | Carrying Value (1) |
| BOA Loan | $ | 349,082 | | | $ | 375,000 | | | $ | 355,823 | | | $ | 375,000 | |
| BOA/KeyBank Loan | 260,378 | | | 250,000 | | | 263,454 | | | 250,000 | |
| AIG Loan II | 120,141 | | | 124,606 | | | 121,011 | | | 126,792 | |
| AIG Loan | 99,697 | | | 101,884 | | | 102,033 | | | 103,870 | |
| Midland Mortgage Loan | 95,720 | | | 95,792 | | | 97,709 | | | 98,155 | |
| Samsonite Loan | 19,366 | | | 19,114 | | | 21,030 | | | 20,165 | |
| HealthSpring Mortgage Loan | 19,639 | | | 19,669 | | | 20,462 | | | 20,208 | |
| Pepsi Bottling Ventures Loan | 18,262 | | | 18,218 | | | 18,942 | | | 18,587 | |
| Highway 94 Loan | 13,360 | | | 13,732 | | | 14,447 | | | 14,689 | |
| Emporia Partners Mortgage Loan | — | | | — | | | 1,654 | | | 1,627 | |
| Total | $ | 995,645 | | | $ | 1,018,015 | | | $ | 1,016,565 | | | $ | 1,029,093 | |
(1)The carrying values do not include the debt premium/(discount) or deferred financing costs as of December 31, 2021 and 2020. See Note 5, Debt, for details.
9. Equity
Classes
Class T shares, Class S shares, Class D shares, Class I shares, Class A shares, Class AA shares, Class AAA and Class E shares vote together as a single class, and each share is entitled to 1 vote on each matter submitted to a vote at a meeting of the Company's stockholders; provided that with respect to any matter that would only have a material adverse effect on the rights of a particular class of common stock, only the holders of such affected class are entitled to vote.
The following table sets forth the classes of outstanding common stock as of December 31, 2021 and 2020:
| | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
| Class A | 24,509,573 | | | 24,325,680 | |
| Class AA | 47,592,118 | | | 47,304,097 | |
| Class AAA | 926,936 | | | 920,920 | |
| Class D | 42,013 | | | 41,095 | |
| Class E | 249,088,676 | | | 155,272,273 | |
| Class I | 1,911,731 | | | 1,896,696 | |
| Class S | 1,800 | | | 1,800 | |
| Class T | 565,265 | | | 558,107 | |
Common Equity
As of December 31, 2021, the Company had received aggregate gross offering proceeds of approximately $2.8 billion from the sale of shares in the private offering, the public offerings, the DRP offerings and mergers (includes EA-1 offerings and EA-1 merger with Signature Office REIT, Inc., the EA Mergers and the CCIT II Merger), as discussed in Note 1, Organization. As part of the $2.8 billion from the sale of shares, the Company issued approximately 43,772,611 shares of its common stock upon the consummation of the merger of Signature Office REIT, Inc. in June 2015 and 174,981,547 Class E shares (in exchange for all outstanding shares of EA-1's common stock at the time of the EA Mergers) in April 2019 upon the consummation of the EA Mergers and 93,457,668 Class E shares (in exchange for all the outstanding shares of CCIT II's common stock at the time of the CCIT II Merger). As of December 31, 2021, there were 324,638,112 shares outstanding,
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
including shares issued pursuant to the DRP, less shares redeemed pursuant to the SRP and the self-tender offer, which occurred in May 2019.
Termination of Follow-On Offering
The Company’s follow-on offering of up to $2.2 billion shares, consisting of up to $2.0 billion of shares in our expenses were within such limits.
If we consummate the Mergers, we will no longer be externally advisedprimary offering and $0.2 billion of shares pursuant to our Advisory Agreement. Our management teamDRP (collectively, the "Follow-On Offering”) terminated with the expiration of the registration statement on Form S-11 (Registration No. 333-217223), as amended, on September 20, 2020.
Distribution Reinvestment Plan (DRP)
The Company has adopted the DRP, which allows stockholders to have dividends and other distributions otherwise distributable to them invested in additional shares of common stock. No sales commissions or dealer manager fees will handle manybe paid on shares sold through the DRP, but the DRP shares will be charged the applicable distribution fee payable with respect to all shares of these responsibilities formerly handledthe applicable class. The purchase price per share under the DRP is equal to the net asset value ("NAV") per share applicable to the class of shares purchased, calculated using the most recently published NAV available at the time of reinvestment. The Company may amend or terminate the DRP for any reason at any time upon 10 days' prior written notice to stockholders, which may be provided through the Company's filings with the SEC.
In connection with a potential strategic transaction, on February 26, 2020, the Board approved the temporary suspension of the DRP, effective March 8, 2020. On July 16, 2020, the Board approved the reinstatement of the DRP, effective July 27, 2020 and an amendment of the DRP to allow for the use of the most recently published NAV per share of the applicable share class available at the time of reinvestment as the DRP purchase price for each share class.
On July 17, 2020, the Company filed a registration statement on Form S-3 for the registration of up to $100 million in shares pursuant to the Company's DRP (the “DRP Offering”).The DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders.
The following table summarizes the DRP offerings, by our Advisor. See "Item 1--Business" for additional details regardingshare class, as of December 31, 2021:
| | | | | | | | | | | | | | |
| Share Class | | Amount | | Shares |
| Class A | | $ | 9,687 | | | 1,052,170 |
| Class AA | | 19,047 | | 2,068,367 |
| Class AAA | | 290 | | 31,521 |
| Class D | | 21 | | 2,231 |
| Class E | | 311,405 | | 32,299,377 |
| Class I | | 437 | | 47,028 |
| Class S | | 0 | | 12 |
| Class T | | 177 | | 19,090 |
| Total | | $ | 341,064 | | | 35,519,796 | |
As of December 31, 2021 and 2020, the proposed Mergers.Company had issued approximately $341.1 million and $318.2 million in shares pursuant to the DRP offerings, respectively.
Operating Partnership AgreementDRP Suspension
On October 1, 2021, the Board approved a temporary suspension of the DRP, effective October 11, 2021.
Share Redemption Program (SRP)
The Company has adopted the SRP that enables stockholders to sell their stock to the Company in limited circumstances (see section below for details on the suspension of the SRP). On August 8, 2019, the Board amended and restated its SRP, effective as of September 20, 2017, we12, 2019, in order to (i) clarify that only those stockholders who purchased their shares from us or
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
received their shares from the Company (directly or indirectly) through one or more non-cash transactions (including transfers to trusts, family members, etc.) may participate in the SRP; (ii) allocate capacity within each class of common stock such that the Company may redeem up to 5% of the aggregate NAV of each class of common stock; (iii) treat all unsatisfied redemption requests (or portion thereof) as a request for redemption the following quarter unless otherwise withdrawn; and (iv) make certain other clarifying changes.
On November 7, 2019, the Board amended and restated the SRP, effective as of December 12, 2019, in order to (i) provide for redemption sought upon a stockholder’s determination of incompetence or incapacitation; (ii) clarify the circumstances under which a determination of incompetence or incapacitation will entitle a stockholder to such redemption; and (iii) make certain other clarifying changes.
In connection with a potential strategic transaction, on February 26, 2020, the Board approved the temporary suspension of the SRP, effective March 28, 2020. On July 16, 2020, the Board approved the partial reinstatement of the SRP, effective August 17, 2020, subject to the following limitations: (A) redemptions will be limited to those sought upon a stockholder’s death, qualifying disability, or determination of incompetence or incapacitation in accordance with the terms of the SRP, and (B) the quarterly cap on aggregate redemptions will be equal to the aggregate NAV, as of the last business day of the previous quarter, of the shares issued pursuant to the DRP during such quarter. Settlements of share redemptions will be made within the first three business days of the following quarter. Redemption activity during the quarter is listed below.
Under the SRP, the Company will redeem shares as of the last business day of each quarter. The redemption price will be equal to the NAV per share for the applicable class generally on the 13th day of the month prior to quarter end (which will be the most recently published NAV). Redemption requests must be received by 4:00 p.m. (Eastern time) on the second to last business day of the applicable quarter. Redemption requests exceeding the quarterly cap will be filled on a pro rata basis. With respect to any pro rata treatment, redemption requests following the death or qualifying disability of a stockholder will be considered first, as a group, followed by requests where pro rata redemption would result in a stockholder owning less than the minimum balance of $2,500 of shares of the Company's common stock, which will be redeemed in full to the extent there are available funds, with any remaining available funds allocated pro rata among all other redemption requests. All unsatisfied redemption requests must be resubmitted after the start of the next quarter, or upon the recommencement of the SRP, as applicable.
There are several restrictions under the SRP. Stockholders generally must hold their shares for one year before submitting their shares for redemption under the program; however, the Company will waive the one-year holding period in the event of the death or qualifying disability of a stockholder. Shares issued pursuant to the DRP are not subject to the one-year holding period. In addition, the SRP generally imposes a quarterly cap on aggregate redemptions of the Company's shares equal to a value of up to 5% of the aggregate NAV of the outstanding shares as of the last business day of the previous quarter, subject to the further limitations as indicated in the August 8, 2019 amendments discussed above.
As the value on the aggregate redemptions of the Company's shares is outside the Company's control, the 5% quarterly cap is considered to be temporary equity and is presented as common stock subject to redemption on the accompanying consolidated balance sheets.
The following table summarizes share redemption (excluding the self-tender offer) activity during the years ended December 31, 2021 and 2020: | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
| Shares of common stock redeemed | 2,232,476 | | | 1,841,887 | |
| Weighted average price per share | $ | 9.03 | | | $ | 9.01 | |
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
Since July 31, 2014 and through December 31, 2021, the Company had redeemed 28,304,928 shares (excluding the self-tender offer) of common stock for approximately $265.5 million at a weighted average price per share of $9.38 pursuant to the SRP. Since July 31, 2014 and through December 31, 2019, the Company had honored all outstanding redemption requests. During the three months ended September 30, 2019, redemption requests for Class E shares exceeded the quarterly 5% per share class limitation by 2,872,488 shares or approximately $27.4 million. The Class E shares not redeemed during that quarter, or 25% of the shares submitted, were treated as redemption requests for the quarter ended December 31, 2019. All outstanding requests for the quarter ended September 30, 2019 and all new requests for the quarter ended December 31, 2019 were honored on January 2, 2020. Redemptions sought upon a stockholder's death, qualifying disability, or determination of incompetence or incapacitation in the first quarter of 2020 were honored in accordance with the terms of the SRP, and the SRP officially was suspended as of March 28, 2020 for regular redemptions and subsequent redemptions for death, qualifying disability, or determination of incompetence or incapacitation after those honored in the first quarter of 2020. As described above, the SRP was partially reinstated, effective August 17, 2020, for redemptions sought upon a stockholder’s death, qualifying disability, or determination of incompetence or incapacitation in accordance with the terms of the SRP, subject to a quarterly cap on aggregate redemptions equal to the aggregate NAV, as of the last business day of the previous quarter, of the shares issued pursuant to the DRP during such quarter.
SRP Suspension
On October 1, 2021, the Company announced that it will suspend the SRP beginning with the next cycle, which commenced during fourth quarter 2021.
Series A Preferred Shares
On August 8, 2018, EA-1 entered into a Third Amendedpurchase agreement (the "Purchase Agreement") with SHBNPP Global Professional Investment Type Private Real Estate Trust No. 13(H) (acting through Kookmin Bank as trustee) (the "Purchaser") and Restated Limited PartnershipShinhan BNP Paribas Asset Management Corporation, as an asset manager of the Purchaser, pursuant to which the Purchaser agreed to purchase an aggregate of 10,000,000 shares of EA-1 Series A Cumulative Perpetual Convertible Preferred Stock at a price of $25.00 per share (the "EA-1 Series A Preferred Shares") in 2 tranches, each comprising 5,000,000 EA-1 Series A Preferred Shares. On August 8, 2018 (the "First Issuance Date"), EA-1 issued 5,000,000 Series A Preferred Shares to the Purchaser for a total purchase price of $125.0 million (the "First Issuance"). EA-1 paid transaction fees totaling 3.5% of the First Issuance purchase price and incurred approximately $0.4 million in transaction-related expenses to unaffiliated third parties. EA-1's former external advisor incurred transaction-related expenses of approximately $0.2 million, which was reimbursed by EA-1.
Upon consummation of the Mergers, the Company issued 5,000,000 Series A Preferred Shares to the Purchaser. Pursuant to the Purchase Agreement, with our Operating Partnershipthe Purchaser has agreed to purchase an additional 5,000,000 Series A Preferred Shares (the "Second Issuance") at a later date (the "Second Issuance Date") for an additional purchase price of $125.0 million subject to approval by the Purchaser’s internal investment committee and our Advisor. We conduct substantially allthe satisfaction of our operations throughcertain conditions set forth in the Operating Partnership, of which we arePurchase Agreement. Pursuant to the general partner. Our Advisor has a special limited partnershipPurchase Agreement, the Purchaser is generally restricted from transferring the Series A Preferred Shares or the economic interest in the Operating PartnershipSeries A Preferred Shares for a period of five years from the applicable closing date.
The Company's Series A Preferred Shares are not registered under the Securities Act and isare not listed on a partynational securities exchange. The articles supplementary filed by the Company related to the operating partnership agreement. If we consummateSeries A Preferred Shares set forth the Mergers,key terms of such shares as follows:
Distributions
Subject to the special limited partnership interest held by our Advisorterms of the applicable articles supplementary, the holders of the Series A Preferred Shares are entitled to receive distributions quarterly in our Operating Partnership will be redeemed, canceled,arrears at a rate equal to one-fourth (1/4) of the applicable varying rate, as follows:
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and retired. excluding per share amounts)
So long | | | | | |
| i. | 6.55% from and after the First Issuance Date, or if the Second Issuance occurs, 6.55% from and after the Second Issuance Date until the five year anniversary of the First Issuance Date, or if the Second Issuance occurs, the five year anniversary of the Second Issuance Date (the “Reset Date”), subject to paragraphs (iii) and (iv) below; |
| ii. | 6.75% from and after the Reset Date, subject to paragraphs (iii) and (iv) below; |
| iii. | if a listing of the Company's shares of Class E Common Stock or the Series A Preferred Shares on a national securities exchange registered under Section 6(a) of the Exchange Act, does not occur by August 1, 2020 (the “First Triggering Event”), 7.55% from and after August 2, 2020 and 7.75% from and after the Reset Date, subject to (iv) below and certain conditions as set forth in the articles supplementary; or |
| iv. | if such a listing does not occur by August 1, 2021, 8.05% from and after August 2, 2021 until the Reset Date, and 8.25% from and after the Reset Date. |
Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution or winding up of the Advisory Agreement has not been terminated (including by meansCompany, the holders of non-renewal), our Advisorthe Series A Preferred Shares will be entitled to receive a performancebe paid out of the Company's assets legally available for distribution from our Operating Partnershipto the stockholders, after payment of or provision for the Company's debts and other liabilities, liquidating distributions, in cash or property at its fair market value as determined by the Company's Board, in the amount, for each outstanding Series A Preferred Share equal to 12.5%$25.00 per Series A Preferred Share (the "Liquidation Preference"), plus an amount equal to any accumulated and unpaid distributions to the date of payment, before any distribution or payment is made to holders of shares of common stock or any other class or series of equity securities ranking junior to the Series A Preferred Shares but subject to the preferential rights of holders of any class or series of equity securities ranking senior to the Series A Preferred Shares. After payment of the Total Return, subjectfull amount of the Liquidation Preference to which they are entitled, plus an amount equal to any accumulated and unpaid distributions to the date of payment, the holders of Series A Preferred Shares will have no right or claim to any of the Company's remaining assets.
Company Redemption Rights
The Series A Preferred Shares may be redeemed by the Company, in whole or in part, at the Company's option, at a 5.5% Hurdle Amountper share redemption price in cash equal to $25.00 per Series A Preferred Share (the "Redemption Price"), plus any accumulated and unpaid distributions on the Series A Preferred Shares up to the redemption date, plus, a High Water Mark, withredemption fee of 1.5% of the Redemption Price in the case of a Catch-Up (each term asredemption that occurs on or after the date of the First Triggering Event, but before the date that is five years from the First Issuance Date.
Holder Redemption Rights
In the event the Company fails to effect a listing of the Company’s shares of common stock or Series A Preferred Shares by August 1, 2023, the holder of any Series A Preferred Shares has the option to request a redemption of such shares on or on any date following August 1, 2023, at the Redemption Price, plus any accumulated and unpaid distributions up to the redemption date (the "Redemption Right"); provided, however, that no holder of the Series A Preferred Shares shall have a Redemption Right if such a listing occurs prior to or on August 1, 2023.
Conversion Rights
Subject to the Company's redemption rights and certain conditions set forth in the articles supplementary, a holder of the Series A Preferred Shares, at his or her option, will have the right to convert such holder's Series A Preferred Shares into shares of the Company's common stock any time after the earlier of (i) five years from the First Issuance Date, or if the Second Issuance occurs, five years from the Second Issuance Date or (ii) a Change of Control (as defined in the operating partnership agreement)articles supplementary) at a per share conversion rate equal to the Liquidation Preference divided by the then Common Stock Fair Market Value (as defined in the articles supplementary). Such distribution
Issuance of Restricted Stock Units to Executive Officers, Employees and Board of Directors
On May 1, 2019, the Company issued 1,009,415 restricted stock units (“RSUs") to the Company's officers under the Employee and Director Long-Term Incentive Plan of Griffin Capital Essential Asset REIT II, Inc. ("LTIP") Each RSU represents a contingent right to receive 1 share of the Company’s Class E common stock when settled in accordance with the terms of the respective restricted stock unit award agreement and will vest in equal, 25% installments on each of December 31, 2019, 2020, 2021 and 2022, provided that such executive officer remains continuously employed by the Company on each such
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
date, subject to certain accelerated vesting provisions as provided in the restricted stock unit award agreements. The shares of Class E common stock underlying the RSUs will not be delivered upon vesting, but instead will be made annuallydeferred for delivery on May 1, 2023, or, if sooner, upon the executive officer's termination of employment. The fair value of grants issued was approximately $9.7 million.
On January 15, 2020, the Company issued 589,248 RSUs to Company employees, including officers, under the LTIP. Each RSU represents a contingent right to receive 1 share of the Company’s Class E common stock when settled in accordance with the terms of the respective restricted stock award agreement. The remaining RSUs are scheduled to vest in equal, 25% installments on each of December 31, 2021, 2022 and accrue daily.2023 provided that the employee continues to be employed by the Company on each such date, subject to certain accelerated vesting provisions as provided in the respective restricted stock unit award agreement. The performance distributionfair value of grants issued was approximately $5.5 million. Forfeitures on the Company's restricted stock units are recognized as they occur.
On January 22, 2021, the Company issued 1,071,347 RSUs to Company employees, including officers, under the Griffin Realty Trust, Inc. Amended and Restated Employee and Director Long-Term Incentive Plan (the “Amended and Restated LTIP”). Each RSU represents a contingent right to receive 1 share of the Company’s Class E common stock when settled in accordance with the terms of the respective RSU agreement and 1/3 of the RSUs are scheduled to vest equally on each of December 31, 2021, 2022, and 2023 provided that the employee continues to be employed by the Company on each such date, subject to certain accelerated vesting provisions as provided in the respective RSU agreement. The fair value of grants issued was approximately $9.6 million.
On March 1, 2021, the Company issued 3,901 shares of restricted stock as an initial equity grant to each of the 3 former directors of CCIT II who were appointed to the Board in connection with the CCIT II Merger. The shares of restricted stock vested fully upon issuance.
On March 25, 2021, the Company issued 547,908 RSUs to Company employees, including officers, under the Amended and Restated LTIP. Each RSU represents a contingent right to receive 1 share of the Company’s Class E common stock when settled in accordance with the terms of the respective RSU agreement and 1/4 of the RSUs are scheduled to vest equally on each of March 25, 2022, 2023, 2024, and 2025, provided that the employee continues to be employed by the Company on each such date, subject to certain accelerated vesting provisions as provided in the respective RSU agreement. The fair value of grants issued was approximately $4.9 million.
On June 15, 2021, the Company issued 49,614 shares of restricted stock to each of the Company’s independent directors. The fair value of grants issued was approximately $0.4 million. The shares of restricted stock vested 50% upon issuance and the remaining will vest one year from the grant date.
As of December 31, 2021, there was $13.1 million of unrecognized compensation expense remaining, which vests between two and four years.
Total compensation expense for the year ended December 31, 20182021 and 2020 was $7.8 million. If we consummate the Mergers, we will amend the Third Amendedapproximately $7.5 million and Restated Limited Partnership Agreement to remove the provisions related to the performance distribution, among other changes.$5.2 million, respectively.
| | | | | | | | | | | | | | |
| | Number of Unvested Shares of RSU Awards | | Weighted-Average Grant Date Fair Value per Share |
| Balance at December 31, 2019 | | 757,061 | | | |
| Granted | | 589,248 | | | $ | 9.35 | |
| Forfeited | | (3,744) | | | $ | 9.35 | |
| Vested | | (398,729) | | | $ | 9.48 | |
| Balance at December 31, 2020 | | 943,836 | | | |
| Granted | | 1,619,255 | | | $ | 8.97 | |
| Forfeited | | (222,367) | | | $ | 9.10 | |
| Vested | | (812,111) | | | $ | 9.24 | |
| Balance at December 31, 2021 | | 1,528,613 | | | |
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
Distributions
Property Management Agreements
Griffin Capital Essential Asset Property Management II, LLC, our property manager, is wholly owned by Griffin Capital Property Management, LLC. Our Sponsor, throughEarnings and profits, which determine the taxability of distributions to stockholders, may differ from income reported for financial reporting purposes due to the differences for federal income tax purposes in the treatment of loss on debt, revenue recognition and compensation expense and in the basis of depreciable assets and estimated useful lives used to compute depreciation expense.
The following unaudited table summarizes the federal income tax treatment for all distributions per share for the years ended December 31, 2021, 2020, and 2019 reported for federal tax purposes and serves as a seriesdesignation of holding companies,capital gain distributions, if applicable, pursuant to Code Section 857(b)(3)(C) and Treasury Regulation §1.857-6(e).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Ordinary income | | $ | 0.03 | | 9 | % | | $ | 0.13 | | 33 | % | | $ | 0.22 | | 37 | % |
| Capital gain | | — | | — | % | | — | | — | % | | 0.08 | | 13 | % |
| Return of capital | | 0.32 | | 91 | % | | 0.27 | | 67 | % | | 0.30 | | 50 | % |
| Total distributions paid | | $ | 0.35 | | 100 | % | | $ | 0.40 | | 100 | % | | $ | 0.60 | | 100 | % |
10.Noncontrolling Interests
Noncontrolling interests represent limited partnership interests in the GRT OP in which the Company is the ownergeneral partner. General partnership units and limited partnership units of Griffin Capital Property Management, LLC. Our property manager manages our properties pursuantthe GRT OP were issued as part of the initial capitalization of the GRT OP and GCEAR II Operating Partnership, in conjunction with members of management's contribution of certain assets, other contributions, and in connection with the self-administration transaction as discussed in Note 1, Organization.
As of December 31, 2021, noncontrolling interests were approximately 9.0% of total shares and 9.2% of weighted average shares outstanding (both measures assuming GRT OP Units were converted to our property management agreements. If we consummatecommon stock). The Company has evaluated the Mergers, we will directly own Griffin Capital Property Management, LLC.
We expect that we will contract directly with non-affiliated third party property managers with respect to our individual properties. In such event, orterms of the limited partnership interests in the event anGRT OP, and as a result, has classified limited partnership interests issued in the initial capitalization, in conjunction with the contributed assets and in connection with the self-administration transaction, as noncontrolling interests, which are presented as a component of permanent equity, except as discussed below.
The Company evaluates individual property is self-managed bynoncontrolling interests for the tenant, we will pay our property manager an oversight fee equalability to 1.0%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 gross revenuesend of the property managed, plus reimbursable costs as applicable. Reimbursable costsperiod in which the determination is made.
As of December 31, 2021, the limited partners of the GRT OP owned approximately $31.8 million GRT OP Units, which were issued to affiliated parties and expenses include wagesunaffiliated third parties in exchange for the contribution of certain properties to the Company, and salariesin connection with the self-administration transaction and other expenses of employees engaged in operating, managing and maintaining our properties, as well as certain allocations of office, administrative, and supply costs. Ourservices In addition, 0.2 million GRT OP Units were issued to unaffiliated third parties unrelated to property manager may waive or defercontributions. To the extent the contributors should elect to redeem all or a portion of these reimbursements or electtheir GRT OP Units, pursuant to receive Class I shares or Class I units in our Operating Partnership in lieu of these reimbursements at any time and from time to time, in its sole discretion. In the event that we contract directly with our property manager with respect to a particular property, we will pay the property manager up to 3.0%, or greater if the lease so allows,terms of the gross monthly revenues collected for each property it manages, plus reimbursable costs as applicable. Our property manager may pay some or all of these fees to third parties with whom it subcontracts to perform property management services. In no event will we pay bothrespective contribution agreement, such redemption shall be at a property management feeper unit value equivalent to the price at which the contributor acquired its GRT OP Units in the respective transaction.
The limited partners of the GRT OP, other than those related to the Will Partners REIT, LLC ("Will Partners") property manager and an oversight feecontribution, will have the right to our property manager with respectcause the general partner of the GRT OP, the Company, to a particular property.
In addition, we may pay our property manager or its designees a leasing fee in an amountredeem their GRT OP Units for cash equal to the fee customarily chargedvalue of an equivalent number of shares, or, at the Company’s option, purchase their GRT OP Units by others rendering similar servicesissuing 1 share of the Company’s common stock for the original redemption value of each limited partnership unit redeemed. The Company has the control and ability to settle such requests in shares. These rights may not be exercised under certain circumstances which could cause the Company to lose its REIT election.
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
The following summarizes the activity for noncontrolling interests recorded as equity for the years ended December 31, 2021 and 2020:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Beginning balance | $ | 226,550 | | | $ | 245,040 | |
| | | |
| Reclass of noncontrolling interest subject to redemption | (159) | | | 224 | |
| Repurchase of noncontrolling interest | — | | | (1,137) | |
| Issuance of stock dividend for noncontrolling interest | — | | | 1,068 | |
| Distributions to noncontrolling interests | (10,942) | | | (13,306) | |
| Allocated distributions to noncontrolling interests subject to redemption | (18) | | | (29) | |
| Net income (loss) | 66 | | | (1,732) | |
| Other comprehensive loss | 3,156 | | | (3,578) | |
| Ending balance | $ | 218,653 | | | $ | 226,550 | |
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 same geographic area. Further, although a substantial majority ofGRT OP agreement. As the propertiesgeneral 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 we intend to acquire are leased under net leases in whichnot considered redeemable.
11. Related Party Transactions
Summarized below are the tenants are responsible for tenant improvements, we may also pay our property manager or its designees a construction management fee for planning and coordinating the construction of any tenant directed improvements for which we are responsible to perform pursuant to lease concessions, including tenant-paid finish-out or improvements. Our property manager will also be entitled to a construction management fee of 5.0% of the cost of improvements.
Allrelated party transaction costs
and expenses incurred by
our property manager on our behalf in fulfilling its duties to us under the
property management agreements are to be paid out of an account that is fully funded by us, or paid directly by us. Such costs and expenses may include, but are not limited to, reasonable wages and salaries of on-site and off-site employees of our property manager who are directly engaged in the operation, management, maintenance, leasing, construction, or access control of our properties, including taxes, insurance and benefits relating to such employees, along with the legal, travel and other out-of-pocket expenses that are directly related to the management and leasing of specific properties we own. Our property manager will also allocate a portion of its office, administrative and supplies expense to us to the extent directly related to the foregoing reasonable reimbursable expensesCompany for the
managementyears ended December 31, 2021, 2020 and 2019, respectively, and any related amounts receivable and payable as of
our properties.December 31, 2021 and 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Incurred for the Year Ended December 31, | | Receivable as of December 31, |
| 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| Assets Assumed through the Self-Administration Transaction | | | | | | | | | |
| Cash to be received from an affiliate related to deferred compensation and other payroll costs | $ | — | | | $ | — | | | $ | 658 | | | $ | — | | | $ | — | |
| Other fees | — | | | 243 | | | — | | | — | | | 293 | |
| Due from GCC | | | | | | | | | |
| Reimbursable Expense Allocation | 20 | | | 15 | | | 4 | | | 11 | | | 4 | |
| Payroll/Expense Allocation | 19 | | | 653 | | | 481 | | | 260 | | | 1,114 | |
| Due from Affiliates | | | | | | | | | |
| Payroll/Expense Allocation | — | | | — | | | 1,217 | | | — | | | — | |
| O&O Costs (including payroll allocated to O&O) | — | | | — | | | 157 | | | — | | | — | |
Other Fees | — | | | — | | | 6,375 | | | — | | | — | |
| Total incurred/receivable | $ | 39 | | | $ | 911 | | | $ | 8,892 | | | $ | 271 | | | $ | 1,411 | |
We anticipate that the property management agreements with our property manager will have terms
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and shall be automatically extended for additional one-year periods unless we or our property manager give 60 days’ prior written notice of such party’s intention to terminate a property management agreement. Under the property management agreements, our property manager is not prevented from engaging in other activities or business ventures, whether or not such other activities or business ventures are in competition with us or our business, including, without limitation, property management services for other parties, including other REITs, or for other programs advised, sponsored or organized by our Sponsor or its affiliates.excluding per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Incurred for the Year Ended December 31, | | Payable as of December 31, |
| 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| Expensed | | | | | | | | | |
| Operating expenses | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,085 | |
| Asset management fees | — | | | — | | | — | | | — | | | 695 | |
| | | | | | | | | |
| Disposition fees | — | | | — | | | 641 | | | — | | | — | |
| Costs advanced by the advisor | 2,275 | | | 2,000 | | | 3,771 | | | 929 | | | — | |
| Consulting fee - shared services | 2,520 | | | 2,500 | | | 2,500 | | | 461 | | | — | |
| Capitalized | | | | | | | | | |
| Acquisition fees | — | | | — | | | 942 | | | — | | | — | |
| Leasing commissions | — | | | — | | | 2,540 | | | — | | | — | |
| Assumed through Self- Administration Transaction/EA Mergers | | | | | | | | | |
| Earn-out | — | | | — | | | — | | | 197 | | | 262 | |
| Other Fees | — | | | — | | | 20 | | | — | | | — | |
| Stockholder Servicing Fee | — | | | — | | | 692 | | | 92 | | | 494 | |
| Other | | | | | | | | | |
| Distributions | 8,688 | | | 10,537 | | | 14,138 | | | 739 | | | 736 | |
| Total incurred/payable | $ | 13,483 | | | $ | 15,037 | | | $ | 25,244 | | | $ | 2,418 | | | $ | 3,272 | |
Dealer Manager AgreementRevenue Recognition
Griffin Capital Securities, LLC,Leases associated with the acquisition and contribution of certain real estate assets have net minimum rent payment increases during the term of the lease and are recorded to rental revenue on a straight-line basis, commencing as of the contribution or acquisition date. If a lease provides for contingent rental income, the Company will defer the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved.
Tenant reimbursement revenue, which is wholly ownedcomprised of additional amounts collected from tenants for the recovery of certain operating expenses, including repair and maintenance, property taxes (excluding taxes paid by GCC, our former sponsor, through a holding company, serves as our dealer manager.
Our dealer manager provides wholesaling, sales promotionallessee directly to a third party on behalf of the lessor) and marketing services to us in connection with our Follow-On Offering. Specifically, our dealer manager ensures compliance with SEC rulesinsurance, and regulations and FINRA rules relatingcapital expenditures, to the sales process. In addition, our dealer manager oversees participating broker-dealer relationships, assists in the assembling of prospectus kits, assists in the due diligence process and ensures proper handling of investment proceeds.
We commenced our Follow-On Offering on September 20, 2017 and offered Class T shares, Class S shares, Class D shares and Class I shares in our Follow-On Offering.
Pursuantextent allowed pursuant to the dealer manager agreement, we will paylease (collectively, "Recoverable Expenses"), is recognized as revenue when the additional rent is due. Recoverable Expenses to the dealer manager selling commissions of up to 3.0% of the total purchase price for each sale of Class T shares and selling commissions of up to 3.5% of the total purchase price for each sale of Class S shares. We will not pay to the dealer manager any selling commissions in respect of the purchase of any Class D shares, Class I shares or DRP shares. We also will pay to the dealer manager dealer manager fees of up to 0.5% of the total purchase price for each sale of Class T shares. We will not pay to the dealer manager any dealer manager fees in respect of the purchase of any Class S shares, Class D shares, Class I shares or DRP shares. Substantially all of the selling commissions and dealer manager fees may be reallowedreimbursed by the dealer manager to the participating broker-dealers who sold the shares giving rise to such selling commissions and dealer manager fees. In addition, subject to FINRA’s limitations on underwriting compensation, we will pay to the dealer manager a distribution fee for ongoing services rendered to stockholders by participating broker-dealers or broker-dealers servicing investors’ accounts, referred to as servicing broker-dealers. The fee accrues daily and is paid monthly in arrears and is calculatedtenant are determined based on the average daily NAVCompany's estimate of the property's operating expenses for the applicable month (the “Average NAV”). The distribution fees for the different share classes are as follows: (i) for Class T shares, 1/365th of 1.0%year, pro-rated based on leased square footage of the Average NAVproperty, and are collected in equal installments as additional rent from the tenant, pursuant to the terms of the outstanding Class T shares for each day, consisting of an advisor distribution fee of 1/365th of 0.75% and a dealer distribution fee of 1/365th of 0.25% of the Average NAV of the Class T shares for each day; (ii) for Class S shares, 1/365th of 1.0% of the Average NAV of the outstanding Class S shares for each day; and (iii) for Class D shares, 1/365th of 0.25% of the Average NAV of the outstanding Class D shares for each day. The dealer manager is not entitled to any distribution fee with respect to Class I shares.
We will cease paying the distribution fee with respect to any Class T share, Class S share or Class D share held in a stockholder's account at the end of the month in which the dealer manager in conjunction with the transfer agent determines that total selling commissions, dealer manager fees and distribution fees paid with respect to all shares from the Follow-On Offering held by such stockholder within such account would exceed, in the aggregate, 9.0% (or a lower limit as set forth in any applicable agreement between the dealer manager and a participating broker-dealer) of the gross proceeds from the sale of such shares (including the gross proceeds of any shares issued under the DRP with respect thereto).lease. At the end of such month, such Class T share, Class S share or Class D share (and any shares issued undereach quarter, the DRP with respect thereto) will convert into a numberCompany reconciles the amount of Class I shares (including any fractional shares) with an equivalent NAV as such share. In addition, we will cease payingadditional rent paid by the distribution fee ontenant during the Class T shares, Class S shares and Class D shares onquarter to the earlier to occuractual amount of the following: (i)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 listingcap on certain or all property operating expenses.
In a situation in which a lease associated with a significant tenant has been, or is expected to be, terminated early, or extended, the Company evaluates the remaining useful life of our shares; (ii) a mergeramortizable assets in the asset group related to the lease that will be terminated (i.e., above- and below-market lease intangibles, in-place lease value and deferred leasing costs). Based upon consideration of the facts and circumstances surrounding the termination or consolidationextension, the Company may write-off or accelerate the amortization associated with or into another entity, or the sale orasset group. Such amounts are included within rental and other dispositionincome for above- and below-market lease intangibles and amortization for the remaining lease related asset groups in the consolidated statements of all or substantially alloperations.
Lease Accounting
On January 1, 2019, the Company adopted ASC 842 using the modified retrospective approach and elected to apply the provisions as of our assets, including any liquidation of us; or (iii) the date followingof adoption on a prospective basis. Upon adoption of ASC 842, the completionCompany elected the “package of practical expedients,” which allowed the primary portionCompany to not reassess (a) whether expired or existing contracts as of January 1, 2019 are or contain leases, (b) the Follow-On Offering on which, inlease classification for any expired or existing leases as of January 1, 2019, and (c) the aggregate, underwriting compensation from all sources in connection with the Follow-On Offering, including selling commissions, dealer manager fees, the distribution fee and other underwriting compensation, is equal to 9.0%treatment of the gross proceeds from the primary portion of our Follow-On Offering.
Our dealer manager has entered into participating dealer agreements with certain other broker-dealers authorizing them to sell our shares. Upon sale of our shares by such broker-dealers, our dealer manager re-allows all of the sales commissions paid in connection with sales made by these broker-dealers. Our dealer manager may also re-allow to these broker-dealers a portion of the dealer manager fee as marketing fees, reimbursement of certaininitial direct costs and expenses of attending training and education meetings sponsored by our dealer manager, payment of attendance fees required for employees of our dealer manager or other affiliates to attend retail seminars and public seminars sponsored by these broker-dealers, or to defray other distribution-related expenses. The dealer manager will re-allow the distribution fees to participating broker-dealers and servicing broker-dealers for ongoing services performed by such broker-dealers, and will retain any such distribution fees to the extent a broker-dealer is not eligible to receive it for failure to provide such services.
We also pay an additional amount of gross offering proceeds as reimbursements to participating broker-dealers (either directly or through our dealer manager) for bona fide accountable due diligence expenses incurred by such participating broker-dealers. Such reimbursement of due diligence expenses may include travel, lodging, meals and other reasonable out-of-pocket expenses incurred by participating broker-dealers and their personnel when visiting our office to verify information relating to usany existing leases as of January 1, 2019. The package of practical expedients was made as a single election and our offeringswas consistently applied to all leases that commenced before January 1, 2019.
Lessor
ASC 842 requires lessors to account for leases using an approach that is substantially equivalent to ASC 840 for sales-type leases, direct financing leases, and in some cases, reimbursementoperating leases. As the Company elected the package of practical expedients, the allocable shareCompany's existing leases as of actual out-of-pocket expenses of internal due diligence personnel of the participating broker-dealer conducting due diligence on the offering.
Fees PaidJanuary 1, 2019 continue to Our Affiliates
be accounted for as operating leases.
For details regarding the related party costs and fees incurred, paid and due to affiliates as of December 31, 2018, and due to affiliates as of December 31, 2017, please see Note 10, Related Party Transactions, to the consolidated financial statements.
Director Independence
While our shares are not listed for trading on any national securities exchange, as required by our charter, a majority of the members of our Board and each committee of our Board are "independent" as determined by our Board by applying the definition of "independent" adopted by the New York Stock Exchange, consistent with the NASAA Statement of Policy Regarding Real Estate Investment Trusts and applicable rules and regulations of the SEC. Our Board has determined that Messrs. Tang and Sanders and Ms. Briscoe each meet the relevant definition of "independent" and has no material relationship with us other than by virtue of his or her service on our Board. Our audit, compensation, and nominating and corporate governance committees are comprised entirely of independent directors.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Fees Paid to Principal Auditor
The audit committee reviewed the audit and non-audit services performed by Ernst & Young LLP ("Ernst & Young"), as well as the fees charged by Ernst & Young for such services. In its review of the non-audit service fees, the audit committee considered whether the provision of such services is compatible with maintaining the independence of Ernst & Young. The aggregate fees billed to us for professional accounting services provided by Ernst & Young, including the audits of our annual financial statements, for the years ended December 31, 2018 and 2017, respectively, are set forth in the table below. |
| | | | | | | |
| | 2018 | | 2017 |
| Audit Fees | $ | 421,605 |
| | $ | 446,679 |
|
| Audit-Related Fees | 93,180 |
| | — |
|
| Tax Fees | 118,785 |
| | 113,744 |
|
| All Other Fees | 1,250 |
| | 1,250 |
|
| Total | $ | 634,820 |
| | $ | 561,673 |
|
For purposes of the preceding table, the professional fees are classified as follows:
•Audit Fees - These are fees for professional services performed for the audit of our annual financial statements and the required review of our quarterly financial statements and other procedures performed by the independent auditors to be able to form an opinion on our consolidated financial statements. These fees also cover services that are normally provided by independent auditors in connection with statutory and regulatory filings or engagements, and services that generally only an independent auditor reasonably can provide, such as services associated with filing registration statements, periodic reports and other filings with the SEC.
•Audit-Related Fees - These are fees for assurance and related services that traditionally are performed by an independent auditor, such as due diligence related to acquisitions and dispositions, audits related to acquisitions, attestation services that are not required by statute or regulation, internal control reviews and consultation concerning financial accounting and reporting standards.
•Tax Fees - These are fees for all professional services performed by professional staff in our independent auditor's tax division, except those services related to the audit of our financial statements. These include fees for tax compliance, tax planning and tax advice, including federal, state and local issues. Such services may also include assistance with tax audits and appeals before the IRS and similar state and local agencies, as well as federal, state and local tax issues related to due diligence.
•All Other Fees - These are fees for other permissible services that do not meet one of the above-described categories, including assistance with internal audit plans and risk assessments.
Audit Committee Pre-Approval Policies
The Audit Committee Charter imposes a duty on the audit committee to pre-approve all auditing services performed for us by our independent auditor, as well as all permitted non-audit services (including the fees and terms thereof) in order to ensure that the provision of such services does not impair the auditor's independence. In determining whether or not to pre-approve services, the audit committee considers whether the service is permissible under applicable SEC rules. The audit committee may, in its discretion, delegate to one or more of its members the authority to pre-approve any services to be performed by our independent auditors, provided such pre-approval is presented to the full audit committee at its next scheduled meeting.
All services rendered by Ernst & Young in the year ended December 31, 2018 were pre-approved in accordance with the policies set forth above.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) List of Documents Filed.
1.The list of the financial statements contained herein is set forth on page F-1 hereof.
2.Schedule III — Real Estate and Accumulated Depreciation is set forth beginning on page S-1 hereof. All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are not applicable and therefore have been omitted.
3.The Exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index below.
(b) See (a)(3) above.
(c) See (a)(2) above.
EXHIBIT INDEX
The following exhibits are included in this Annual Report on Form 10-K for the year ended December 31, 2018 (and are numbered in accordance with Item 601 of Regulation S-K). |
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Exhibit No. | Description |
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| Agreement and Plan of Merger, dated as of December 14, 2018, by and among Griffin Capital Essential Asset REIT II, Inc., Griffin Capital Essential Asset Operating Partnership II, L.P., Globe Merger Sub, LLC, Griffin Capital Essential Asset REIT, Inc. and Griffin Capital Essential Asset Operating Partnership, L.P., incorporated by reference to Exhibit 2.1 to the Registrant's current report on Form 8-K, filed on December 20, 2018, Commission File No. 000-55605 |
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101* | The following Griffin Capital Essential Asset REIT II, Inc. financial information for the period ended December 31, 2018 formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive (Loss) Income (iv) Consolidated Statements of Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements. |
* | Filed herewith. |
** | Furnished herewith. |
+ | Management contract, compensatory plan or arrangement filed in response to Item 15(a)(3) of Instructions to Form 10-K. |
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of El Segundo, State of California, on March 14, 2019.
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| GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC. |
| | |
| By: | | /s/ Kevin A. Shields |
| | | Kevin A. Shields |
| | | Chief Executive Officer and Chairman |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
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Signature | | Title | | Date |
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/s/ Kevin A. Shields | | Chief Executive Officer and Chairman (Principal Executive Officer) | | March 14, 2019 |
Kevin A. Shields |
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/s/ Javier F. Bitar | | Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) | | March 14, 2019 |
Javier F. Bitar |
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/s/ Michael J. Escalante | | Director and President | | March 14, 2019 |
Michael J. Escalante |
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/s/ J. Grayson Sanders | | Independent Director | | March 14, 2019 |
J. Grayson Sanders |
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/s/ Kathleen S. Briscoe | | Independent Director | | March 14, 2019 |
Kathleen S. Briscoe |
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/s/ Samuel Tang | | Independent Director | | March 14, 2019 |
Samuel Tang |
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Consolidated Financial Statements | |
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Financial Statement Schedule | |
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Griffin Capital Essential Asset REIT II, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Griffin Capital Essential Asset REIT II, Inc. (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2018 and 2017, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2014.
Los Angeles, California
March 14, 2019
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts) |
| | | | | | | |
| | December 31, 2018 |
| | December 31, 2017 |
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| ASSETS | | | |
| Cash and cash equivalents | $ | 28,623 |
| | $ | 33,164 |
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| Restricted cash | 12,904 |
| | 12,886 |
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| Real estate: | | | |
| Land | 122,482 |
| | 122,482 |
|
| Building | 819,224 |
| | 815,721 |
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| 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 |
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| Due from affiliates | 1,202 |
| | 686 |
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| Deferred rent | 31,189 |
| | 22,733 |
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| Other assets, net | 6,850 |
| | 12,224 |
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| Total assets | $ | 1,137,335 |
| | $ | 1,179,948 |
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| 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 |
|
| Commitments and contingencies (Note 11) |
|
| |
|
| 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 (1) | 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 |
|
| |
(1) | See Note 8, Equity, for the number of shares outstanding of each class of common stock as of December 31, 2018 and December 31, 2017.
|
See accompanying notes.
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share
|
| | | | | | | | | | | |
| | 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 |
|
See accompanying notes.
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Net (loss) income | $ | (3,287 | ) | | $ | 11,119 |
| | $ | (6,107 | ) |
| Other comprehensive (loss) income: | | | | | |
| Change in fair value of swap agreement | (952 | ) | | 108 |
| | 841 |
|
| Total comprehensive (loss) income | (4,239 | ) | | 11,227 |
| | (5,266 | ) |
| Comprehensive loss (income) attributable to noncontrolling interests | 9 |
| | (3 | ) | | 3 |
|
| Comprehensive (loss) income attributable to common stockholders | $ | (4,230 | ) | | $ | 11,224 |
| | $ | (5,263 | ) |
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share amounts)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional
Paid-In
Capital | | Cumulative
Distributions | | Accumulated
Deficit | | Accumulated Other Comprehensive Income | | Total
Stockholders’
Equity | | Non-
controlling
Interests | | Total
Equity |
| | Shares | | Amount | |
| Balance December 31, 2015 | 28,556,170 |
| | $ | 29 |
| | $ | 250,757 |
| | $ | (8,258 | ) | | $ | (17,684 | ) | | $ | — |
| | $ | 224,844 |
| | $ | 98 |
| | $ | 224,942 |
|
| Gross proceeds from issuance of common stock | 40,700,406 |
| | 40 |
| | 406,423 |
| | — |
| | — |
| | — |
| | 406,463 |
| | — |
| | 406,463 |
|
| Discount on issuance of common stock | — |
| | — |
| | (696 | ) | | — |
| | — |
| | — |
| | (696 | ) | | — |
| | (696 | ) |
| Offering costs including dealer manager fees to affiliates | — |
| | — |
| | (43,340 | ) | | — |
| | — |
| | — |
| | (43,340 | ) | | — |
| | (43,340 | ) |
| Distributions to common stockholders | — |
| | — |
| | — |
| | (12,479 | ) | | — |
| | — |
| | (12,479 | ) | | — |
| | (12,479 | ) |
| Issuance of shares for distribution reinvestment plan | 1,599,355 |
| | 2 |
| | 15,157 |
| | (15,159 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Repurchase of common stock | (167,442 | ) | | — |
| | (1,627 | ) | | — |
| | — |
| | — |
| | (1,627 | ) | | — |
| | (1,627 | ) |
| Additions to common stock subject to redemption | — |
| | — |
| | (13,531 | ) | | — |
| | — |
| | — |
| | (13,531 | ) | | — |
| | (13,531 | ) |
| Issuance of stock dividends | 251,158 |
| | — |
| | 2,510 |
| | (2,510 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Distributions to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (11 | ) | | (11 | ) |
| Net loss |
|
| | — |
| | — |
| | — |
| | (6,104 | ) | | — |
| | (6,104 | ) | | (3 | ) | | (6,107 | ) |
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | 841 |
| | 841 |
| | — |
| | 841 |
|
| Balance December 31, 2016 | 70,939,647 |
| | $ | 71 |
| | $ | 615,653 |
| | $ | (38,406 | ) | | $ | (23,788 | ) | | $ | 841 |
| | $ | 554,371 |
| | $ | 84 |
| | $ | 554,455 |
|
| Gross proceeds from issuance of common stock | 4,205,673 |
| | 4 |
| | 41,822 |
| | — |
| | — |
| | — |
| | 41,826 |
| | — |
| | 41,826 |
|
| Discount on issuance of common stock | — |
| | — |
| | (16 | ) | | — |
| | — |
| | — |
| | (16 | ) | | — |
| | (16 | ) |
| Stock-based compensation | 25,500 |
| | — |
| | 292 |
| | — |
| | — |
| | — |
| | 292 |
| | — |
| | 292 |
|
| Offering costs including dealer manager fees and stockholder servicing fees to affiliates | — |
| | — |
| | (3,593 | ) | | — |
| | — |
| | — |
| | (3,593 | ) | | — |
| | (3,593 | ) |
| Distributions to common stockholders | — |
| | — |
| | — |
| | (19,427 | ) | | — |
| | — |
| | (19,427 | ) | | — |
| | (19,427 | ) |
| Issuance of shares for distribution reinvestment plan | 2,358,188 |
| | 2 |
| | 22,206 |
| | (22,208 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Repurchase of common stock | (623,499 | ) | | (1 | ) | | (5,741 | ) | | — |
| | — |
| | — |
| | (5,742 | ) | | — |
| | (5,742 | ) |
| Additions to common stock subject to redemption | — |
| | — |
| | (16,467 | ) | | — |
| | — |
| | — |
| | (16,467 | ) | | — |
| | (16,467 | ) |
| Issuance of stock dividends | 269,774 |
| | — |
| | 2,549 |
| | (2,549 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Distributions to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (11 | ) | | (11 | ) |
| Net income | — |
| | — |
| | — |
| | — |
| | 11,116 |
| | — |
| | 11,116 |
| | 3 |
| | 11,119 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | 108 |
| | 108 |
| | — |
| | 108 |
|
| Balance December 31, 2017 | 77,175,283 |
| | $ | 76 |
| | $ | 656,705 |
| | $ | (82,590 | ) | | $ | (12,672 | ) | | $ | 949 |
| | $ | 562,468 |
| | $ | 76 |
| | $ | 562,544 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross proceeds from issuance of common stock | 762,537 |
| | 1 |
| | 7,429 |
| | — |
| | — |
| | — |
| | 7,430 |
| | — |
| | 7,430 |
|
| Changes in redeemable common stock | — |
| | — |
| | (6,538 | ) | | — |
| | — |
| | — |
| | (6,538 | ) | | — |
| | (6,538 | ) |
| Discount on issuance of common stock | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Stock-based compensation | 10,500 |
| | — |
| | 44 |
| | — |
| | — |
| | — |
| | 44 |
| | — |
| | 44 |
|
| Offering costs including dealer manager fees and stockholder servicing fees to affiliates | — |
| | — |
| | (1,140 | ) | | — |
| | — |
| | — |
| | (1,140 | ) | | — |
| | (1,140 | ) |
| Distributions to common stockholders | — |
| | — |
| | — |
| | (22,709 | ) | | — |
| | — |
| | (22,709 | ) | | — |
| | (22,709 | ) |
| Issuance of shares for distribution reinvestment plan | 2,083,950 |
| | 2 |
| | 19,996 |
| | (19,998 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Repurchase of common stock | (2,506,299 | ) | | (3 | ) | | (23,763 | ) | | — |
| | — |
| | — |
| | (23,766 | ) | | — |
| | (23,766 | ) |
| Additions to common stock subject to redemption | — |
| | — |
| | 3,768 |
| | — |
| | — |
| | — |
| | 3,768 |
| | — |
| | 3,768 |
|
| Issuance of stock dividends | 2 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Issuance of limited partnership units | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,185 |
| | 1,185 |
|
| Distributions to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (70 | ) | | (70 | ) |
| Net (loss) | — |
| | — |
| | — |
| | — |
| | (3,281 | ) | | — |
| | (3,281 | ) | | (6 | ) | | (3,287 | ) |
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | (949 | ) | | (949 | ) | | (3 | ) | | (952 | ) |
| Balance December 31, 2018 | 77,525,973 |
| | $ | 76 |
| | $ | 656,500 |
| | $ | (125,297 | ) | | $ | (15,953 | ) | | $ | — |
| | $ | 515,326 |
| | $ | 1,182 |
| | $ | 516,508 |
|
See accompanying notes.
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Net (loss) income | $ | (3,287 | ) | | $ | 11,119 |
| | $ | (6,107 | ) |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | |
| Depreciation of building and improvements | 20,466 |
| | 20,194 |
| | 11,630 |
|
| Amortization of tenant origination and absorption costs | 24,199 |
| | 23,756 |
| | 16,264 |
|
| Amortization of above and below market leases | (4,695 | ) | | (4,573 | ) | | (3,592 | ) |
| Amortization of deferred financing costs | 1,384 |
| | 1,106 |
| | 1,196 |
|
| Deferred rent | (8,456 | ) | | (17,308 | ) | | (3,924 | ) |
| Stock based compensation | 44 |
| | 292 |
| | — |
|
| Unrealized loss (gain) on interest rate swap | 77 |
| | 83 |
| | (155 | ) |
| Performance distribution allocation (non-cash) | 3,904 |
| | — |
| | — |
|
| Change in operating assets and liabilities: | | | | | |
| Other assets, net | 1,397 |
| | 4,590 |
| | (1,040 | ) |
| Accrued expenses and other liabilities, net | 3,376 |
| | (2,615 | ) | | 3,094 |
|
| Due to affiliates, net | 2,546 |
| | 3,068 |
| | (922 | ) |
| Net cash provided by operating activities | 40,955 |
| | 39,712 |
| | 16,444 |
|
| Investing Activities: | | | | | |
| Acquisition of properties, net | — |
| | (44,234 | ) | | (538,845 | ) |
| Restricted reserves | (1,803 | ) | | (42,430 | ) | | (3,541 | ) |
| Improvements to real estate | — |
| | (21 | ) | | (40 | ) |
| Payments for construction in progress | (502 | ) | | (772 | ) | | (80 | ) |
| Real estate acquisition deposits | — |
| | 250 |
| | 8,700 |
|
| Net cash used in investing activities | (2,305 | ) | | (87,207 | ) | | (533,806 | ) |
| Financing Activities: | | | | | |
| Proceeds from borrowings - Revolving Credit Facility | — |
| | 24,300 |
| | 249,900 |
|
| Proceeds from borrowings - BofA/KeyBank Loan | 250,000 |
| | — |
| | — |
|
| Proceeds from borrowings - Term Loan | 113,000 |
| | — |
| | — |
|
| Principal payoff of indebtedness - Revolving Credit Facility | (357,673 | ) | | — |
| | (55,000 | ) |
| Deferred financing costs | (6,603 | ) | | (30 | ) | | (1,578 | ) |
| Issuance of common stock | 7,465 |
| | 30,699 |
| | 383,170 |
|
| Offering costs | (4,778 | ) | | — |
| | — |
|
| Repurchase of common stock | (23,766 | ) | | (5,742 | ) | | (1,627 | ) |
| Distributions paid to common stockholders | (20,753 | ) | | (19,232 | ) | | (11,541 | ) |
| Distributions paid to noncontrolling interests | (65 | ) | | (11 | ) | | (11 | ) |
| Net cash (used in) provided by financing activities | (43,173 | ) | | 29,984 |
| | 563,313 |
|
| Net (decrease) increase in cash, cash equivalents and restricted cash | (4,523 | ) | | (17,511 | ) | | 45,951 |
|
| Cash, cash equivalents and restricted cash at the beginning of the period | 46,050 |
| | 63,561 |
| | 17,610 |
|
| Cash, cash equivalents and restricted cash at the end of the period | $ | 41,527 |
| | $ | 46,050 |
| | $ | 63,561 |
|
| Supplemental disclosure of cash flow information: | | | | | |
| Cash paid for interest | $ | 19,200 |
| | $ | 13,116 |
| | $ | 9,228 |
|
| Supplemental disclosures of non-cash investing and financing transactions: | | | | | |
| (Decrease) Increase in fair value swap agreement | $ | (952 | ) | | $ | 108 |
| | $ | 841 |
|
| Increase in Stock Servicing Fee Payable | $ | 174 |
| | $ | 660 |
| | $ | 17,449 |
|
| Increase in distributions payable to common stockholders | $ | 1,955 |
| | $ | 195 |
| | $ | 938 |
|
| Common stock issued pursuant to the distribution reinvestment plan | $ | 19,998 |
| | $ | 22,208 |
| | $ | 15,158 |
|
See accompanying notes.
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II,REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20182021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
1. Organization
Griffin Capital Essential Asset REIT II, Inc.,Upon adoption of ASC 842, the Company elected the practical expedient permitting lessors to elect by class of underlying asset to not separate nonlease components (for example, maintenance services, including common area maintenance) from associated lease components (the “non-separation practical expedient”) if both of the following criteria are met: (1) the timing and pattern of transfer of the lease and non-lease component(s) are the same and (2) the lease component would be classified as an operating lease if it were accounted for separately. If both criteria are met, the combined component is accounted for in accordance with ASC 842 if the lease component is the predominant component of the combined component; otherwise, the combined component is accounted for in accordance with the revenue recognition standard. The Company assessed the criteria above with respect to the Company's operating leases and determined that they qualify for the non-separation practical expedient. As a Maryland corporation (the “Company”), was formed on November 20, 2013 underresult, the Maryland General Corporation Law ("MGCL")Company accounted for and qualifiedpresented all rental income earned pursuant to operating leases, including property expense recovery, as a real estate investment trust (“REIT”) commencing withsingle line item, “Rental income,” in the year ended December 31, 2015. The Company was organized primarily with the purposeconsolidated statement of acquiring single tenant net lease properties that are considered essential to the occupying tenant, and has used a substantial amount of the net proceeds from its initial public offering ("IPO") to invest in such properties. The Company’s year end is December 31.
operations for all periods presented. Prior to the executionadoption of the Merger Agreement (as defined below), on December 14, 2018, Griffin Capital Essential Asset REIT, Inc. ("GCEAR"), a non-traded REIT sponsored by our former sponsor, entered into a series of transactions and became self-managed (the “Self Administration Transaction”) and succeeded to the advisory, asset management and property management arrangements formerly in place for the Company. Accordingly, the sponsor ofASC 842, the Company has changed from Griffin Capital Company, LLC ("GCC")presented rental income, property expense recovery and other income related to Griffin Capital Real Estate Company, LLC (the "Sponsor" or "GRECO") untilleases separately in the Company Merger (defined below) is consummated.Company's consolidated statements of operations.
Griffin Capital Essential Asset Advisor II, LLC, a Delaware limited liability company (the “Advisor”), was formed on November 19, 2013. GRECO, is the sole member of the Advisor. GRECO is owned by Griffin Capital Essential Asset Operating Partnership, L.P. (the "GCEAR Operating Partnership")Under ASC 842, lessors are required to record revenues and Griffin Capital Essential Asset TRS, Inc., a Delaware corporation. The Advisor is responsible for managing the Company’s affairsexpenses on a day-to-daygross basis for lessor costs (which include real estate taxes) when these costs are reimbursed by a lessee. Conversely, lessors are required to record revenues and identifying and making acquisitions and investmentsexpenses on a net basis for lessor costs when they are paid by a lessee directly to a third party on behalf of the lessor. Prior to the adoption of ASC 842, the Company underrecorded revenues and expenses on a gross basis for real estate taxes whether they were reimbursed to the termsCompany by a tenant or paid directly by a tenant to the taxing authorities on the Company's behalf. Effective January 1, 2019, the Company is recording these costs in accordance with ASC 842.
Lessee
ASC 842 requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset (“ROU asset”), which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASC 842 also requires lessees to classify leases as either finance or operating leases based on whether or not the lease is effectively a financed purchase of the Advisory Agreement (as defined below). The Company's officers are also officersleased asset by the lessee. This classification is used to evaluate whether the lease expense should be recognized based on an effective interest method or on a straight-line basis over the term of the Advisorlease.
On January 1, 2019, the Company was the lessee on 2 ground leases, which were classified as operating leases under ASC 840. As the Company elected the packages of practical expedients, the Company is not required to reassess the classification of these existing leases and, certainas such, these leases continue to be accounted for as operating leases.
On January 1, 2019, the Company recognized ROU assets and lease liabilities for these leases on the Company's consolidated balance sheets, and on a go-forward basis, lease expense will be recognized on a straight-line basis over the remaining term of the officers are also officerslease. On January 1, 2019, the Company recorded a ROU asset of the Sponsor.
Griffin Capital Securities, LLC (the “Dealer Manager”) is$25.5 million and a Delaware limitedcorresponding liability company and is a wholly-owned subsidiary of Griffin Capital, LLC (“GC”), a Delaware limited liability company. The Company’s former sponsor, GCC, is the sole member of GC. The Dealer Manager is responsible for marketing the Company’s shares offered pursuantapproximately $27.6 million relating to the Company's public offerings.existing ground lease arrangements. These operating leases were recognized based on the present value of the future minimum lease payments over the lease term. As these leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available in determining the present value of future payments. The discount rate used to determine the present value of these operating leases’ future payments was 5.36%. There was no impact to beginning equity as a result of the adoption related to the lessee accounting as the difference between the asset and liability is attributed to derecognition of pre-existing straight-line rent balances.
The Company’s property manager is Griffin Capital Essential Asset Property Management II, LLC, a Delaware limited liability company (the “Property Manager”), which was formed on November 19, 2013Upon adoption of ASC 842, the Company also elected the practical expedient to managenot separate non-lease components, such as common area maintenance, from associated lease components for the Company's ground and office space leases.
Derivative Instruments and Hedging Activities
ASC 815, Derivatives and Hedging ("ASC 815") provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, ASC 815 requires qualitative disclosures regarding the Company’s properties, or provide oversightobjectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of other property managers engagedgains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by ASC 815, the Company or an affiliaterecorded all derivatives on the consolidated balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the Company. The Property Manager derives substantially all of its income from the property management services it performs for the Company.
Griffin Capital Essential Asset Operating Partnership II, L.P., (the "Operating Partnership") owns,derivative, and will own, directly or indirectly, all of the properties acquired by the Company. The Operating Partnership will conduct certain activities through the Company’s taxable REIT subsidiary, Griffin Capital Essential Asset TRS II, Inc., a Delaware corporation (the “TRS”), formed on November 22, 2013, which is a wholly-owned subsidiary of the Operating Partnership. The TRS had no activity as of December 31, 2018.
On September 20, 2017,whether the Company commencedhas elected to designate a follow-on offering of up to $2.2 billion of shares (the "Follow-On Offering"), consisting of up to $2.0 billion of sharesderivative in a hedging relationship and apply hedge accounting and whether the Company's primary offering and $0.2 billion of shares pursuant to the distribution reinvestment plan ("DRP").
Pursuant to the Follow-On Offering, the Company offered to the public four new classes of shares of common stock: Class T shares, Class S shares, Class D shares and Class I shares (the “New Shares”) with net asset value (“NAV”) based pricing. The share classes have different selling commissions, dealer manager fees and ongoing distribution fees. In connection with the Follow-On Offering, the Company reclassified all Class T and Class I shares sold in its IPO as "Class AA" and "Class AAA" shares, respectively.
On September 20, 2017, the Company entered into an amended and restated advisory agreement (the "Advisory Agreement") with the Advisor and the Operating Partnership, which replaced the Original Advisory Agreement and modified various provisions including the fees and expense reimbursements payable to the Advisor. See Note 10, Related Party Transactions, for additional details.
hedging relationship
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II,REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20182021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. See Note 6, Interest Rate Contracts, for more detail.
Income Taxes
The Company has elected to be taxed as a REIT under the Internal Revenue Code ("Code"). To qualify as a REIT, the Company must meet certain organizational and operational requirements. The Company intends to adhere to these requirements and maintain its REIT status for the current year and subsequent years. As a REIT, the Company generally will not be subject to federal income taxes on taxable income that is distributed to stockholders. However, the Company may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed taxable income, if any. If the Company fails to qualify as a REIT in any taxable year, the Company will then be subject to federal income taxes on the taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service ("IRS") grants the Company relief under certain statutory provisions. Such an event could materially adversely affect net income and net cash available for distribution to stockholders. As of December 31, 2021, the Company satisfied the REIT requirements and distributed all of its taxable income.
Pursuant to the Code, the Company has elected to treat its corporate subsidiary as a TRS. In general, the TRS may perform non-customary services for the Company’s tenants and may engage in any real estate or non-real estate-related business. The TRS will be subject to corporate federal and state income tax.
Goodwill
Goodwill represents the excess of consideration paid over the fair value of underlying identifiable net assets of business acquired. The Company's goodwill has an indeterminate life and is not amortized, but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company takes a qualitative approach to consider whether an impairment of goodwill exists prior to quantitatively determining the fair value of the reporting unit in step one of the impairment test. The Company performs its annual assessment on October 1st.
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 unaudited consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.
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. Unvested RSUs that contain non-forfeitable rights to dividends are participating securities and are included in the computation of earnings per share pursuant to the two-class method. The effect of including unvested restricted stock using the treasury stock method was excluded from our calculation of weighted average shares of common stock outstanding – diluted, as the inclusion would have been anti-dilutive for the years ended December 31, 2021, 2020 and 2019. Total excluded shares were 1,350,335, 453,335, and 101,375 for the years ended December 31, 2021, 2020, and 2019, respectively.
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
Segment Information
ASC 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 1 reportable segment.
Unaudited Data
Any references to the number of buildings, square footage, number of leases, occupancy, and any amounts derived from these values in the notes to the consolidated financial statements are unaudited and outside the scope of the Company's independent registered public accounting firm's audit of its consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board ("PCAOB").
Recently Issued Accounting Pronouncements
Changes to GAAP are established by the FASB in the form of ASUs to the FASB’s Accounting Standards Codification. The Company considers the applicability and impact of all ASUs. Other than the ASUs discussed below, the FASB has not recently issued any other ASUs that the Company expects to be applicable and have a material impact on the Company's financial statements.
Adoption of New Accounting Pronouncements
During the first quarter of 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
3. Real Estate
As of December 31, 2021, the Company’s real estate portfolio consisted of 121 properties (including one land parcel held for future development), in 26 states consisting substantially of office, industrial, and manufacturing facilities with a combined acquisition value of approximately $5.3 billion, including the allocation of the purchase price to above and below-market lease valuation.
Depreciation expense for buildings and improvements for the years ended December 31, 2021, 2020, and 2019 was $125.4 million, $94.0 million, and $80.4 million, respectively. Amortization expense for intangibles, including but not limited to, tenant origination and absorption costs for the years ended December 31, 2021, 2020, and 2019 was $84.2 million, $67.1 million and $73.0 million respectively.
2021 Acquisitions
CCIT II Merger
The CCIT II Merger was accounted for as an asset acquisition under ASC 805, with the Company treated as the accounting acquirer. The total purchase price was allocated to the individual assets acquired and liabilities assumed based upon their relative fair values. Intangible assets were recognized at their relative fair values in accordance with ASC 350, Intangibles. Based on an evaluation of the relevant factors and the guidance in ASC 805 requiring significant management judgment, the entity considered the acquirer for accounting purposes is also the legal acquirer. In order to make this consideration, various factors have been analyzed including which entity issued its equity interests, relative voting rights, existence of minority interests (if any), control of the Board, management composition, existence of a premium as it applies to the exchange ratio, relative size, transaction initiation, operational structure, relative composition of employees, surviving brand and name, and other factors. The strongest factor identified was the relative size of the Company as compared to CCIT II. Based on financial
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
measures, the Company was a significantly larger entity than CCIT II and its stockholders hold the majority of the voting shares of the Company.
The assets (including identifiable intangible assets) and liabilities (including executory contracts and other commitments) of CCIT II as of the effective time of the CCIT II Merger were recorded at their respective relative fair values and added to those of the Company. Transaction costs incurred by the Company were capitalized in the period in which the costs were incurred and services were received. Intangible assets were recognized at their relative fair values in accordance with ASC 805. Upon the effective time of the CCIT II Merger on March 1, 2021, each of CCIT II's 67.1 million issued and outstanding shares of common stock were converted into the right to receive 1.392 newly issued shares of the Class E common stock of the Company (approximately 93.5 million shares). Total consideration transferred is calculated as such:
| | | | | |
| As of March 1, 2021 |
| CCIT II's common stock shares prior to conversion | 67,139,129 | |
| Exchange ratio | 1.392 |
| Implied GRT common stock issued as consideration | 93,457,668 | |
| GRT's Class E NAV per share in effect at March 1, 2021 | $ | 8.97 | |
| Total consideration | $ | 838,315 | |
The following table summarizes the final purchase price allocation based on a valuation report prepared by the Company's third-party valuation specialist that was subject to management's review and approval: | | | | | |
| March 1, 2021 |
| Assets: | |
| Cash assumed | $ | 2,721 | |
| Land | 143,724 | |
| Building and improvements | 992,779 | |
| Tenant origination and absorption cost | 152,793 | |
| In-place lease valuation (above market) | 11,591 | |
| Intangibles | 27,788 | |
| Other assets | 1,690 | |
| Total assets | $ | 1,333,086 | |
| Liabilities: | |
| Debt | $ | 415,926 | |
| In-place lease valuation (below market) | 10,026 | |
| Lease liability | 4,616 | |
| Accounts payable and other liabilities | 20,604 | |
| Total liabilities | $ | 451,172 | |
| Fair value of net assets acquired | 881,914 | |
| Less: GRT's CCIT II Merger expenses | 43,599 | |
| Fair value of net assets acquired, less GRT's CCIT II Merger expenses | $ | 838,315 | |
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
Merger-Related Expenses
In connection with the Follow-On Offering,CCIT II Merger, the Company incurred various transaction and administrative costs. These costs included advisory fees, legal, tax, accounting, valuation fees, and other costs. These costs were capitalized as a component of the cost of the assets acquired.
The following is a breakdown of the Company's boardcosts incurred related to the CCIT II Merger: | | | | | |
| Amount |
| Termination fee of the CCIT II advisory agreement | $ | 28,439 | |
| Advisory and valuation fees | 4,699 | |
| Legal, accounting and tax fees | 5,115 | |
| Other fees | 5,346 | |
| Total CCIT II Merger-related fees | $ | 43,599 | |
Real Estate - Valuation and Purchase Price Allocation
The Company allocates the purchase price to the relative fair value of directorsthe tangible assets of a property by valuing the property as if it were vacant. This “as-if vacant” value is estimated using an income, or discounted cash flow, approach that relies upon Level 3 inputs, which are unobservable inputs based on the Company's review of the assumptions a market participant would use. These Level 3 inputs include discount rates, capitalization rates, market rents and comparable sales data for similar properties. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. In calculating the “as-if vacant” value for the properties acquired during the year ended December 31, 2021, the Company used a discount rate of 5.75% to 8.75%.
In determining the fair value of intangible lease assets or liabilities, the Company also considers Level 3 inputs. Acquired above and below-market leases are valued based on the present value of the difference between prevailing market rates and the in-place rates measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases, if applicable. The estimated fair value of acquired in-place at-market tenant leases are the costs that would have been incurred to lease the property to the occupancy level of the property at the date of acquisition. Such estimates include the value associated with leasing commissions, legal and other costs, as well as the estimated period necessary to lease such properties that would be incurred to lease the property to its occupancy level at the time of its acquisition. Acquisition costs associated with asset acquisitions are capitalized during the period they are incurred.
The following table summarizes the purchase price allocation of the properties acquired during the year ended December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Acquisition | | Land | | | Building | | Improvements | | Tenant origination and absorption costs | | Other Intangibles | In-place lease valuation - above/(below) market | | Financing Leases | | Total (1) |
| CCIT II Properties | | $143,724 | (2) | | $958,166 | | $34,613 | | $152,793 | | $27,788 | $1,565 | | $(3,681) | | $1,314,968 |
(1)The allocations noted above are based on a determination of the relative fair value of the total consideration provided and represent the amount paid including capitalized acquisition costs.
(2)Approximately $5.6 million includes land allocation related to the Company's finance leases.
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
Intangibles
The Company allocated a portion of the acquired and contributed real estate asset value to in-place lease valuation, tenant origination and absorption cost, and other intangibles, net of the write-off of intangibles for the years ended December 31, 2021 and 2020:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| In-place lease valuation (above market) | $ | 49,578 | | | $ | 43,576 | |
| In-place lease valuation (above market) - accumulated amortization | (35,049) | | | (35,604) | |
| In-place lease valuation (above market), net | 14,529 | | | 7,972 | |
| | | |
| Ground leasehold interest (below market) | 2,254 | | | 2,254 | |
| Ground leasehold interest (below market) - accumulated amortization | (219) | | | (191) | |
| Ground leasehold interest (below market), net | 2,035 | | | 2,063 | |
| | | |
| Intangibles - other | 32,028 | | | 4,240 | |
| Intangibles - other - accumulated amortization | (5,492) | | | (4,240) | |
| Intangibles - other, net | 26,536 | | | — | |
| Intangible assets, net | $ | 43,100 | | | $ | 10,035 | |
| | | |
| In-place lease valuation (below market) | $ | (77,859) | | | $ | (68,334) | |
| Land leasehold interest (above market) | (3,072) | | | (3,072) | |
| In-place lease valuation & land leasehold interest - accumulated amortization | 50,634 | | | 44,073 | |
| Intangibles - other (above market) | (329) | | | — | |
| Intangible liabilities, net | $ | (30,626) | | | $ | (27,333) | |
| | | |
| Tenant origination and absorption cost | $ | 876,324 | | | $ | 740,489 | |
| Tenant origination and absorption cost - accumulated amortization | (473,893) | | | (412,462) | |
| Tenant origination and absorption cost, net | $ | 402,431 | | | $ | 328,027 | |
The intangible assets are amortized over the remaining lease term of each property, which on a weighted-average basis, was approximately 6.25 years and 6.83 years as of December 31, 2021 and 2020, respectively. The amortization of the intangible assets and other leasing costs for the respective periods is as follows: | | | | | | | | | | | | | | | | | |
| | Amortization (income) expense for the year ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Above and below market leases, net | $ | (1,323) | | | $ | (2,292) | | | $ | (3,201) | |
| Tenant origination and absorption cost | $ | 78,389 | | | $ | 62,459 | | | $ | 69,502 | |
| Ground leasehold amortization (below market) | $ | (349) | | | $ | (291) | | | $ | (52) | |
| Other leasing costs amortization | $ | 6,209 | | | $ | 4,908 | | | $ | 3,581 | |
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
The following table sets forth the estimated annual amortization (income) expense for in-place lease valuation, net, tenant origination and absorption costs, ground leasehold interest, and other leasing costs as of December 31, 2021 for the next five years:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year | | In-place lease valuation, net | | Tenant origination and absorption costs | | Ground leasehold interest | | Other leasing costs |
| 2022 | | $ | (1,954) | | | $ | 76,375 | | | $ | (290) | | | $ | 6,123 | |
| 2023 | | $ | (2,618) | | | $ | 68,638 | | | $ | (290) | | | $ | 6,197 | |
| 2024 | | $ | (1,768) | | | $ | 54,990 | | | $ | (291) | | | $ | 6,060 | |
| 2025 | | $ | (1,297) | | | $ | 43,368 | | | $ | (290) | | | $ | 6,007 | |
| 2026 | | $ | (1,151) | | | $ | 38,702 | | | $ | (290) | | | $ | 5,290 | |
Sale of Properties
On February 18, 2021, the Company sold the 2275 Cabot Drive property located in Lisle, Illinois for a total proceeds of $1.8 million, less closing costs and other closing credits. The property sold for an approximate amount equal to the carrying value.
On April 12, 2021, the Company sold the 2200 Channahon Road property located in Joliet, Illinois for total proceeds of $11.5 million, less closing costs and other closing credits. The property sold for an approximate amount equal to the carrying value.
On June 8, 2021, the Company sold the Houston Westway I property located in Houston, Texas for total proceeds of $10.5 million, less closing costs and other closing credits. The property sold for an approximate amount equal to the carrying value.
Impairments
2200 Channahon Road and Houston Westway I
During the year ended December 31, 2021, the Company recorded an impairment provision of approximately $4.2 million as it was determined that the carrying value of the real estate would not be recoverable on 2 properties. This impairment resulted from changes in longer absorption periods, lower market rents and shorter anticipated hold periods. In determining the fair value of property, the Company considered Level 3 inputs. See Note 8,Fair Value Measurements, for details.
Restricted Cash
In conjunction with the acquisition of certain assets, as required by certain lease provisions or certain lenders in conjunction with an acquisition or debt financing, or credits received by the seller of certain assets, the Company assumed or funded reserves for specific property improvements and deferred maintenance, re-leasing costs, and taxes and insurance, which are included on the consolidated balance sheets as restricted cash. Additionally, an ongoing replacement reserve is funded by certain tenants pursuant to each tenant’s respective lease as follows:
| | | | | | | | | | | |
| Balance as of December 31, |
| 2021 | | 2020 |
| Cash reserves | $ | 15,234 | | | $ | 20,385 | |
| Restricted lockbox | 2,288 | | | 13,967 | |
| Total | $ | 17,522 | | | $ | 34,352 | |
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
4.Investments in Unconsolidated Entities
The interests discussed below are deemed to be variable interests in VIEs and, based on an evaluation of the variable interests against the criteria for consolidation, the Company determined that it is not the primary beneficiary of the investments, as the Company does not have power to direct the activities of the entities that most significantly affect their performance. As such, the interest in the VIEs is recorded using the equity method of accounting in the accompanying consolidated financial statements. Under the equity method, the investments in the unconsolidated entities are 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. The Company's maximum exposure to losses associated with its unconsolidated investments is primarily limited to its carrying value in the investments.
Digital Realty Trust, Inc.
In September 2014, the Company, through an SPE wholly-owned by the GRT OP, acquired an 80% interest in a joint venture with an affiliate of Digital Realty Trust, Inc. ("Digital") 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 "Board""Digital Property").
In September 2014, the joint venture entered into a secured term loan (the "Digital Loan") in the amount of approximately $102.0 million. The Digital Loan had an original maturity date of September 9, 2019 and included 2 extension options of 12 additional months each beyond the original maturity date. On March 29, 2019, the joint venture executed the first 12-month loan extension. Based on the executed extension, the new loan maturity date was September 9, 2020. The extension did not change the loan amount, rate or other substantive terms. The members were also required to issue a $10.2 million stand-by letter of credit, of which the Company's portion was $8.2 million.
Since the tenant did not execute a long term extension or sign a new lease with the joint venture, the joint venture elected not to accept the loan extension terms offered by the lender and subsequent discussions did not result in an additional loan extension in 2020. As a result, on September 9, 2020, the lender provided a notice of default for non-payment of the unpaid balance of the non-recourse Digital Loan and exercised its right to draw on the stand-by letter of credit. The Company funded the $8.2 million stand-by letter of credit with cash.
As part of the wind up of the joint venture, the Company had recorded a receivable from the Digital managing member of $4.1 million. The $4.1 million payment was received in April 2021 and the Company has written off its remaining investment in the venture. In April 2021, the lender sold the Digital Loan and concurrently, the Digital-GCEAR 1 (Ashburn) joint venture executed a deed in lieu thereby extinguishing any further obligations. The Company is not exposed to any future funding obligations and there are no other future losses expected to arise from this investment.
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
5. Debt
As of December 31, 2021 and 2020, the Company’s debt consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | | Contractual Interest Rate (1) | | Loan Maturity (4) | | Effective Interest Rate (2) |
| 2021 | | 2020 | | | |
| HealthSpring Mortgage Loan | $ | 19,669 | | | $ | 20,208 | | | 4.18% | | April 2023 | | 4.63% |
| Midland Mortgage Loan | 95,792 | | | 98,155 | | | 3.94% | | April 2023 | | 4.12% |
| Emporia Partners Mortgage Loan | — | | | 1,627 | | | —% | | — | | —% |
| Samsonite Loan | 19,114 | | | 20,165 | | | 6.08% | | September 2023 | | 5.03% |
| Highway 94 Loan | 13,732 | | | 14,689 | | | 3.75% | | August 2024 | | 4.87% |
| Pepsi Bottling Ventures Loan | 18,218 | | | 18,587 | | | 3.69% | | October 2024 | | 3.92% |
| AIG Loan II | 124,606 | | | 126,792 | | | 4.15% | | November 2025 | | 4.94% |
| BOA Loan | 375,000 | | | 375,000 | | | 3.77% | | October 2027 | | 3.91% |
| BOA/KeyBank Loan | 250,000 | | | 250,000 | | | 4.32% | | May 2028 | | 4.14% |
| AIG Loan | 101,884 | | | 103,870 | | | 4.96% | | February 2029 | | 5.07% |
| Total Mortgage Debt | 1,018,015 | | | 1,029,093 | | | | | | | |
Revolving Credit Facility (3) | 373,500 | | | 373,500 | | | LIBO Rate + 1.45% | | June 2023 | | 1.67% |
| 2023 Term Loan | 200,000 | | | 200,000 | | | LIBO Rate + 1.40% | | June 2023 | | 1.59% |
| 2024 Term Loan | 400,000 | | | 400,000 | | | LIBO Rate + 1.40% | | April 2024 | | 1.58% |
| 2025 Term Loan | 400,000 | | | — | | | LIBO Rate + 1.40% | | December 2025 | | 1.82% |
| 2026 Term Loan | 150,000 | | | 150,000 | | | LIBO Rate + 1.40% | | April 2026 | | 1.55% |
| Total Debt | 2,541,515 | | | 2,152,593 | | | | | | | |
| Unamortized Deferred Financing Costs and Discounts, net | (9,138) | | | (12,166) | | | | | | | |
| Total Debt, net | $ | 2,532,377 | | | $ | 2,140,427 | | | | | | | |
(1)Including the effect of the interest rate swap agreements with a total notional amount of $750.0 million the weighted average interest rate as of December 31, 2021 was 3.18% for both the Company’s fixed-rate and variable-rate debt combined and 3.86% for the Company’s fixed-rate debt only.
(2)Reflects the effective interest rate as of December 31, 2021 and includes the effect of amortization of discounts/premiums and deferred financing costs.
(3)The LIBO rate as of December 1, 2021 (effective date) was 0.10%. The Revolving Credit Facility has an initial term of approximately six months, maturing on June 28, 2022, and may be extended for a one-year period if certain conditions are met and upon payment of an extension fee. See discussion below.
(4)Reflects the loan maturity as of December 31, 2021.
Second Amended and Restated Credit Agreement
Pursuant to the Second Amended and Restated Credit Agreement dated as of April 30, 2019 (as amended by the First Amendment to the Second Amended and Restated Credit Agreement dated as of October 1, 2020, the Second Amendment to the Second Amended and Restated Credit Agreement dated as of December 18, 2020, and the Third Amendment to the Second Amended and Restated Credit Agreement dated as of July 14, 2021 (the “Third Amendment”), the “Second Amended and Restated Credit Agreement”), with KeyBank National Association (“KeyBank”) as administrative agent, and a syndicate of lenders, we, through the GRT OP, as the borrower, have been provided with a $1.9 billion credit facility consisting of a $750 million senior unsecured revolving credit facility (the “Revolving Credit Facility”) maturing in June 2022 with (subject to the satisfaction of certain customary conditions) a one-year extension option, a $200 million senior unsecured term loan maturing in June 2023 (the “$200M 5-Year Term Loan”), a $400 million senior unsecured term loan maturing in April 2024 (the “$400M 5-Year Term Loan”), a $400 million senior unsecured term loan maturing in December 2025 (the $400M 5-Year Term Loan) (collectively, the “KeyBank Loans”), and a $150 million senior unsecured term loan maturing in April 2026 (the “$150M 7-Year Term Loan”).The credit facility also provides the option, subject to obtaining additional commitments from lenders and certain other customary conditions, to increase the commitments under the Revolving Credit Facility, increase the existing term loans and/or incur new term loans by up to an additional $600 million in the aggregate. As of December 31, 2021, the remaining capacity under the Revolving Credit Facility was $376.5 million.
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
Based on the terms as of December 31, 2021, the interest rate for the credit facility varies based on the consolidated leverage ratio of the GRT OP, us, and our subsidiaries and ranges (a) in the case of the Revolving Credit Facility, from LIBOR plus 1.30% to LIBOR plus 2.20%, (b) in the case of each of the $200M 5-Year Term Loan, the $400M 5-Year Term Loan $400M 5-Year Term Loan, 2025, and the $150M 7-Year Term Loan, from LIBOR plus 1.25% to LIBOR plus 2.15%.If the GRT OP obtains an investment grade rating of its senior unsecured long term debt from Standard & Poor's Rating Services, Moody's Investors Service, Inc., or Fitch, Inc., the applicable LIBOR margin and base rate margin will vary based on such rating and range (i) in the case of the Revolving Credit Facility, from LIBOR plus 0.825% to LIBOR plus 1.55%, (ii) in the case of each of the $200M 5-Year Term Loan, the $400M 5-Year Term Loan and the $400M 5-Year Term Loan 2025, and the $150M 7-Year Term Loan, from LIBOR plus 1.90% to LIBOR plus 1.75%.
On March 1, 2021, the Company exercised its right to draw on the $400M 5-Year Term Loan 2025 to repay CCIT II's existing debt balance in connection with the CCIT II Merger.
The Second Amended and Restated Credit Agreement provides that the GRT OP must maintain a pool of unencumbered real properties (each a "Pool Property" and collectively the "Pool Properties") that meet certain requirements contained in the Second Amended and Restated Credit Agreement. The agreement sets forth certain covenants relating to the Pool Properties, including, without limitation, the following:
•there must be no less than 15 Pool Properties at any time;
•no greater than 15% of the aggregate pool value may be contributed by a single Pool Property or tenant;
•no greater than 15% of the aggregate pool value may be contributed by Pool Properties subject to ground leases;
•no greater than 20% of the aggregate pool value may be contributed by Pool Properties which are under development or assets under renovation;
•the minimum aggregate leasing percentage of all Pool Properties must be no less than 90%; and
•other limitations as determined by KeyBank upon further due diligence of the Pool Properties.
Borrowing availability under the Second Amended and Restated Credit Agreement is limited to the lesser of the maximum amount of all loans outstanding that would result in (i) an unsecured leverage ratio of no greater than 60%, or (ii) an unsecured interest coverage ratio of no less than 2.00:1.00.
Guarantors of the KeyBank Loans include the Company, each special purpose entity that owns a Pool Property, and each of the GRT OP's other subsidiaries which owns a direct or indirect equity interest in a SPE that owns a Pool Property.
In addition to customary representations, warranties, covenants, and indemnities, the KeyBank Loans require the GRT OP to comply with the following at all times, which will be tested on a quarterly basis:
•a maximum consolidated leverage ratio of 60%, or, the ratio may increase to 65% for up to 4 consecutive quarters after a material acquisition;
•a minimum consolidated tangible net worth of 75% of the Company's consolidated tangible net worth at closing of the Revolving Credit Facility, or approximately $2.0 billion, plus 75% of net future equity issuances (including GRT OP Units), minus 75% of the amount of any payments used to redeem the Company's stock or GRT OP Units, minus any amounts paid for the redemption or retirement of or any accrued return on the preferred equity issued under the preferred equity investment made in EA-1 in August 2018 by SHBNPP Global Professional Investment Type Private Real Estate Trust No. 13 (H);
•upon consummation, if ever, of an initial public offering, a minimum consolidated tangible net worth of 75% of the Company's consolidated tangible net worth at the time of such initial public offering plus 75% of net future equity issuances (including GRT OP Units) should the Company publicly list its shares;
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
•a minimum consolidated fixed charge coverage ratio of not less than 1.50:1.00;
•a maximum total secured debt ratio of not greater than 40%, which ratio will increase by 5 percentage points for 4 quarters after closing of a material acquisition that is financed with secured debt;
•a minimum unsecured interest coverage ratio of 2.00:1.00;
•a maximum total secured recourse debt ratio, excluding recourse obligations associated with interest rate hedges, of 10% of our total asset value; and
•aggregate maximum unhedged variable rate debt of not greater than 30% of the Company's total asset value.
Furthermore, the activities of the GRT OP, the Company, and the Company's subsidiaries must be focused principally on the ownership, development, operation and management of office, industrial, manufacturing, warehouse, distribution or educational properties (or mixed uses thereof) and businesses reasonably related or ancillary thereto.
Third Amendment to Second Amended and Restated Credit Agreement
On July 14, 2021, the Company, through the GRT OP, entered into the Third Amendment. The Third Amendment amended the Second Amended and Restated Credit Agreement to decrease the applicable interest rate margin for the $150M 7-Year Term Loan. After giving effect to the Third Amendment, the $150M 7-Year Term Loan accrues interest, at the GRT OP's election, at a per annum rate equal to either (i) the LIBOR plus an applicable margin ranging from 1.25% to 2.15% or (ii) a base rate plus an applicable margin ranging from 0.25% to 1.15%, in each case such applicable margin to be based on the Company's consolidated leverage ratio. Prior to the Third Amendment, the applicable margin for LIBOR based loans was 1.65% to 2.50% and for base rate loans was 0.65% to 1.50%, in each case based on the Company's consolidated leverage ratio. All other terms of the Second Amended and Restated Credit Agreement were unchanged. No new term loan borrowings were incurred under the Third Amendment. The applicable rate for the $150M 7-Year Term Loan decreased 35 basis points from 1.75% to 1.40%.
Debt Covenant Compliance
Pursuant to the terms of the Company's mortgage loans and the KeyBank Loans, the GRT OP, 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 December 31, 2021.
The following summarizes the future scheduled principal repayments of all loans as of December 31, 2021 per the loan terms discussed above:
| | | | | |
| As of December 31, 2021 |
| 2022 | $ | 9,501 | |
| 2023 | 336,814 | |
| 2024 | 433,929 | |
| 2025 | 519,901 | |
| 2026 | 152,546 | |
| Thereafter | 1,088,824 | |
| Total principal | 2,541,515 | |
| Unamortized debt premium/(discount) | (166) | |
| Unamortized deferred loan costs | (8,972) | |
| Total | $ | 2,532,377 | |
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
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 enters 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 values 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
The Company has entered into interest rate swap agreements to hedge the variable cash flows associated with certain existing or forecasted LIBOR based variable-rate debt, including the Company's KeyBank Loans. The change in the fair value of derivatives designated and qualifying as cash flow hedges is initially recorded in accumulated other comprehensive income ("AOCI") and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt.
The following table sets forth a summary of the interest rate swaps at December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Fair Value (1) | | Current Notional Amounts |
| | | | | | | | December 31, | | December 31, |
| Derivative Instrument | | Effective Date | | Maturity Date | | Interest Strike Rate | | 2021 | | 2020 | | 2021 | | 2020 |
| Assets/(Liabilities) | | | | | | | | | | | | | | |
| Interest Rate Swap | | 3/10/2020 | | 7/1/2025 | | 0.83% | | $ | 1,648 | | | $ | (2,963) | | | $ | 150,000 | | | $ | 150,000 | |
| Interest Rate Swap | | 3/10/2020 | | 7/1/2025 | | 0.84% | | 1,059 | | | (2,023) | | | 100,000 | | | 100,000 | |
| Interest Rate Swap | | 3/10/2020 | | 7/1/2025 | | 0.86% | | 749 | | | (1,580) | | | 75,000 | | | 75,000 | |
| Interest Rate Swap | | 7/1/2020 | | 7/1/2025 | | 2.82% | | (7,342) | | | (13,896) | | | 125,000 | | | 125,000 | |
| Interest Rate Swap | | 7/1/2020 | | 7/1/2025 | | 2.82% | | (5,909) | | | (11,140) | | | 100,000 | | | 100,000 | |
| Interest Rate Swap | | 7/1/2020 | | 7/1/2025 | | 2.83% | | (5,899) | | | (11,148) | | | 100,000 | | | 100,000 | |
| Interest Rate Swap | | 7/1/2020 | | 7/1/2025 | | 2.84% | | (5,958) | | | (11,225) | | | 100,000 | | | 100,000 | |
| Total | | | | | | | | $ | (21,652) | | | $ | (53,975) | | | $ | 750,000 | | | $ | 750,000 | |
(1)The Company records all derivative instruments on a gross basis in the consolidated balance sheets, and accordingly there are no offsetting amounts that net assets against liabilities. As of December 31, 2021, derivatives in a liability position are included in an asset or liability position are included in the line item "Other assets or Interest rate swap liability," respectively, in the consolidated balance sheets at fair value. The LIBO rate as of December 31, 2021 (effective date) was 0.10%.
The following table sets forth the impact of the interest rate swaps on the consolidated statements of operations for the periods presented:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
| Interest Rate Swap in Cash Flow Hedging Relationship: | | | |
| Amount of (loss) gain recognized in AOCI on derivatives | $ | (18,165) | | | $ | (38,319) | |
| Amount of (gain) loss reclassified from AOCI into earnings under “Interest expense” | $ | (14,284) | | | $ | 8,615 | |
| Total interest expense presented in the consolidated statement of operations in which the effects of cash flow hedges are recorded | $ | 85,087 | | | $ | 79,646 | |
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
During the twelve months subsequent to December 31, 2021, the Company estimates that an additional $11.4 million of its expense will be recognized from AOCI into earnings.
Certain agreements with the derivative counterparties contain a provision that if the Company defaults on any of its indebtedness, including a 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 December 31, 2021 and 2020, the fair value of interest rate swaps that were in a liability position, which excludes any adjustment for nonperformance risk related to these agreements, was approximately $25.1 million and $54.0 million, respectively. As of December 31, 2021 and December 31, 2020, 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 December 31, 2021 and 2020:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Prepaid tenant rent | $ | 26,477 | | | $ | 20,780 | |
| Real estate taxes payable | 14,751 | | | 15,380 | |
| Property operating expense payable | 11,126 | | | 8,473 | |
| Accrued tenant improvements | 10,123 | | | 30,011 | |
| Deferred compensation | 10,119 | | | 10,599 | |
| Interest payable | 9,683 | | | 9,147 | |
| Other liabilities | 26,842 | | | 20,044 | |
| Total | $ | 109,121 | | | $ | 114,434 | |
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 years ended December 31, 2021 and 2020.
The following table sets 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 December 31, 2021 and 2020:
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Assets/(Liabilities) | | Total Fair Value | | Quoted Prices in Active Markets for Identical Assets and Liabilities | | Significant Other Observable Inputs | | Significant Unobservable Inputs |
| December 31, 2021 | | | | | | | | |
| Interest Rate Swap Asset | | $ | 3,456 | | | $ | — | | | $ | 3,456 | | | $ | — | |
| Interest Rate Swap Liability | | $ | (25,108) | | | $ | — | | | $ | (25,108) | | | $ | — | |
| Corporate Owned Life Insurance Asset | | $ | 6,875 | | | $ | — | | | $ | 6,875 | | | $ | — | |
| Mutual Funds Asset | | $ | 5,543 | | | $ | 5,543 | | | $ | — | | | $ | — | |
| | | | | | | | |
| December 31, 2020 | | | | | | | | |
| Interest Rate Swap Liability | | $ | (53,975) | | | $ | — | | | $ | (53,975) | | | $ | — | |
| Corporate Owned Life Insurance Asset | | $ | 4,454 | | | $ | — | | | $ | 4,454 | | | $ | — | |
| Mutual Funds Asset | | $ | 6,643 | | | $ | 6,643 | | | $ | — | | | $ | — | |
Real Estate
For the year ended December 31, 2021, the Company determined that 2 of the Company's properties were impaired based on expected hold period and selling price. The Company considered these inputs as Level 3 measurements within the fair value hierarchy. The following table is a summary of the quantitative information related to the non-recurring fair value measurement for the impairment of the Company's real estate properties for the year-ended December 31, 2021:
| | | | | | | | | | | | | | | | | |
| | Range of Inputs or Inputs |
| Unobservable Inputs: | | 2200 Channahon Road | | Houston Westway I | |
| | | | | |
| | | | | |
| Expected selling price per square foot | | $8.30 | | $72.90 | |
| Estimated hold period | | Less than one year | | Less than one year | |
Financial Instruments Disclosed at Fair Value
Financial instruments as of December 31, 2021 and December 31, 2020 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 December 31, 2021 and 2020. The fair value of the 10 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.
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| | 2021 | | 2020 |
| | Fair Value | | Carrying Value (1) | | Fair Value | | Carrying Value (1) |
| BOA Loan | $ | 349,082 | | | $ | 375,000 | | | $ | 355,823 | | | $ | 375,000 | |
| BOA/KeyBank Loan | 260,378 | | | 250,000 | | | 263,454 | | | 250,000 | |
| AIG Loan II | 120,141 | | | 124,606 | | | 121,011 | | | 126,792 | |
| AIG Loan | 99,697 | | | 101,884 | | | 102,033 | | | 103,870 | |
| Midland Mortgage Loan | 95,720 | | | 95,792 | | | 97,709 | | | 98,155 | |
| Samsonite Loan | 19,366 | | | 19,114 | | | 21,030 | | | 20,165 | |
| HealthSpring Mortgage Loan | 19,639 | | | 19,669 | | | 20,462 | | | 20,208 | |
| Pepsi Bottling Ventures Loan | 18,262 | | | 18,218 | | | 18,942 | | | 18,587 | |
| Highway 94 Loan | 13,360 | | | 13,732 | | | 14,447 | | | 14,689 | |
| Emporia Partners Mortgage Loan | — | | | — | | | 1,654 | | | 1,627 | |
| Total | $ | 995,645 | | | $ | 1,018,015 | | | $ | 1,016,565 | | | $ | 1,029,093 | |
(1)The carrying values do not include the debt premium/(discount) or deferred financing costs as of December 31, 2021 and 2020. See Note 5, Debt, for details.
9. Equity
Classes
Class T shares, Class S shares, Class D shares, Class I shares, Class A shares, Class AA shares, Class AAA and Class E shares vote together as a single class, and each share is entitled to 1 vote on each matter submitted to a vote at a meeting of the Company's stockholders; provided that with respect to any matter that would only have a material adverse effect on the rights of a particular class of common stock, only the holders of such affected class are entitled to vote.
The following table sets forth the classes of outstanding common stock as of December 31, 2021 and 2020:
| | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
| Class A | 24,509,573 | | | 24,325,680 | |
| Class AA | 47,592,118 | | | 47,304,097 | |
| Class AAA | 926,936 | | | 920,920 | |
| Class D | 42,013 | | | 41,095 | |
| Class E | 249,088,676 | | | 155,272,273 | |
| Class I | 1,911,731 | | | 1,896,696 | |
| Class S | 1,800 | | | 1,800 | |
| Class T | 565,265 | | | 558,107 | |
Common Equity
As of December 31, 2021, the Company had received aggregate gross offering proceeds of approximately $2.8 billion from the sale of shares in the private offering, the public offerings, the DRP offerings and mergers (includes EA-1 offerings and EA-1 merger with Signature Office REIT, Inc., the EA Mergers and the CCIT II Merger), as discussed in Note 1, Organization. As part of the $2.8 billion from the sale of shares, the Company issued approximately 43,772,611 shares of its common stock upon the consummation of the merger of Signature Office REIT, Inc. in June 2015 and 174,981,547 Class E shares (in exchange for all outstanding shares of EA-1's common stock at the time of the EA Mergers) in April 2019 upon the consummation of the EA Mergers and 93,457,668 Class E shares (in exchange for all the outstanding shares of CCIT II's common stock at the time of the CCIT II Merger). As of December 31, 2021, there were 324,638,112 shares outstanding,
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
including shares issued pursuant to the DRP, less shares redeemed pursuant to the SRP and the self-tender offer, which occurred in May 2019.
Termination of Follow-On Offering
The Company’s follow-on offering of up to $2.2 billion shares, consisting of up to $2.0 billion of shares in our primary offering and $0.2 billion of shares pursuant to our DRP (collectively, the "Follow-On Offering”) terminated with the expiration of the registration statement on Form S-11 (Registration No. 333-217223), as amended, on September 20, 2020.
Distribution Reinvestment Plan (DRP)
The Company has adopted the DRP, which allows stockholders to have dividends and other distributions otherwise distributable to them invested in additional shares of common stock. No sales commissions or dealer manager fees will be paid on shares sold through the DRP, but the DRP shares will be charged the applicable distribution fee payable with respect to all shares of the applicable class. The purchase price per share under the DRP is equal to the net asset value ("NAV") per share applicable to the class of shares purchased, calculated using the most recently published NAV available at the time of reinvestment. The Company may amend or terminate the DRP for any reason at any time upon 10 days' prior written notice to stockholders, which may be provided through the Company's filings with the SEC.
In connection with a potential strategic transaction, on February 26, 2020, the Board approved the temporary suspension of the DRP, effective March 8, 2020. On July 16, 2020, the Board approved the reinstatement of the DRP, effective July 27, 2020 and an amendment of the DRP to allow for the use of the most recently published NAV per share of the applicable share class available at the time of reinvestment as the DRP purchase price for each share class.
On July 17, 2020, the Company filed a registration statement on Form S-3 for the registration of up to $100 million in shares pursuant to the Company's DRP (the “DRP Offering”).The DRP Offering may be terminated at any time upon 10 days’ prior written notice to stockholders.
The following table summarizes the DRP offerings, by share class, as of December 31, 2021:
| | | | | | | | | | | | | | |
| Share Class | | Amount | | Shares |
| Class A | | $ | 9,687 | | | 1,052,170 |
| Class AA | | 19,047 | | 2,068,367 |
| Class AAA | | 290 | | 31,521 |
| Class D | | 21 | | 2,231 |
| Class E | | 311,405 | | 32,299,377 |
| Class I | | 437 | | 47,028 |
| Class S | | 0 | | 12 |
| Class T | | 177 | | 19,090 |
| Total | | $ | 341,064 | | | 35,519,796 | |
As of December 31, 2021 and 2020, the Company had issued approximately $341.1 million and $318.2 million in shares pursuant to the DRP offerings, respectively.
DRP Suspension
On October 1, 2021, the Board approved a temporary suspension of the DRP, effective October 11, 2021.
Share Redemption Program (SRP)
The Company has adopted the SRP that enables stockholders to sell their stock to the Company in limited circumstances (see section below for details on the suspension of the SRP). On August 8, 2019, the Board amended and restated DRPits SRP, effective as of September 30, 201712, 2019, in order to include(i) clarify that only those stockholders who purchased their shares from us or
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
received their shares from the Company (directly or indirectly) through one or more non-cash transactions (including transfers to trusts, family members, etc.) may participate in the SRP; (ii) allocate capacity within each class of common stock such that the Company may redeem up to 5% of the aggregate NAV of each class of common stock; (iii) treat all of its shares, includingunsatisfied redemption requests (or portion thereof) as a request for redemption the New Shares, underfollowing quarter unless otherwise withdrawn; and (iv) make certain other clarifying changes.
On November 7, 2019, the DRP.
In connection with the Follow-On Offering, the Company’s Board adopted a share redemption program for the New Shares (and IPO shares that have been held for four years or longer) (the “SRP”). On June 4, 2018, the Company’s Board amended and restated the SRP, effective as of December 12, 2019, in order to allow stockholders(i) provide for redemption sought upon a stockholder’s determination of incompetence or incapacitation; (ii) clarify the Company’s IPO sharescircumstances under which a determination of incompetence or incapacitation will entitle a stockholder to utilizesuch redemption; and (iii) make certain other clarifying changes.
In connection with a potential strategic transaction, on February 26, 2020, the Board approved the temporary suspension of the SRP, effective March 28, 2020. On July 16, 2020, the Board approved the partial reinstatement of the SRP, effective August 17, 2020, subject to the following limitations: (A) redemptions will be limited to those sought upon a stockholder’s death, qualifying disability, or determination of incompetence or incapacitation in accordance with the terms of the SRP, and (B) the quarterly cap on aggregate redemptions will be equal to the aggregate NAV, as of July 5, 2018. Priorthe last business day of the previous quarter, of the shares issued pursuant to that time, the Company had a separateDRP during such quarter. Settlements of share redemption program for its IPO shares. See Note 8, Equity, for additional details. redemptions will be made within the first three business days of the following quarter. Redemption activity during the quarter is listed below.
Under the SRP, stockholders are allowed tothe Company will redeem their shares after a one-year holding period at aas of the last business day of each quarter. The redemption price will be equal to the NAV per share for the applicable class generally on the 13th day of the month prior to quarter end.end (which will be the most recently published NAV). Redemption requests must be received by 4:00 p.m. (Eastern time) on the second to last business day of the applicable quarter. Redemption requests exceeding the quarterly cap will be filled on a pro rata basis. With respect to any pro rata treatment, redemption requests following the death or qualifying disability of a stockholder will be considered first, as a group, followed by requests where pro rata redemption would result in a stockholder owning less than the minimum balance of $2,500 of shares of the Company's common stock, which will be redeemed in full to the extent there are available funds, with any remaining available funds allocated pro rata among all other redemption requests. All unsatisfied redemption requests must be resubmitted after the start of the next quarter, or upon the recommencement of the SRP, as applicable.
There are several restrictions under the SRP. Stockholders generally must hold their shares for one year before submitting their shares for redemption under the program; however, the Company will waive the one-year holding period in the event of the death or qualifying disability of a stockholder. Shares issued pursuant to the DRP are not subject to the one-year holding period. In addition, the SRP generally imposes a quarterly cap on aggregate redemptions of the Company's shares equal to a value of up to 5% of the aggregate NAV of the outstanding shares as of the last business day of the previous quarter, subject to the further limitations as indicated in the August 8, 2019 amendments discussed above.
As the value on the aggregate redemptions of the Company's shares is outside the Company's control, the 5% quarterly cap is considered to be temporary equity and is presented as common stock subject to redemption on the accompanying consolidated balance sheets.
The following table summarizes share redemption (excluding the self-tender offer) activity during the years ended December 31, 2021 and 2020: | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
| Shares of common stock redeemed | 2,232,476 | | | 1,841,887 | |
| Weighted average price per share | $ | 9.03 | | | $ | 9.01 | |
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
Since July 31, 2014 and through December 31, 2021, the Company had redeemed 28,304,928 shares (excluding the self-tender offer) of common stock for approximately $265.5 million at a weighted average price per share of $9.38 pursuant to the SRP. Since July 31, 2014 and through December 31, 2019, the Company had honored all outstanding redemption requests. During the three months ended September 30, 2019, redemption requests for Class E shares exceeded the quarterly 5% per share class limitation by 2,872,488 shares or approximately $27.4 million. The Class E shares not redeemed during that quarter, or 25% of the shares submitted, were treated as redemption requests for the quarter ended December 31, 2019. All outstanding requests for the quarter ended September 30, 2019 and all new requests for the quarter ended December 31, 2019 were honored on January 2, 2020. Redemptions sought upon a stockholder's death, qualifying disability, or determination of incompetence or incapacitation in the first quarter of 2020 were honored in accordance with the terms of the SRP, and the SRP officially was suspended as of March 28, 2020 for regular redemptions and subsequent redemptions for death, qualifying disability, or determination of incompetence or incapacitation after those honored in the first quarter of 2020. As described above, the SRP was partially reinstated, effective August 17, 2020, for redemptions sought upon a stockholder’s death, qualifying disability, or determination of incompetence or incapacitation in accordance with the terms of the SRP, subject to a quarterly cap on aggregate redemptions equal to the aggregate NAV, as of the last business day of the previous quarter, of the shares issued pursuant to the DRP during such quarter.
SRP Suspension
On October 1, 2021, the Company announced that it will suspend the SRP beginning with the next cycle, which commenced during fourth quarter 2021.
Series A Preferred Shares
On August 16,8, 2018, the Company’s Board approved the temporary suspensionEA-1 entered into a purchase agreement (the "Purchase Agreement") with SHBNPP Global Professional Investment Type Private Real Estate Trust No. 13(H) (acting through Kookmin Bank as trustee) (the "Purchaser") and Shinhan BNP Paribas Asset Management Corporation, as an asset manager of the primary portionPurchaser, pursuant to which the Purchaser agreed to purchase an aggregate of 10,000,000 shares of EA-1 Series A Cumulative Perpetual Convertible Preferred Stock at a price of $25.00 per share (the "EA-1 Series A Preferred Shares") in 2 tranches, each comprising 5,000,000 EA-1 Series A Preferred Shares. On August 8, 2018 (the "First Issuance Date"), EA-1 issued 5,000,000 Series A Preferred Shares to the Purchaser for a total purchase price of $125.0 million (the "First Issuance"). EA-1 paid transaction fees totaling 3.5% of the Follow-On Offering, effective August 17, 2018. On December 12, 2018,First Issuance purchase price and incurred approximately $0.4 million in transaction-related expenses to unaffiliated third parties. EA-1's former external advisor incurred transaction-related expenses of approximately $0.2 million, which was reimbursed by EA-1.
Upon consummation of the Mergers, the Company also temporarily suspendedissued 5,000,000 Series A Preferred Shares to the DRP offeringPurchaser. Pursuant to the Purchase Agreement, the Purchaser has agreed to purchase an additional 5,000,000 Series A Preferred Shares (the "Second Issuance") at a later date (the "Second Issuance Date") for an additional purchase price of $125.0 million subject to approval by the Purchaser’s internal investment committee and the SRP. Beginningsatisfaction of certain conditions set forth in January 2019, all distributionsthe Purchase Agreement. Pursuant to the Purchase Agreement, the Purchaser is generally restricted from transferring the Series A Preferred Shares or the economic interest in the Series A Preferred Shares for a period of five years from the applicable closing date.
The Company's Series A Preferred Shares are not registered under the Securities Act and are not listed on a national securities exchange. The articles supplementary filed by the Company were paid in cash. The SRP was officially suspendedrelated to the Series A Preferred Shares set forth the key terms of such shares as of January 19, 2019.follows:
On December 14, 2018, the Company, the Operating Partnership, Globe Merger Sub, LLC, a wholly owned subsidiary of the Company (“Merger Sub”), GCEAR, and the GCEAR Operating Partnership, entered into an Agreement and Plan of Merger (the “Merger Agreement”).Distributions
Subject to the terms and conditions of the Merger Agreement, (i) GCEAR will merge withapplicable articles supplementary, the holders of the Series A Preferred Shares are entitled to receive distributions quarterly in arrears at a rate equal to one-fourth (1/4) of the applicable varying rate, as follows:
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and into Merger Sub, with Merger Sub surviving as a direct, wholly owned subsidiaryexcluding per share amounts)
| | | | | |
| i. | 6.55% from and after the First Issuance Date, or if the Second Issuance occurs, 6.55% from and after the Second Issuance Date until the five year anniversary of the First Issuance Date, or if the Second Issuance occurs, the five year anniversary of the Second Issuance Date (the “Reset Date”), subject to paragraphs (iii) and (iv) below; |
| ii. | 6.75% from and after the Reset Date, subject to paragraphs (iii) and (iv) below; |
| iii. | if a listing of the Company's shares of Class E Common Stock or the Series A Preferred Shares on a national securities exchange registered under Section 6(a) of the Exchange Act, does not occur by August 1, 2020 (the “First Triggering Event”), 7.55% from and after August 2, 2020 and 7.75% from and after the Reset Date, subject to (iv) below and certain conditions as set forth in the articles supplementary; or |
| iv. | if such a listing does not occur by August 1, 2021, 8.05% from and after August 2, 2021 until the Reset Date, and 8.25% from and after the Reset Date. |
Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the Series A Preferred Shares will be entitled to be paid out of the Company's assets legally available for distribution to the stockholders, after payment of or provision for the Company's debts and other liabilities, liquidating distributions, in cash or property at its fair market value as determined by the Company's Board, in the amount, for each outstanding Series A Preferred Share equal to $25.00 per Series A Preferred Share (the “Company Merger”"Liquidation Preference"), plus an amount equal to any accumulated and (ii)unpaid distributions to the Operating Partnershipdate of payment, before any distribution or payment is made to holders of shares of common stock or any other class or series of equity securities ranking junior to the Series A Preferred Shares but subject to the preferential rights of holders of any class or series of equity securities ranking senior to the Series A Preferred Shares. After payment of the full amount of the Liquidation Preference to which they are entitled, plus an amount equal to any accumulated and unpaid distributions to the date of payment, the holders of Series A Preferred Shares will merge with and intohave no right or claim to any of the GCEAR Operating Partnership (the “Partnership Merger” and, together withCompany's remaining assets.
Company Redemption Rights
The Series A Preferred Shares may be redeemed by the Company, Merger,in whole or in part, at the “Mergers”Company's option, at a per share redemption price in cash equal to $25.00 per Series A Preferred Share (the "Redemption Price"), withplus any accumulated and unpaid distributions on the GCEAR Operating Partnership survivingSeries A Preferred Shares up to the Partnership Merger. Atredemption date, plus, a redemption fee of 1.5% of the Redemption Price in the case of a redemption that occurs on or after the date of the First Triggering Event, but before the date that is five years from the First Issuance Date.
Holder Redemption Rights
In the event the Company fails to effect a listing of the Company’s shares of common stock or Series A Preferred Shares by August 1, 2023, the holder of any Series A Preferred Shares has the option to request a redemption of such shares on or on any date following August 1, 2023, at the Redemption Price, plus any accumulated and unpaid distributions up to the redemption date (the "Redemption Right"); provided, however, that no holder of the Series A Preferred Shares shall have a Redemption Right if such a listing occurs prior to or on August 1, 2023.
Conversion Rights
Subject to the Company's redemption rights and certain conditions set forth in the articles supplementary, a holder of the Series A Preferred Shares, at his or her option, will have the right to convert such holder's Series A Preferred Shares into shares of the Company's common stock any time (x)after the earlier of (i) five years from the First Issuance Date, or if the Second Issuance occurs, five years from the Second Issuance Date or (ii) a Change of Control (as defined in the articles supplementary) at a per share conversion rate equal to the Liquidation Preference divided by the then Common Stock Fair Market Value (as defined in the articles supplementary).
Issuance of Restricted Stock Units to Executive Officers, Employees and Board of Directors
On May 1, 2019, the Company issued 1,009,415 restricted stock units (“RSUs") to the Company's officers under the Employee and Director Long-Term Incentive Plan of Griffin Capital Essential Asset REIT II, Inc. ("LTIP") Each RSU represents a contingent right to receive 1 share of the Company’s Class E common stock when settled in accordance with the applicable provisionsterms of the Maryland General Corporation Law,respective restricted stock unit award agreement and will vest in equal, 25% installments on each of December 31, 2019, 2020, 2021 and 2022, provided that such executive officer remains continuously employed by the separate existenceCompany on each such
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and (y)excluding per share amounts)
date, subject to certain accelerated vesting provisions as provided in the restricted stock unit award agreements. The shares of Class E common stock underlying the RSUs will not be delivered upon vesting, but instead will be deferred for delivery on May 1, 2023, or, if sooner, upon the executive officer's termination of employment. The fair value of grants issued was approximately $9.7 million.
On January 15, 2020, the Company issued 589,248 RSUs to Company employees, including officers, under the LTIP. Each RSU represents a contingent right to receive 1 share of the Company’s Class E common stock when settled in accordance with the Delaware Revised Uniform Limited Partnership Act, the separate existenceterms of the Operating Partnership shall cease. See Note 11, Commitmentsrespective restricted stock award agreement. The remaining RSUs are scheduled to vest in equal, 25% installments on each of December 31, 2021, 2022 and Contingencies, for additional details.2023 provided that the employee continues to be employed by the Company on each such date, subject to certain accelerated vesting provisions as provided in the respective restricted stock unit award agreement. The fair value of grants issued was approximately $5.5 million. Forfeitures on the Company's restricted stock units are recognized as they occur.
2. Basis of PresentationOn January 22, 2021, the Company issued 1,071,347 RSUs to Company employees, including officers, under the Griffin Realty Trust, Inc. Amended and Summary of Significant Accounting Policies
The accompanying consolidated financial statementsRestated Employee and Director Long-Term Incentive Plan (the “Amended and Restated LTIP”). Each RSU represents a contingent right to receive 1 share of the Company are prepared by management on the accrual basis of accounting andCompany’s Class E common stock when settled in accordance with generally accepted accounting principlesthe terms of the respective RSU agreement and 1/3 of the RSUs are scheduled to vest equally on each of December 31, 2021, 2022, and 2023 provided that the employee continues to be employed by the Company on each such date, subject to certain accelerated vesting provisions as provided in the United States (“GAAP”)respective RSU agreement. The fair value of grants issued was approximately $9.6 million.
On March 1, 2021, the Company issued 3,901 shares of restricted stock as containedan initial equity grant to each of the 3 former directors of CCIT II who were appointed to the Board in connection with the CCIT II Merger. The shares of restricted stock vested fully upon issuance.
On March 25, 2021, the Company issued 547,908 RSUs to Company employees, including officers, under the Amended and Restated LTIP. Each RSU represents a contingent right to receive 1 share of the Company’s Class E common stock when settled in accordance with the terms of the respective RSU agreement and 1/4 of the RSUs are scheduled to vest equally on each of March 25, 2022, 2023, 2024, and 2025, provided that the employee continues to be employed by the Company on each such date, subject to certain accelerated vesting provisions as provided in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”),respective RSU agreement. The fair value of grants issued was approximately $4.9 million.
On June 15, 2021, the Company issued 49,614 shares of restricted stock to each of the Company’s independent directors. The fair value of grants issued was approximately $0.4 million. The shares of restricted stock vested 50% upon issuance and the remaining will vest one year from the grant date.
As of December 31, 2021, there was $13.1 million of unrecognized compensation expense remaining, which vests between two and four years.
Total compensation expense for the year ended December 31, 2021 and 2020 was approximately $7.5 million and $5.2 million, respectively.
| | | | | | | | | | | | | | |
| | Number of Unvested Shares of RSU Awards | | Weighted-Average Grant Date Fair Value per Share |
| Balance at December 31, 2019 | | 757,061 | | | |
| Granted | | 589,248 | | | $ | 9.35 | |
| Forfeited | | (3,744) | | | $ | 9.35 | |
| Vested | | (398,729) | | | $ | 9.48 | |
| Balance at December 31, 2020 | | 943,836 | | | |
| Granted | | 1,619,255 | | | $ | 8.97 | |
| Forfeited | | (222,367) | | | $ | 9.10 | |
| Vested | | (812,111) | | | $ | 9.24 | |
| Balance at December 31, 2021 | | 1,528,613 | | | |
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
Distributions
Earnings and profits, which determine the taxability of distributions to stockholders, may differ from income reported for financial reporting purposes due to the differences for federal income tax purposes in the treatment of loss on debt, revenue recognition and compensation expense and in conjunction with rulesthe basis of depreciable assets and regulations ofestimated useful lives used to compute depreciation expense.
The following unaudited table summarizes the Securities and Exchange Commission ("SEC"). The consolidated financial statements include accounts and related adjustments, which are, in the opinion of management, of a normal recurring nature and necessaryfederal income tax treatment for a fair presentation of the Company's financial position, results of operations and cash flowsall distributions per share for the years ended December 31, 20182021, 2020, and 2017.2019 reported for federal tax purposes and serves as a designation of capital gain distributions, if applicable, pursuant to Code Section 857(b)(3)(C) and Treasury Regulation §1.857-6(e).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Ordinary income | | $ | 0.03 | | 9 | % | | $ | 0.13 | | 33 | % | | $ | 0.22 | | 37 | % |
| Capital gain | | — | | — | % | | — | | — | % | | 0.08 | | 13 | % |
| Return of capital | | 0.32 | | 91 | % | | 0.27 | | 67 | % | | 0.30 | | 50 | % |
| Total distributions paid | | $ | 0.35 | | 100 | % | | $ | 0.40 | | 100 | % | | $ | 0.60 | | 100 | % |
10.Noncontrolling Interests
Noncontrolling interests represent limited partnership interests in the GRT OP in which the Company is the general partner. General partnership units and limited partnership units of the GRT OP were issued as part of the initial capitalization of the GRT OP and GCEAR II Operating Partnership, in conjunction with members of management's contribution of certain assets, other contributions, and in connection with the self-administration transaction as discussed in Note 1, Organization.
As of December 31, 2021, noncontrolling interests were approximately 9.0% of total shares and 9.2% of weighted average shares outstanding (both measures assuming GRT OP Units were converted to common stock). The Company has evaluated the terms of the limited partnership interests in the GRT OP, and as a result, has classified limited partnership interests issued in the initial capitalization, in conjunction with the contributed assets and in connection with the self-administration transaction, as noncontrolling interests, which are presented as a component of permanent equity, except as discussed below.
The consolidated financial statements ofCompany evaluates individual noncontrolling interests for the Company include all accounts ofability to recognize the Company, the Operating Partnership, and its subsidiaries. Intercompany transactions are not shownnoncontrolling interest as permanent equity on the consolidated statements. However,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.
As of December 31, 2021, the limited partners of the GRT OP owned approximately $31.8 million GRT OP Units, which were issued to affiliated parties and unaffiliated third parties in exchange for the contribution of certain properties to the Company, and in connection with the self-administration transaction and other services In addition, 0.2 million GRT OP Units were issued to unaffiliated third parties unrelated to property contributions. To the extent the contributors should elect to redeem all or a portion of their GRT OP 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 GRT OP Units in the respective transaction.
The limited partners of the GRT OP, 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 GRT OP, the Company, to redeem their GRT OP Units for cash equal to the value of an equivalent number of shares, or, at the Company’s option, purchase their GRT OP Units by issuing 1 share of the Company’s common stock for the original redemption value of each limited partnership unit redeemed. The Company has the control and ability to settle such requests in shares. These rights may not be exercised under certain circumstances which could cause the Company to lose its REIT election.
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
The following summarizes the activity for noncontrolling interests recorded as equity for the years ended December 31, 2021 and 2020:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Beginning balance | $ | 226,550 | | | $ | 245,040 | |
| | | |
| Reclass of noncontrolling interest subject to redemption | (159) | | | 224 | |
| Repurchase of noncontrolling interest | — | | | (1,137) | |
| Issuance of stock dividend for noncontrolling interest | — | | | 1,068 | |
| Distributions to noncontrolling interests | (10,942) | | | (13,306) | |
| Allocated distributions to noncontrolling interests subject to redemption | (18) | | | (29) | |
| Net income (loss) | 66 | | | (1,732) | |
| Other comprehensive loss | 3,156 | | | (3,578) | |
| Ending balance | $ | 218,653 | | | $ | 226,550 | |
Noncontrolling interests subject to redemption
Operating partnership units issued pursuant to the Will Partners property owning entity is a wholly owned subsidiary which is a special purpose entity ("SPE"), whose assets and creditcontribution are not availableincluded in permanent equity on the consolidated balance sheets. The partners holding these units can cause the general partner to satisfyredeem the debts or obligationsunits for the cash value, as defined in the GRT OP 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.
11. Related Party Transactions
Summarized below are the related party transaction costs incurred by the Company for the years ended December 31, 2021, 2020 and 2019, respectively, and any related amounts receivable and payable as of any other entity, except to the extent required with respect to any co-borrower or guarantor under the same credit facility.December 31, 2021 and 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Incurred for the Year Ended December 31, | | Receivable as of December 31, |
| 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| Assets Assumed through the Self-Administration Transaction | | | | | | | | | |
| Cash to be received from an affiliate related to deferred compensation and other payroll costs | $ | — | | | $ | — | | | $ | 658 | | | $ | — | | | $ | — | |
| Other fees | — | | | 243 | | | — | | | — | | | 293 | |
| Due from GCC | | | | | | | | | |
| Reimbursable Expense Allocation | 20 | | | 15 | | | 4 | | | 11 | | | 4 | |
| Payroll/Expense Allocation | 19 | | | 653 | | | 481 | | | 260 | | | 1,114 | |
| Due from Affiliates | | | | | | | | | |
| Payroll/Expense Allocation | — | | | — | | | 1,217 | | | — | | | — | |
| O&O Costs (including payroll allocated to O&O) | — | | | — | | | 157 | | | — | | | — | |
Other Fees | — | | | — | | | 6,375 | | | — | | | — | |
| Total incurred/receivable | $ | 39 | | | $ | 911 | | | $ | 8,892 | | | $ | 271 | | | $ | 1,411 | |
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Incurred for the Year Ended December 31, | | Payable as of December 31, |
| 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| Expensed | | | | | | | | | |
| Operating expenses | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,085 | |
| Asset management fees | — | | | — | | | — | | | — | | | 695 | |
| | | | | | | | | |
| Disposition fees | — | | | — | | | 641 | | | — | | | — | |
| Costs advanced by the advisor | 2,275 | | | 2,000 | | | 3,771 | | | 929 | | | — | |
| Consulting fee - shared services | 2,520 | | | 2,500 | | | 2,500 | | | 461 | | | — | |
| Capitalized | | | | | | | | | |
| Acquisition fees | — | | | — | | | 942 | | | — | | | — | |
| Leasing commissions | — | | | — | | | 2,540 | | | — | | | — | |
| Assumed through Self- Administration Transaction/EA Mergers | | | | | | | | | |
| Earn-out | — | | | — | | | — | | | 197 | | | 262 | |
| Other Fees | — | | | — | | | 20 | | | — | | | — | |
| Stockholder Servicing Fee | — | | | — | | | 692 | | | 92 | | | 494 | |
| Other | | | | | | | | | |
| Distributions | 8,688 | | | 10,537 | | | 14,138 | | | 739 | | | 736 | |
| Total incurred/payable | $ | 13,483 | | | $ | 15,037 | | | $ | 25,244 | | | $ | 2,418 | | | $ | 3,272 | |
Revenue Recognition
Leases associated with the acquisition and contribution of certain real estate assets have net minimum rent payment increases during the term of the lease and are recorded to rental revenue on a straight-line basis, commencing as of the contribution or acquisition date. See Note 3, Real Estate, for more details. If a lease provides for contingent rental income, the Company will defer the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved.
Tenant reimbursement revenue, which is comprised of additional amounts collected from tenants for the recovery of certain operating expenses, including repair and maintenance, property taxes (excluding taxes paid by a lessee directly to a third party on behalf of the lessor) 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
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)
operating expenses for the year, pro ratedpro-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 least quarterly,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 the Recoverable Expenses incurred by the Company for the same period. The difference, if any, is either charged or credited to the tenant pursuant to the provisions of the lease. In certain instances, the lease may restrict the amount the Company can recover from the tenant such as a cap on certain or all property operating expenses.
Use of Estimates
The preparation of the 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.
Principles of Consolidation
The Company's financial statements, and the financial statements of the Company's Operating Partnership, including its wholly-owned subsidiaries, are consolidated in the accompanying consolidated financial statements. The portion of these entities not wholly-owned by the Company is presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments that are readily convertible to cash withIn a maturity of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents may include cash and short-term investments. Short-term investments are stated at cost, which approximates fair value. There were no cash equivalents, nor were there restrictions on the use of the Company’s cash balance as of December 31, 2018 and 2017.
The Company maintains its cash accounts with major financial institutions. The cash balances consist of business checking accounts. These accounts are insured by the Federal Deposit Insurance Corporation up to $250,000 at each institution. The Company has not experienced any losses with respect to cash balances in excess of government provided insurance. Management believes there was no significant concentration of credit risk with respect to these cash balances as of December 31, 2018.
Restricted Cash
In conjunction with acquisitions of certain assets, as required by certain lease provisions or certain lenders in conjunction with an acquisition or debt financing, or credits received by the seller of certain assets, the Company assumed or funded reserves for specific property improvements and deferred maintenance, re-leasing costs, and taxes and insurance, which are included on the consolidated balance sheets as restricted cash. As of December 31, 2018, the Company had approximately $12.9 million in restricted cash, which includes tenant improvement funds.
Real Estate Purchase Price Allocation
The Company applies the provisions in ASC 805-10, Business Combinations ("ASC 805-10"), to account for the acquisition of real estate, or real estate related assets,situation in which a lease associated with a significant tenant has been, or other contract, is expected to be, terminated early, or extended, the Company evaluates the remaining useful life of amortizable assets in place representing an active revenue stream, as anthe asset acquisition (in rare cases, a business combination)group related to the lease that will be terminated (i.e., above- and below-market lease intangibles, in-place lease value and deferred leasing costs). In accordanceBased upon consideration of the facts and circumstances surrounding the termination or extension, the Company may write-off or accelerate the amortization associated with the provisionsasset group. Such amounts are included within rental and other income for above- and below-market lease intangibles and amortization for the remaining lease related asset groups in the consolidated statements of ASC 805-10 (on an asset acquisition),operations.
Lease Accounting
On January 1, 2019, the Company recognizesadopted ASC 842 using the assets acquired,modified retrospective approach and elected to apply the liabilities assumed and any noncontrolling interest in the acquired entity at their relative fair values. The accounting provisions have also established that transaction costs associated with an asset acquisition are capitalized.
Acquired in-place leases are valued as above-market or below-market as of the date of acquisition.adoption on a prospective basis. Upon adoption of ASC 842, the Company elected the “package of practical expedients,” which allowed the Company to not reassess (a) whether expired or existing contracts as of January 1, 2019 are or contain leases, (b) the lease classification for any expired or existing leases as of January 1, 2019, and (c) the treatment of initial direct costs relating to any existing leases as of January 1, 2019. The valuationpackage of practical expedients was made as a single election and was consistently applied to all leases that commenced before January 1, 2019.
Lessor
ASC 842 requires lessors to account for leases using an approach that is measured based onsubstantially equivalent to ASC 840 for sales-type leases, direct financing leases, and operating leases. As the present value (using an interest rate, which reflectsCompany elected the risks associated withpackage of practical expedients, the Company's existing leases acquired)as of the difference between (a) the contractual amountsJanuary 1, 2019 continue to be paid pursuant to the in-place leases and (b) management’s estimate of fair market lease ratesaccounted for the corresponding in-place leases over a period equal to the remaining non-cancelable term of the lease
as operating leases.
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II,REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20182021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
for above-market leases, taking into consideration below-market extension options for below-market leases. In addition, renewal optionsUpon adoption of ASC 842, the Company elected the practical expedient permitting lessors to elect by class of underlying asset to not separate nonlease components (for example, maintenance services, including common area maintenance) from associated lease components (the “non-separation practical expedient”) if both of the following criteria are consideredmet: (1) the timing and will be included inpattern of transfer of the valuation of in-place leases if (1) it is likely thatlease and non-lease component(s) are the tenant will exercise the option,same and (2) the renewal rent is considered tolease component would be sufficiently below a fair market rental rate at the time of renewal. The above-market and below-market lease values are capitalized as intangible lease assets or liabilities and amortizedclassified as an adjustmentoperating lease if it were accounted for separately. If both criteria are met, the combined component is accounted for in accordance with ASC 842 if the lease component is the predominant component of the combined component; otherwise, the combined component is accounted for in accordance with the revenue recognition standard. The Company assessed the criteria above with respect to the Company's operating leases and determined that they qualify for the non-separation practical expedient. As a result, the Company accounted for and presented all rental income overearned pursuant to operating leases, including property expense recovery, as a single line item, “Rental income,” in the remaining termsconsolidated statement of operations for all periods presented. Prior to the adoption of ASC 842, the Company presented rental income, property expense recovery and other income related to leases separately in the Company's consolidated statements of operations.
Under ASC 842, lessors are required to record revenues and expenses on a gross basis for lessor costs (which include real estate taxes) when these costs are reimbursed by a lessee. Conversely, lessors are required to record revenues and expenses on a net basis for lessor costs when they are paid by a lessee directly to a third party on behalf of the respective leases.
The aggregate relative fair valuelessor. Prior to the adoption of in-place leases includes direct costs associated with obtainingASC 842, the Company recorded revenues and expenses on a new tenant, opportunity costs associated with lost rentals, which are avoided by acquiring an in-place lease, and tenant relationships. Direct costs associated with obtaining a new tenant include commissions, tenant improvements, and other direct costs and are estimated using methods similar to those used in independent appraisals and management’s consideration of current market costs to execute a similar lease. These direct costs are considered intangible lease assets and are included with real estate assets on the consolidated balance sheets. The intangible lease assets are amortized to expense over the remaining terms of the respective leases. The value of opportunity costs is calculated using the contractual amounts to be paid, includinggross basis for real estate taxes insurance, and other operating expenses, pursuantwhether they were reimbursed to the in-placeCompany by a tenant or paid directly by a tenant to the taxing authorities on the Company's behalf. Effective January 1, 2019, the Company is recording these costs in accordance with ASC 842.
Lessee
ASC 842 requires lessees to recognize the following for all leases over(with the exception of short-term leases) at the commencement date: (1) a market lease-up periodlease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset (“ROU asset”), which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for a similar lease. Customer relationships are valuedthe lease term. ASC 842 also requires lessees to classify leases as either finance or operating leases based on management’s evaluation of certain characteristics of each tenant’swhether or not the lease and the Company’s overall relationship with that respective tenant. Characteristics management will consider in allocating these values include the nature and extentis effectively a financed purchase of the Company’s existing business relationships with tenants, growth prospects for developing new business withleased asset by the tenant,lessee. This classification is used to evaluate whether the tenant’s credit quality and expectations of lease renewals (including those existing underexpense should be recognized based on an effective interest method or on a straight-line basis over the termsterm of the lease.
On January 1, 2019, the Company was the lessee on 2 ground leases, which were classified as operating leases under ASC 840. As the Company elected the packages of practical expedients, the Company is not required to reassess the classification of these existing leases and, as such, these leases continue to be accounted for as operating leases.
On January 1, 2019, the Company recognized ROU assets and lease agreement), among other factors. These intangibles will be included in intangible lease assetsliabilities for these leases on the Company's consolidated balance sheets, and are amortized toon a go-forward basis, lease expense will be recognized on a straight-line basis over the remaining term of the respective leases.
The determination of the relative fair values of the assets and liabilities acquired requires the use of significant assumptions about current market rental rates, rental growth rates, discount rates and other variables.
Depreciation and Amortization
The purchase price of real estate acquired and the 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 | | 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,lease. On January 1, 2019, the Company will accelerate the remaining useful liferecorded a ROU asset of the unamortized lease-related costs.
Impairment$25.5 million and a corresponding liability of Real Estate and Related Intangible Assets
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of real estate and related intangible assets may not be recoverable, including credit ratings 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 or lease guarantors) 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 pursuantapproximately $27.6 million relating to the lease; (3) monitoring news reports and press releases regarding the tenants (or their parent companies orCompany's existing ground lease guarantors), and their underlying business and industry; and (4) monitoring the timeliness of rent collections.
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)
When indicators of potential impairment are present that indicate that the carrying amounts of real estate and related intangible assets may not be recoverable, management assesses whether the carrying value of the assets will be recovered through the future undiscountedarrangements. These operating cash flows expected from the use of the assets and the eventual disposition. If,leases were recognized based on this analysis, the Company does not believe that it will be able to recover the carrying value of the asset, the Company will record an impairment charge to the extent the carrying value exceeds the net present value of the estimated future cash flowsminimum lease payments over the lease term. As these leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available in determining the present value of future payments. The discount rate used to determine the present value of these operating leases’ future payments was 5.36%. There was no impact to beginning equity as a result of the asset.
Projections of expected future undiscounted cash flows require management to estimate future market rental income amounts subsequentadoption related to the expirationlessee accounting as the difference between the asset and liability is attributed to derecognition of current lease agreements, property operating expenses, discount rates, the numberpre-existing straight-line rent balances.
Upon adoption of months it takes to re-lease the property and the number of years the property is held for investment. For the year ended December 31, 2018,ASC 842, the Company didalso elected the practical expedient to not record any impairment charges related to its real estate assets or intangible assets.separate non-lease components, such as common area maintenance, from associated lease components for the Company's ground and office space leases.
Derivative Instruments and Hedging Activities
ASC Topic 815: 815, Derivatives and HedgingHedging ("ASC 815") provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments;instruments, (b) how the entity accounts for derivative instruments and related hedged items;items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, ASC 815 requires qualitative disclosures regarding the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by ASC 815, the Company recorded all derivatives on the consolidated balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, and whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. See Note 5, 6, Interest Rate Contracts., for more detail.
Income Taxes
The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"("Code") for the year ended December 31, 2015. . To qualify as a REIT, the Company must meet certain organizational and operational requirements. The Company intends to adhere to these requirements including a requirement to currently distribute at least 90% ofand maintain its REIT status for the REIT’s ordinary taxable income to stockholders.current year and subsequent years. As a REIT, the Company generally will not be subject to federal income taxtaxes on taxable income that is distributed to stockholders. However, the Company may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed taxable income, if any. If the Company fails to qualify as a REIT in any taxable year, after the Company initially qualifies to be taxed as a REIT, the Company will then be subject to federal income taxes on the taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service ("IRS") grants the Company relief under certain statutory provisions. Such an event could materially adversely affect net income and net cash available for distribution to stockholders. However,As of December 31, 2021, the Company believes that it is organizedsatisfied the REIT requirements and will operate in such a manner asdistributed all of its taxable income.
Pursuant to qualify for treatment as a REIT and intends to operate in the foreseeable future in such a manner that it will remain qualified as a REIT for federal income tax purposes.
The Company could engage in certain business activities that could have an adverse effect on its REIT qualification. TheCode, the Company has elected to isolate these business activities in the books and records of thetreat its corporate subsidiary as a TRS. In general, the TRS may perform additionalnon-customary services for the Company’s tenants and generally may engage in any real estate or non-real estate relatedestate-related business.
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)
The TRS will be subject to corporate federal and state income tax. As
Goodwill
Goodwill represents the excess of December 31, 2018,consideration paid over the TRSfair value of underlying identifiable net assets of business acquired. The Company's goodwill has an indeterminate life and is not commenced operations.amortized, but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company takes a qualitative approach to consider whether an impairment of goodwill exists prior to quantitatively determining the fair value of the reporting unit in step one of the impairment test. The Company performs its annual assessment on October 1st.
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 unaudited consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.
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. AsUnvested RSUs that contain non-forfeitable rights to dividends are participating securities and are included in the computation of December 31, 2018 and December 31, 2017, there were no material common stock equivalents that would have a dilutive effect on earnings (loss) per share for common stockholders.
The Company retroactively adjusted the number of common shares outstanding in accordance with ASC 260-10, Earnings per Share ("ASC 260-10"). ASC 260-10 requires retroactively adjusting the computations of basic and diluted earnings per share for all periods presentedpursuant to reflect the change in capital structure, iftwo-class method. The effect of including unvested restricted stock using the numbertreasury stock method was excluded from our calculation of weighted average shares of common stock outstanding – diluted, as the inclusion would have been anti-dilutive for the years ended December 31, 2021, 2020 and 2019. Total excluded shares outstanding increases as a resultwere 1,350,335, 453,335, and 101,375 for the years ended December 31, 2021, 2020, and 2019, respectively.
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in common stock resulting from stock dividends, stock splits, or reverse stock splits occur after the close of the period but before the consolidated financial statements are issued or are available to be issued, the per-share computations for thosethousands unless otherwise noted and any prior-period consolidated financial statements presented shall be based on the new number of shares.excluding per share amounts)
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 one1 reportable segment.
Unaudited Data
Any references to the number of buildings, square footage, number of leases, occupancy, and any amounts derived from these values in the notes to the consolidated financial statements are unaudited and outside the scope of the Company's independent registered public accounting firm's audit of its consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board.Board ("PCAOB").
Recently Issued Accounting Pronouncements
In February 2016,Changes to GAAP are established by the FASB in the form of ASUs to the FASB’s Accounting Standards Codification. The Company considers the applicability and impact of all ASUs. Other than the ASUs discussed below, the FASB has not recently issued any other ASUs that the Company expects to be applicable and have a material impact on the Company's financial statements.
Adoption of New Accounting Pronouncements
During the first quarter of 2020, the FASB issued ASU No. 2016-02, Leases ("ASU No. 2016-02")2020-04, Reference Rate Reform (Topic 848). ASU No. 2016-02 amends2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU No. 2016-02 will direct how first quarter of 2020, the Company accounts for payments fromelected to apply the elements of leases that are generally fixed and determinable at the inception of the lease (“Fixed Lease Payments”) while ASU No. 2014-09 (defined below) will direct how the Company accounts for the non-lease components of lease contracts, primarily expense reimbursements (“Non-Lease Payments”)hedge accounting expedients related to probability and the accountingassessments of effectiveness for future LIBOR-indexed cash flows to assume that the disposition of real estate facilities. ASU No. 2016-02index upon which future hedged transactions will be effective beginning inbased matches the first quarter of 2019. Early adoption of ASU No. 2016-02 as of its issuance is permitted.
ASU No. 2016-02 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. Basedindex on the required adoption datecorresponding derivatives. Application of January 1, 2019,these expedients preserves the modified retrospective method for ASU No. 2016-02 requires applicationpresentation of the standardderivatives consistent with past presentation. The Company continues to all leases that exist at, or commence after, January 1, 2017 (beginning of the earliest comparative period presented in the 2019 financial statements), with a cumulative adjustment to the opening balance of accumulated earnings (deficit) on January 1, 2017, for the effect of applying the standard at the date of initial application, and restatement of the amounts presented prior to January 1, 2019.
The FASB has also issued an amendment to the standard that would provide an entity an optional transition method to initially account forevaluate the impact of the adoption of the standard with a cumulative adjustment to accumulated earnings (deficit) on January 1, 2019 (the effective date of ASU No. 2016-02), rather than January 1, 2017, which would eliminate the
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise notedguidance and excluding per share amounts)
need to restate amounts presented prior to January 1, 2019. Under ASU No. 2016-02, an entity may elect a practical expedient package, which states that: (1) an entity need not reassess whether any expired or existing contracts are leases or contain leases; (2) an entity need not reassess the lease classification for any expired or existing leases; and (3) an entity need not reassess initial direct costs for any existing leases. These three practical expedients are availableapply other elections as a single election that must be electedapplicable as a package and must be consistently applied to all existing leases at the date of adoption. The FASB has also tentatively noted in May 2017 board meeting minutes that lessors that adopt this package of practical expedients are not expected to reassess expired or existing leases at the date of initial application, which is January 1, 2017 under ASU No. 2016-02, or January 1, 2019, if the Company elects the optional transition method. The FASB noted that the transition provisions generally enable entities to “run off” their existing leases for the remainder of the lease term, which would effectively eliminate the need to calculate adjustment to the opening balance of accumulated earnings (deficit).
In July 2018, the FASB approved an amendment to the ASU to allow lessors to elect, as a practical expedient, not to allocate the total consideration to lease and non-lease components based on their relative standalone selling prices. The single-lease component practical expedient allows lessors to elect a combined single-lease component presentation if (1) the timing and pattern of transfer of the lease component and the non-lease component(s) associated with it are the same, and (2) the lease component would be classified as an operating lease if it were accounted for separately. Non-lease components that do not meet the criteria of this practical expedient and combined components in which the non-lease component is the predominant component will be accounted for under the new revenue recognition ASU.
The Company does not expect that ASU No. 2016-02 will impact the Company's accounting for Fixed Lease Payments because the Company's accounting policy is currently consistent with the provisions of the standard. The Company plans to elect the practical expedient mentioned above, which will treat payments for expense reimbursements that qualify as Non-Lease Payments and meet the criteria above as a single lease component. Under ASU No. 2016-02, reimbursements relating to property taxes and insurances are Fixed Lease Payments as the payments relates to the right to use the leased assets, while reimbursements relating to maintenance activities and common area expense are Non-Lease Payments and would be accounted under ASU No. 2016-02, assuming the Non-Lease Payments meet the criteria above.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”). ASU No. 2014-09 replaces substantially all industry-specific revenue recognition requirements and converges areas under this topic with International Financial Reporting Standards. ASU No. 2014-09 implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. ASU No. 2014-09 also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers. Other major provisions in ASU No. 2014-09 include capitalizing and amortizing certain contract costs, ensuring the time value of money is consideredadditional changes in the applicable transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. ASU No. 2014-09 was originally effective for reporting periods beginning after December 31, 2016 (for public entities). On April 1, 2015, the FASB voted to defer the effective date of ASU No. 2014-09 by one year to annual reporting periods beginning after December 15, 2017. On July 9, 2015, the FASB affirmed its proposal to defer the effective date to annual reporting periods beginning after December 15, 2017, although entities may elect to adopt the standard as of the original effective date. The Company adopted the guidance using the modified retrospective approach for the fiscal year beginning January 1, 2018. The impact was minimal upon adoption of the new accounting guidance on its consolidated financial statements relating to the recognition of gains and losses on the sale of real estate assets as the Company’s current accounting for such transactions is consistent with the new guidance’s core principle. Rental income from leasing arrangements is a substantial portion of the Company’s revenue, is specifically excluded from ASU No. 2014-09 and will be governed by the applicable lease codification ASU No. 2016-02.market occur.
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments clarify how an entity should identify the unit of accounting (i.e., the specified good or service) for the principal versus agent evaluation, and how it should apply the control principle to certain types of arrangements, such as service transactions, by explaining what a principal controls before the specified good or service is transferred to the customer. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements of ASU No. 2014-09 described above. The Company adopted the guidance using the modified retrospective approach for the fiscal year beginning January 1, 2018. The impact was minimal upon adoption of the new accounting guidance on its consolidated financial statements relating to the recognition of reporting
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)
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 December 31, 2018,2021, the Company'sCompany’s real estate portfolio consisted of 27121 properties (35 buildings)(including one land parcel held for future development), in 1726 states consisting substantially of office, industrial, distribution, and data centermanufacturing facilities with a combined acquisition value of $1.1approximately $5.3 billion, including the allocation of the purchase price to above-marketabove and below-market lease valuation, encompassing approximately 7.3 million square feet.valuation.
Depreciation expense for buildings and improvements for the yearyears ended December 31, 20182021, 2020, and 2019 was $20.5 million.$125.4 million, $94.0 million, and $80.4 million, respectively. Amortization expense for intangibles, including but not limited to, tenant origination and absorption costs for the yearyears ended December 31, 20182021, 2020, and 2019 was $24.2 million.$84.2 million, $67.1 million and $73.0 million respectively.
Future Minimum Contractual Rent Payments2021 Acquisitions
CCIT II Merger
The
future minimum contractual rent payments pursuantCCIT II Merger was accounted for as an asset acquisition under ASC 805, with the Company treated as the accounting acquirer. The total purchase price was allocated to the
current lease terms are shownindividual assets acquired and liabilities assumed based upon their relative fair values. Intangible assets were recognized at their relative fair values in
the table below. The Company's current leases have expirations ranging from 2020 to 2044. |
| | | |
| | As of December 31, 2018 |
| 2019 | $ | 78,887 |
|
| 2020 | 80,492 |
|
| 2021 | 72,677 |
|
| 2022 | 73,538 |
|
| 2023 | 71,308 |
|
| Thereafter | 457,495 |
|
| Total | $ | 834,397 |
|
Intangibles
The Company allocated a portionaccordance with ASC 350, Intangibles. Based on an evaluation of the acquired real estate asset value to in-place lease valuation and tenant origination and absorption cost. The in-place lease was measured against comparable leasing informationrelevant factors and the present valueguidance in ASC 805 requiring significant management judgment, the entity considered the acquirer for accounting purposes is also the legal acquirer. In order to make this consideration, various factors have been analyzed including which entity issued its equity interests, relative voting rights, existence of minority interests (if any), control of the difference betweenBoard, management composition, existence of a premium as it applies to the contractual, in-place rentexchange ratio, relative size, transaction initiation, operational structure, relative composition of employees, surviving brand and name, and other factors. The strongest factor identified was the fair market rent was calculated using, as the discount rate, the capitalization rate utilized to compute the valuerelative size of the real estate at acquisition. The intangible assets are amortized over the remaining lease terms of the respective properties, whichCompany as compared to CCIT II. Based on a weighted-average basis, was approximately 9.3 and 10.3 years as of December 31, 2018 and December 31, 2017, respectively. |
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| In-place lease valuation (above market) | $ | 4,046 |
| | $ | 4,046 |
|
| In-place lease valuation (above market), accumulated amortization | (1,123 | ) | | (752 | ) |
| Intangible assets, net | $ | 2,923 |
| | $ | 3,294 |
|
| In-place lease valuation (below market) | $ | (62,070 | ) | | $ | (62,070 | ) |
| In-place lease valuation (below market) - accumulated amortization | 15,841 |
| | 10,775 |
|
| In-place lease valuation (below market), net | $ | (46,229 | ) | | $ | (51,295 | ) |
| Tenant origination and absorption cost | $ | 240,364 |
| | $ | 240,364 |
|
| Tenant origination and absorption cost - accumulated amortization | (71,364 | ) | | (47,165 | ) |
| Tenant origination and absorption cost, net | $ | 169,000 |
| | $ | 193,199 |
|
financial
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II,REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20182021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
measures, the Company was a significantly larger entity than CCIT II and its stockholders hold the majority of the voting shares of the Company.
The assets (including identifiable intangible assets) and liabilities (including executory contracts and other commitments) of CCIT II as of the effective time of the CCIT II Merger were recorded at their respective relative fair values and added to those of the Company. Transaction costs incurred by the Company were capitalized in the period in which the costs were incurred and services were received. Intangible assets were recognized at their relative fair values in accordance with ASC 805. Upon the effective time of the CCIT II Merger on March 1, 2021, each of CCIT II's 67.1 million issued and outstanding shares of common stock were converted into the right to receive 1.392 newly issued shares of the Class E common stock of the Company (approximately 93.5 million shares). Total consideration transferred is calculated as such:
| | | | | |
| As of March 1, 2021 |
| CCIT II's common stock shares prior to conversion | 67,139,129 | |
| Exchange ratio | 1.392 |
| Implied GRT common stock issued as consideration | 93,457,668 | |
| GRT's Class E NAV per share in effect at March 1, 2021 | $ | 8.97 | |
| Total consideration | $ | 838,315 | |
The following table summarizes the final purchase price allocation based on a valuation report prepared by the Company's third-party valuation specialist that was subject to management's review and approval: | | | | | |
| March 1, 2021 |
| Assets: | |
| Cash assumed | $ | 2,721 | |
| Land | 143,724 | |
| Building and improvements | 992,779 | |
| Tenant origination and absorption cost | 152,793 | |
| In-place lease valuation (above market) | 11,591 | |
| Intangibles | 27,788 | |
| Other assets | 1,690 | |
| Total assets | $ | 1,333,086 | |
| Liabilities: | |
| Debt | $ | 415,926 | |
| In-place lease valuation (below market) | 10,026 | |
| Lease liability | 4,616 | |
| Accounts payable and other liabilities | 20,604 | |
| Total liabilities | $ | 451,172 | |
| Fair value of net assets acquired | 881,914 | |
| Less: GRT's CCIT II Merger expenses | 43,599 | |
| Fair value of net assets acquired, less GRT's CCIT II Merger expenses | $ | 838,315 | |
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
Merger-Related Expenses
In connection with the CCIT II Merger, the Company incurred various transaction and administrative costs. These costs included advisory fees, legal, tax, accounting, valuation fees, and other costs. These costs were capitalized as a component of the cost of the assets acquired.
The following is a breakdown of the Company's costs incurred related to the CCIT II Merger: | | | | | |
| Amount |
| Termination fee of the CCIT II advisory agreement | $ | 28,439 | |
| Advisory and valuation fees | 4,699 | |
| Legal, accounting and tax fees | 5,115 | |
| Other fees | 5,346 | |
| Total CCIT II Merger-related fees | $ | 43,599 | |
Real Estate - Valuation and Purchase Price Allocation
The Company allocates the purchase price to the relative fair value of the tangible assets of a property by valuing the property as if it were vacant. This “as-if vacant” value is estimated using an income, or discounted cash flow, approach that relies upon Level 3 inputs, which are unobservable inputs based on the Company's review of the assumptions a market participant would use. These Level 3 inputs include discount rates, capitalization rates, market rents and comparable sales data for similar properties. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. In calculating the “as-if vacant” value for the properties acquired during the year ended December 31, 2021, the Company used a discount rate of 5.75% to 8.75%.
In determining the fair value of intangible lease assets or liabilities, the Company also considers Level 3 inputs. Acquired above and below-market leases are valued based on the present value of the difference between prevailing market rates and the in-place rates measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases, if applicable. The estimated fair value of acquired in-place at-market tenant leases are the costs that would have been incurred to lease the property to the occupancy level of the property at the date of acquisition. Such estimates include the value associated with leasing commissions, legal and other costs, as well as the estimated period necessary to lease such properties that would be incurred to lease the property to its occupancy level at the time of its acquisition. Acquisition costs associated with asset acquisitions are capitalized during the period they are incurred.
The following table summarizes the purchase price allocation of the properties acquired during the year ended December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Acquisition | | Land | | | Building | | Improvements | | Tenant origination and absorption costs | | Other Intangibles | In-place lease valuation - above/(below) market | | Financing Leases | | Total (1) |
| CCIT II Properties | | $143,724 | (2) | | $958,166 | | $34,613 | | $152,793 | | $27,788 | $1,565 | | $(3,681) | | $1,314,968 |
(1)The allocations noted above are based on a determination of the relative fair value of the total consideration provided and represent the amount paid including capitalized acquisition costs.
(2)Approximately $5.6 million includes land allocation related to the Company's finance leases.
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
Intangibles
The Company allocated a portion of the acquired and contributed real estate asset value to in-place lease valuation, tenant origination and absorption cost, and other intangibles, net of the write-off of intangibles for the years ended December 31, 2021 and 2020:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| In-place lease valuation (above market) | $ | 49,578 | | | $ | 43,576 | |
| In-place lease valuation (above market) - accumulated amortization | (35,049) | | | (35,604) | |
| In-place lease valuation (above market), net | 14,529 | | | 7,972 | |
| | | |
| Ground leasehold interest (below market) | 2,254 | | | 2,254 | |
| Ground leasehold interest (below market) - accumulated amortization | (219) | | | (191) | |
| Ground leasehold interest (below market), net | 2,035 | | | 2,063 | |
| | | |
| Intangibles - other | 32,028 | | | 4,240 | |
| Intangibles - other - accumulated amortization | (5,492) | | | (4,240) | |
| Intangibles - other, net | 26,536 | | | — | |
| Intangible assets, net | $ | 43,100 | | | $ | 10,035 | |
| | | |
| In-place lease valuation (below market) | $ | (77,859) | | | $ | (68,334) | |
| Land leasehold interest (above market) | (3,072) | | | (3,072) | |
| In-place lease valuation & land leasehold interest - accumulated amortization | 50,634 | | | 44,073 | |
| Intangibles - other (above market) | (329) | | | — | |
| Intangible liabilities, net | $ | (30,626) | | | $ | (27,333) | |
| | | |
| Tenant origination and absorption cost | $ | 876,324 | | | $ | 740,489 | |
| Tenant origination and absorption cost - accumulated amortization | (473,893) | | | (412,462) | |
| Tenant origination and absorption cost, net | $ | 402,431 | | | $ | 328,027 | |
The intangible assets are amortized over the remaining lease term of each property, which on a weighted-average basis, was approximately 6.25 years and 6.83 years as of December 31, 2021 and 2020, respectively. The amortization of the intangible assets and other leasing costs for the respective periods is as follows: | | | | | | | | | | | | | | | | | |
| | Amortization (income) expense for the year ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Above and below market leases, net | $ | (1,323) | | | $ | (2,292) | | | $ | (3,201) | |
| Tenant origination and absorption cost | $ | 78,389 | | | $ | 62,459 | | | $ | 69,502 | |
| Ground leasehold amortization (below market) | $ | (349) | | | $ | (291) | | | $ | (52) | |
| Other leasing costs amortization | $ | 6,209 | | | $ | 4,908 | | | $ | 3,581 | |
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
|
| | | | | | | | | | | |
| | Amortization (income) expense for the year ended December 31, |
| | 2018 | | 2017 | | 2016 |
| In-place lease valuation | $ | (4,695 | ) | | $ | (4,573 | ) | | $ | (3,592 | ) |
| Tenant origination and absorption cost | $ | 24,199 |
| | $ | 23,756 |
| | $ | 16,264 |
|
The following table sets forth the estimated annual amortization (income) expense for in-place lease valuation, andnet, tenant origination and absorption costs, ground leasehold interest, and other leasing costs as of December 31, 20182021 for the next five years: | | | Year | | In-Place Lease Valuation | | Tenant Origination and Absorption Costs | Year | | In-place lease valuation, net | | Tenant origination and absorption costs | | Ground leasehold interest | | Other leasing costs |
| 2019 | | $ | (4,695 | ) | | $ | 24,198 |
| |
| 2020 | | $ | (4,695 | ) | | $ | 24,198 |
| |
| 2021 | | $ | (3,799 | ) | | $ | 19,715 |
| |
| 2022 | | $ | (3,774 | ) | | $ | 19,256 |
| 2022 | | $ | (1,954) | | | $ | 76,375 | | | $ | (290) | | | $ | 6,123 | |
| 2023 | | $ | (2,901 | ) | | $ | 16,502 |
| 2023 | | $ | (2,618) | | | $ | 68,638 | | | $ | (290) | | | $ | 6,197 | |
| 2024 | | 2024 | | $ | (1,768) | | | $ | 54,990 | | | $ | (291) | | | $ | 6,060 | |
| 2025 | | 2025 | | $ | (1,297) | | | $ | 43,368 | | | $ | (290) | | | $ | 6,007 | |
| 2026 | | 2026 | | $ | (1,151) | | | $ | 38,702 | | | $ | (290) | | | $ | 5,290 | |
4. DebtSale of Properties
On February 18, 2021, the Company sold the 2275 Cabot Drive property located in Lisle, Illinois for a total proceeds of $1.8 million, less closing costs and other closing credits. The property sold for an approximate amount equal to the carrying value.
AsOn April 12, 2021, the Company sold the 2200 Channahon Road property located in Joliet, Illinois for total proceeds of $11.5 million, less closing costs and other closing credits. The property sold for an approximate amount equal to the carrying value.
On June 8, 2021, the Company sold the Houston Westway I property located in Houston, Texas for total proceeds of $10.5 million, less closing costs and other closing credits. The property sold for an approximate amount equal to the carrying value.
Impairments
2200 Channahon Road and Houston Westway I
During the year ended December 31, 2018 and 2017,2021, the Company's debt and related deferred financing costs consistedCompany recorded an impairment provision of approximately $4.2 million as it was determined that the carrying value of the following:real estate would not be recoverable on 2 properties. This impairment resulted from changes in longer absorption periods, lower market rents and shorter anticipated hold periods. In determining the fair value of property, the Company considered Level 3 inputs. See Note 8,Fair Value Measurements, for details.
Restricted Cash
In conjunction with the acquisition of certain assets, as required by certain lease provisions or certain lenders in conjunction with an acquisition or debt financing, or credits received by the seller of certain assets, the Company assumed or funded reserves for specific property improvements and deferred maintenance, re-leasing costs, and taxes and insurance, which are included on the consolidated balance sheets as restricted cash. Additionally, an ongoing replacement reserve is funded by certain tenants pursuant to each tenant’s respective lease as follows:
| | | | | | | | | | | |
| Balance as of December 31, |
| 2021 | | 2020 |
| Cash reserves | $ | 15,234 | | | $ | 20,385 | |
| Restricted lockbox | 2,288 | | | 13,967 | |
| Total | $ | 17,522 | | | $ | 34,352 | |
|
| | | | | | | | | | | | | | | |
| | December 31, | | Contractual Interest Rate (1) | | Payment Type | | Loan Maturity | | Effective Interest Rate (2) |
| | 2018 | | 2017 | | | | |
| BofA/KeyBank Loan | $ | 250,000 |
| | $ | — |
| | 4.32% | | Interest Only | | May 2028 | | 4.42% |
| AIG Loan | 126,970 |
| | 126,970 |
| | 4.15% | | Interest Only (3) | | November 2025 | | 4.22% |
| Total Mortgage Debt | 376,970 |
| | 126,970 |
| | | | | | | | |
| Term Loan | 113,000 |
| | — |
| | LIBOR + 1.25%(4) | | Interest Only | | June 2023 | | 3.67% |
| Revolving Credit Facility | 85 |
| | 357,758 |
| | LIBOR + 1.30%(4)(5) | | Interest Only | | June 2023(6) | | 3.89% |
| Total Debt | 490,055 |
| | 484,728 |
| | | | | | | | |
| Unamortized deferred financing costs | (8,100 | ) | | (2,880 | ) | | | | | | | | |
| Total Debt, net | $ | 481,955 |
| | $ | 481,848 |
| | | | | | | | |
| |
(1) | The weighted average interest rate as of December 31, 2018 was approximately 4.15% for the Company's fixed-rate and variable-rate debt combined. |
| |
(2) | Includes the effect of amortization of deferred financing costs. |
| |
(3) | The AIG Loan (as defined below) requires monthly payments of interest only, at a fixed rate, for the first five years and fixed monthly payments of principal and interest thereafter. |
| |
(4) | The London Interbank Offered Rate ("LIBOR") as of December 31, 2018 was 2.35%. |
| |
(5) | As discussed below, the Company entered into an amended and restated credit agreement in June 2018. The contractual interest rate on the original |
revolving credit facility was LIBOR + 1.50% as of March 31, 2018.
| |
(6) | The Revolving Credit Facility (as defined below) has an initial term of four years, maturing on June 28, 2022, and may be extended for a one-year period if certain conditions are met and upon payment of an extension fee. See discussion below. |
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II,REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20182021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
4.Investments in Unconsolidated Entities
AmendedThe interests discussed below are deemed to be variable interests in VIEs and, Restated Credit Agreementbased on an evaluation of the variable interests against the criteria for consolidation, the Company determined that it is not the primary beneficiary of the investments, as the Company does not have power to direct the activities of the entities that most significantly affect their performance. As such, the interest in the VIEs is recorded using the equity method of accounting in the accompanying consolidated financial statements. Under the equity method, the investments in the unconsolidated entities are 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. The Company's maximum exposure to losses associated with its unconsolidated investments is primarily limited to its carrying value in the investments.
On June 28, 2018,Digital Realty Trust, Inc.
In September 2014, the Company, through an SPE wholly-owned by the Operating Partnership, entered intoGRT OP, acquired an amended80% interest in a joint venture with an affiliate of Digital Realty Trust, Inc. ("Digital") 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 restated credit agreementmaintaining a data center facility located in Ashburn, Virginia (the "Amended and Restated Credit Agreement""Digital Property") related to a revolving credit facility and a term loan (collectively,.
In September 2014, the "Unsecured Credit Facility") with a syndicate of lenders, under which KeyBank, National Association ("KeyBank") serves as administrative agent, and various notes related thereto. In addition, the Companyjoint venture entered into a guaranty agreement.
Pursuant to the Amended and Restated Credit Agreement, the Company was provided with a revolving credit facility (the "Revolving Credit Facility") in an initial commitment amount of up to $550.0 million and asecured term loan (the "Term"Digital Loan") in an initial commitmentthe amount of approximately $102.0 million. The Digital Loan had an original maturity date of September 9, 2019 and included 2 extension options of 12 additional months each beyond the original maturity date. On March 29, 2019, the joint venture executed the first 12-month loan extension. Based on the executed extension, the new loan maturity date was September 9, 2020. The extension did not change the loan amount, rate or other substantive terms. The members were also required to issue a $10.2 million stand-by letter of credit, of which the Company's portion was $8.2 million.
Since the tenant did not execute a long term extension or sign a new lease with the joint venture, the joint venture elected not to accept the loan extension terms offered by the lender and subsequent discussions did not result in an additional loan extension in 2020. As a result, on September 9, 2020, the lender provided a notice of default for non-payment of the unpaid balance of the non-recourse Digital Loan and exercised its right to draw on the stand-by letter of credit. The Company funded the $8.2 million stand-by letter of credit with cash.
As part of the wind up to $200.0of the joint venture, the Company had recorded a receivable from the Digital managing member of $4.1 million. The $4.1 million which commitments may be increased under certain circumstances up to a maximum total commitment of $1.25 billion. Any increasepayment was received in April 2021 and the Company has written off its remaining investment in the venture. In April 2021, the lender sold the Digital Loan and concurrently, the Digital-GCEAR 1 (Ashburn) joint venture executed a deed in lieu thereby extinguishing any further obligations. The Company is not exposed to any future funding obligations and there are no other future losses expected to arise from this investment.
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
5. Debt
As of December 31, 2021 and 2020, the Company’s debt consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | | Contractual Interest Rate (1) | | Loan Maturity (4) | | Effective Interest Rate (2) |
| 2021 | | 2020 | | | |
| HealthSpring Mortgage Loan | $ | 19,669 | | | $ | 20,208 | | | 4.18% | | April 2023 | | 4.63% |
| Midland Mortgage Loan | 95,792 | | | 98,155 | | | 3.94% | | April 2023 | | 4.12% |
| Emporia Partners Mortgage Loan | — | | | 1,627 | | | —% | | — | | —% |
| Samsonite Loan | 19,114 | | | 20,165 | | | 6.08% | | September 2023 | | 5.03% |
| Highway 94 Loan | 13,732 | | | 14,689 | | | 3.75% | | August 2024 | | 4.87% |
| Pepsi Bottling Ventures Loan | 18,218 | | | 18,587 | | | 3.69% | | October 2024 | | 3.92% |
| AIG Loan II | 124,606 | | | 126,792 | | | 4.15% | | November 2025 | | 4.94% |
| BOA Loan | 375,000 | | | 375,000 | | | 3.77% | | October 2027 | | 3.91% |
| BOA/KeyBank Loan | 250,000 | | | 250,000 | | | 4.32% | | May 2028 | | 4.14% |
| AIG Loan | 101,884 | | | 103,870 | | | 4.96% | | February 2029 | | 5.07% |
| Total Mortgage Debt | 1,018,015 | | | 1,029,093 | | | | | | | |
Revolving Credit Facility (3) | 373,500 | | | 373,500 | | | LIBO Rate + 1.45% | | June 2023 | | 1.67% |
| 2023 Term Loan | 200,000 | | | 200,000 | | | LIBO Rate + 1.40% | | June 2023 | | 1.59% |
| 2024 Term Loan | 400,000 | | | 400,000 | | | LIBO Rate + 1.40% | | April 2024 | | 1.58% |
| 2025 Term Loan | 400,000 | | | — | | | LIBO Rate + 1.40% | | December 2025 | | 1.82% |
| 2026 Term Loan | 150,000 | | | 150,000 | | | LIBO Rate + 1.40% | | April 2026 | | 1.55% |
| Total Debt | 2,541,515 | | | 2,152,593 | | | | | | | |
| Unamortized Deferred Financing Costs and Discounts, net | (9,138) | | | (12,166) | | | | | | | |
| Total Debt, net | $ | 2,532,377 | | | $ | 2,140,427 | | | | | | | |
(1)Including the effect of the interest rate swap agreements with a total commitment will be allocated tonotional amount of $750.0 million the Revolving Credit Facility and/orweighted average interest rate as of December 31, 2021 was 3.18% for both the Term Loan in such amountsCompany’s fixed-rate and variable-rate debt combined and 3.86% for the Company’s fixed-rate debt only.
(2)Reflects the effective interest rate as of December 31, 2021 and includes the Operating Partnershipeffect of amortization of discounts/premiums and KeyBank may determine.The Revolving Credit Facility may be prepaid and terminated, in whole or in part, at any time without fees or penalty.deferred financing costs.
(3)The LIBO rate as of December 1, 2021 (effective date) was 0.10%. The Revolving Credit Facility has an initial term of four years,approximately six months, maturing on June 28, 2022. The Revolving Credit Facility2022, and may be extended for a one-year period if certain conditions are met and the Operating Partnership paysupon payment of an extension fee. PaymentsSee discussion below.
(4)Reflects the loan maturity as of December 31, 2021.
Second Amended and Restated Credit Agreement
Pursuant to the Second Amended and Restated Credit Agreement dated as of April 30, 2019 (as amended by the First Amendment to the Second Amended and Restated Credit Agreement dated as of October 1, 2020, the Second Amendment to the Second Amended and Restated Credit Agreement dated as of December 18, 2020, and the Third Amendment to the Second Amended and Restated Credit Agreement dated as of July 14, 2021 (the “Third Amendment”), the “Second Amended and Restated Credit Agreement”), with KeyBank National Association (“KeyBank”) as administrative agent, and a syndicate of lenders, we, through the GRT OP, as the borrower, have been provided with a $1.9 billion credit facility consisting of a $750 million senior unsecured revolving credit facility (the “Revolving Credit Facility”) maturing in June 2022 with (subject to the satisfaction of certain customary conditions) a one-year extension option, a $200 million senior unsecured term loan maturing in June 2023 (the “$200M 5-Year Term Loan”), a $400 million senior unsecured term loan maturing in April 2024 (the “$400M 5-Year Term Loan”), a $400 million senior unsecured term loan maturing in December 2025 (the $400M 5-Year Term Loan) (collectively, the “KeyBank Loans”), and a $150 million senior unsecured term loan maturing in April 2026 (the “$150M 7-Year Term Loan”).The credit facility also provides the option, subject to obtaining additional commitments from lenders and certain other customary conditions, to increase the commitments under the Revolving Credit Facility, are interest only and are due onincrease the first dayexisting term loans and/or incur new term loans by up to an additional $600 million in the aggregate. As of each quarter. Amounts borrowedDecember 31, 2021, the remaining capacity under the Revolving Credit Facility may be repaidwas $376.5 million.
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and reborrowed, subject toexcluding per share amounts)
Based on the terms as of December 31, 2021, the Amended and Restated Credit Agreement.
The Term Loan has an initial term of five years, maturing on June 28, 2023. Payments under the Term Loan are interest only and are due on the first day of each quarter. Amounts borrowed under the Term Loan may not be repaid and reborrowed.
The Unsecured Credit Facility has an interest rate calculatedfor the credit facility varies based on LIBOR plus the applicable LIBOR margin, as provided in the Amended and Restated Credit Agreement, or the Base Rate plus the applicable base rate margin, as provided in the agreement. The applicable LIBOR margin and base rate margin are dependent on the consolidated leverage ratio of the Operating Partnership,GRT OP, us, and our subsidiaries and ranges (a) in the Company,case of the Revolving Credit Facility, from LIBOR plus 1.30% to LIBOR plus 2.20%, (b) in the case of each of the $200M 5-Year Term Loan, the $400M 5-Year Term Loan $400M 5-Year Term Loan, 2025, and the Company's subsidiaries, as disclosed in the periodic compliance certificate provided$150M 7-Year Term Loan, from LIBOR plus 1.25% to the administrative agent each quarter. LIBOR plus 2.15%.If the Operating PartnershipGRT OP obtains an investment grade rating of its senior unsecured long term debt from Standard & Poor's Rating Services, or Moody's Investors Service, Inc., or Fitch, Inc., the applicable LIBOR margin and base rate margin will be dependentvary based on such rating.rating and range (i) in the case of the Revolving Credit Facility, from LIBOR plus 0.825% to LIBOR plus 1.55%, (ii) in the case of each of the $200M 5-Year Term Loan, the $400M 5-Year Term Loan and the $400M 5-Year Term Loan 2025, and the $150M 7-Year Term Loan, from LIBOR plus 1.90% to LIBOR plus 1.75%.
On March 1, 2021, the Company exercised its right to draw on the $400M 5-Year Term Loan 2025 to repay CCIT II's existing debt balance in connection with the CCIT II Merger.
The Second Amended and Restated Credit Agreement relating to the Revolving Credit Facility provides that the Operating PartnershipGRT OP must maintain a pool of unencumbered real properties (each a "Pool Property" and collectively the "Pool Properties") that meet certain requirements contained in the Second Amended and Restated Credit Agreement. The agreement sets forth certain covenants relating to the Pool Properties, including, without limitation, the following:
•there must be no less than 15 Pool Properties;Properties at any time;
•no greater than 15% of the aggregate pool value may be contributed by a single Pool Property or tenant;
•no greater than 15% of the aggregate pool value may be contributed by Pool Properties subject to ground leases;
•no greater than 20% of the aggregate pool value may be contributed by Pool Properties which are under development;development or assets under renovation;
•the minimum aggregate leasing percentage of all Pool Properties must be no less than 90%; and
•other limitations as determined by KeyBank upon further due diligence of the Pool Properties.
Borrowing availability under the Second Amended and Restated Credit Agreement is limited to the lesser of the maximum amount of all loans outstanding that would result in (i) an asset poolunsecured leverage ratio of no greater than 60%, or (ii) an asset pool debt serviceunsecured interest coverage ratio of no less than 1.35:2.00:1.00.
Guarantors of the KeyBank Loans include the Company, each special purpose entity that owns a Pool Property, and each of the GRT OP's other subsidiaries which owns a direct or indirect equity interest in a SPE that owns a Pool Property.
AsIn addition to customary representations, warranties, covenants, and indemnities, the KeyBank Loans require the GRT OP to comply with the following at all times, which will be tested on a quarterly basis:
•a maximum consolidated leverage ratio of December 31, 2018,60%, or, the remaining capacity pursuantratio may increase to 65% for up to 4 consecutive quarters after a material acquisition;
•a minimum consolidated tangible net worth of 75% of the UnsecuredCompany's consolidated tangible net worth at closing of the Revolving Credit Facility, was $221.1 million.or approximately $2.0 billion, plus 75% of net future equity issuances (including GRT OP Units), minus 75% of the amount of any payments used to redeem the Company's stock or GRT OP Units, minus any amounts paid for the redemption or retirement of or any accrued return on the preferred equity issued under the preferred equity investment made in EA-1 in August 2018 by SHBNPP Global Professional Investment Type Private Real Estate Trust No. 13 (H);
•upon consummation, if ever, of an initial public offering, a minimum consolidated tangible net worth of 75% of the Company's consolidated tangible net worth at the time of such initial public offering plus 75% of net future equity issuances (including GRT OP Units) should the Company publicly list its shares;
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II,REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20182021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
•a minimum consolidated fixed charge coverage ratio of not less than 1.50:1.00;
Bank•a maximum total secured debt ratio of Americanot greater than 40%, which ratio will increase by 5 percentage points for 4 quarters after closing of a material acquisition that is financed with secured debt;
•a minimum unsecured interest coverage ratio of 2.00:1.00;
•a maximum total secured recourse debt ratio, excluding recourse obligations associated with interest rate hedges, of 10% of our total asset value; and KeyBank Loan
•aggregate maximum unhedged variable rate debt of not greater than 30% of the Company's total asset value.
Furthermore, the activities of the GRT OP, the Company, and the Company's subsidiaries must be focused principally on the ownership, development, operation and management of office, industrial, manufacturing, warehouse, distribution or educational properties (or mixed uses thereof) and businesses reasonably related or ancillary thereto.
Third Amendment to Second Amended and Restated Credit Agreement
On April 27, 2018,July 14, 2021, the Company, through four SPEs that own the respective four properties noted belowGRT OP, entered into the Third Amendment. The Third Amendment amended the Second Amended and are owned byRestated Credit Agreement to decrease the applicable interest rate margin for the $150M 7-Year Term Loan. After giving effect to the Third Amendment, the $150M 7-Year Term Loan accrues interest, at the GRT OP's election, at a per annum rate equal to either (i) the LIBOR plus an applicable margin ranging from 1.25% to 2.15% or (ii) a base rate plus an applicable margin ranging from 0.25% to 1.15%, in each case such applicable margin to be based on the Company's Operating Partnership, entered into a loan agreement (the "Loan Agreement”) with Bank of America, N.A.consolidated leverage ratio. Prior to the Third Amendment, the applicable margin for LIBOR based loans was 1.65% to 2.50% and KeyBank (together with their successors and assigns, collectively,for base rate loans was 0.65% to 1.50%, in each case based on the "Lender") in which the Company borrowed $250.0 million (the "BofA/KeyBank Loan").
The Company utilized approximately $249.8 millionCompany's consolidated leverage ratio. All other terms of the proceeds provided by the BofA/KeyBank Loan to pay down a portion of the Company's RevolvingSecond Amended and Restated Credit Facility. In connection with this pay down of the Company's Revolving Credit Facility, KeyBank released four of the special purpose entities owned by the Company's Operating Partnership from their obligations as guarantorsAgreement were unchanged. No new term loan borrowings were incurred under the Revolving Credit Facility.Third Amendment. The BofA/KeyBank Loan is secured by cross-collateralized and cross-defaulted first mortgage liens on the properties with the following tenants: 3M Company, Amazon.com.dedc LLC, Southern Company Services, Inc. and IGT (each, a "Secured Property"). In connection with this transaction, the Company entered into a nonrecourse carve-out guaranty agreement.
In addition to their first mortgage lien, the Lender also has a security interest in all other property relating to the ownership, use, maintenance or operation of the improvements on each Secured Property and all rents, profits and revenues from each Secured Property.
The BofA/KeyBank Loan has a term of 10 years, maturing on May 1, 2028. The BofA/KeyBank Loan bears interest at an annualapplicable rate of 4.32%. Commencing on June 1, 2020, the BofA/KeyBank Loan may be prepaid but only if such prepayment is made in full (with certain exceptions), subject to certain conditions set forth in the Loan Agreement, including 30 days' prior notice to the Lender and payment of a prepayment premium in addition to all unpaid principal and accrued interest to the date of such prepayment. Commencing on November 1, 2027, the BofA/KeyBank Loan may be prepaid in whole or in part, subject to satisfaction of certain conditions, including 30 days' prior notice to the Lender, without payment of any prepayment premium.
As of December 31, 2018, there was approximately $250.0 million outstanding pursuant to the BofA/KeyBank Loan.
AIG Loan
On October 22, 2015, six SPEs that are wholly-owned by the Operating Partnership entered into promissory notes with The Variable Annuity Life Insurance Company, American General Life Insurance Company, and the United States Life Insurance Company (collectively, the "Lenders"), pursuant to which the Lenders provided such SPEs with a loan in the aggregate amount of approximately $127.0 million (the "AIG Loan").
The AIG Loan has a term of 10 years, maturing on November 1, 2025. The AIG Loan bears interest at a rate of 4.15%. The AIG Loan requires monthly payments of interest only for the first five years and fixed monthly payments of principal and interest thereafter. The AIG$150M 7-Year Term Loan is secured by cross-collateralized and cross-defaulted first lien deeds of trust and second lien deeds of trust on certain properties. Commencing October 31, 2017, each of the individual promissory notes comprising the AIG Loan may be prepaid but only if such prepayment is made in full, subjectdecreased 35 basis points from 1.75% to 30 days' prior notice to the holder and payment of a prepayment premium in addition to all unpaid principal and accrued interest to the date of such prepayment.1.40%.
As of December 31, 2018, there was approximately $127.0 million outstanding pursuant to the AIG Loan.
Debt Covenant Compliance
Pursuant to the terms of the Unsecured Credit Facility, BofA/Company's mortgage loans and the KeyBank Loan and AIG Loan,Loans, the GRT OP, in consolidation with the Company, is subject to certain loan compliance covenants. The Company was in compliance with all applicableof its debt covenants as of December 31, 2018.2021.
The following summarizes the future scheduled principal repayments of all loans as of December 31, 2021 per the loan terms discussed above:
| | | | | |
| As of December 31, 2021 |
| 2022 | $ | 9,501 | |
| 2023 | 336,814 | |
| 2024 | 433,929 | |
| 2025 | 519,901 | |
| 2026 | 152,546 | |
| Thereafter | 1,088,824 | |
| Total principal | 2,541,515 | |
| Unamortized debt premium/(discount) | (166) | |
| Unamortized deferred loan costs | (8,972) | |
| Total | $ | 2,532,377 | |
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II,REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20182021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
The following summarizes the future principal repayments of all loans as of December 31, 2018 per the loan terms discussed above: |
| | | |
| | December 31, 2018 |
| 2019 | $ | — |
|
| 2020 | — |
|
| 2021 | 2,178 |
|
| 2022 | 2,270 |
|
| 2023 | 2,367 |
|
| Thereafter | 483,240 |
|
| Total principal | 490,055 |
|
| Unamortized deferred loan costs | (8,100 | ) |
| Total | $ | 481,955 |
|
5.6. 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 enteredenters 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 valuevalues 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
The Company has entered into an interest rate swap agreementagreements to hedge the variable cash flows associated with the LIBOR-basedcertain existing or forecasted LIBOR based variable-rate debt, onincluding the Company's Revolving Credit Facility. The interest rate swap was effective for the period from April 1, 2016 to December 12, 2018 with a notional amount of $100.0 million.
Effective as of November 1, 2017, the GCEAR Operating Partnership novated one of its $100.0 million swaps to the Operating Partnership, as a result of the repayment of debt. The terms of the cash flow swap are listed in the table below.
On April 30, 2018, the Company settled the $100.0 million cash flow hedge contract purchased from the GCEAR Operating Partnership, which resulted in the Company receiving a net settlement of approximately $0.1 million.
KeyBank Loans. The change in the fair value of derivatives designated and qualifying as cash flow hedges is initially recorded in accumulated other comprehensive income ("AOCI") and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt.
As of December 31, 2018, all of the Company's interest rate swap agreements have matured.
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)
The following table sets forth a summary of the interest rate swaps at December 31, 20182021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Fair Value (1) | | Current Notional Amounts |
| | | | | | | | December 31, | | December 31, |
| Derivative Instrument | | Effective Date | | Maturity Date | | Interest Strike Rate | | 2021 | | 2020 | | 2021 | | 2020 |
| Assets/(Liabilities) | | | | | | | | | | | | | | |
| Interest Rate Swap | | 3/10/2020 | | 7/1/2025 | | 0.83% | | $ | 1,648 | | | $ | (2,963) | | | $ | 150,000 | | | $ | 150,000 | |
| Interest Rate Swap | | 3/10/2020 | | 7/1/2025 | | 0.84% | | 1,059 | | | (2,023) | | | 100,000 | | | 100,000 | |
| Interest Rate Swap | | 3/10/2020 | | 7/1/2025 | | 0.86% | | 749 | | | (1,580) | | | 75,000 | | | 75,000 | |
| Interest Rate Swap | | 7/1/2020 | | 7/1/2025 | | 2.82% | | (7,342) | | | (13,896) | | | 125,000 | | | 125,000 | |
| Interest Rate Swap | | 7/1/2020 | | 7/1/2025 | | 2.82% | | (5,909) | | | (11,140) | | | 100,000 | | | 100,000 | |
| Interest Rate Swap | | 7/1/2020 | | 7/1/2025 | | 2.83% | | (5,899) | | | (11,148) | | | 100,000 | | | 100,000 | |
| Interest Rate Swap | | 7/1/2020 | | 7/1/2025 | | 2.84% | | (5,958) | | | (11,225) | | | 100,000 | | | 100,000 | |
| Total | | | | | | | | $ | (21,652) | | | $ | (53,975) | | | $ | 750,000 | | | $ | 750,000 | |
(1)The Company records all derivative instruments on a gross basis in the consolidated balance sheets, and accordingly there are no offsetting amounts that net assets against liabilities. As of December 31, 2017:2021, derivatives in a liability position are included in an asset or liability position are included in the line item "Other assets or Interest rate swap liability," respectively, in the consolidated balance sheets at fair value. The LIBO rate as of December 31, 2021 (effective date) was 0.10%.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Fair Value (1) | | Current Effective Notional Amount (2) |
| Derivative Instrument | | Effective Date | | Maturity Date/Termination | | Interest Strike Rate | | December 31, | | December 31, |
| | | | | 2018 | | 2017 | | 2018 | | 2017 |
| Interest Rate Swap | | 4/1/2016 | | 12/12/2018 | | 0.74% | | $ | — |
| | $ | 967 |
| | $ | — |
| | $ | 100,000 |
|
| Interest Rate Swap | | 11/1/2017 | | 4/30/2018 | | 1.50% | | — |
| | 65 |
| | — |
| | 100,000 |
|
| Total | | | | | | | | $ | — |
| | $ | 1,032 |
| | $ | — |
| | $ | 200,000 |
|
| |
(1) | The Company records all derivative instruments on a gross basis on the consolidated balance sheets, and accordingly, there are no offsetting amounts that net assets against liabilities. As of December 31, 2018, all of the Company's derivatives have matured. |
| |
(2) | Represents the notional amount of swap that was effective as of the balance sheet date of December 31, 2018 and December 31, 2017. |
The following table sets forth the impact of the interest rate swaps on the consolidated financial statements of operations for the periods presented:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
| Interest Rate Swap in Cash Flow Hedging Relationship: | | | |
| Amount of (loss) gain recognized in AOCI on derivatives | $ | (18,165) | | | $ | (38,319) | |
| Amount of (gain) loss reclassified from AOCI into earnings under “Interest expense” | $ | (14,284) | | | $ | 8,615 | |
| Total interest expense presented in the consolidated statement of operations in which the effects of cash flow hedges are recorded | $ | 85,087 | | | $ | 79,646 | |
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
|
| | | | | | | | |
| | | Year Ended December 31, |
| | | 2018 | | 2017 |
| Interest Rate Swaps in Cash Flow Hedging Relationship: | | | | |
| Amount of gain (loss) recognized in AOCI on derivatives | | $ | 281 |
| | $ | 428 |
|
| Amount of (gain) reclassified from AOCI into earnings under “Interest expense” | | $ | (1,233 | ) | | $ | (319 | ) |
| Total interest expense presented in the consolidated statement of operations in which the effects of cash flow hedges are recorded | | $ | 20,375 |
| | $ | 15,519 |
|
Certain agreements with the derivative counterparties contain a provision that if the Company defaults on any of its indebtedness, including a 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. 6. As of December 31, 2021 and 2020, the fair value of interest rate swaps that were in a liability position, which excludes any adjustment for nonperformance risk related to these agreements, was approximately $25.1 million and $54.0 million, respectively. As of December 31, 2021 and December 31, 2020, 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 December 31, 2021 and 2020:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Prepaid tenant rent | $ | 26,477 | | | $ | 20,780 | |
| Real estate taxes payable | 14,751 | | | 15,380 | |
| Property operating expense payable | 11,126 | | | 8,473 | |
| Accrued tenant improvements | 10,123 | | | 30,011 | |
| Deferred compensation | 10,119 | | | 10,599 | |
| Interest payable | 9,683 | | | 9,147 | |
| Other liabilities | 26,842 | | | 20,044 | |
| Total | $ | 109,121 | | | $ | 114,434 | |
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;liabilities, (ii) "significant other observable inputs;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 yearyears ended December 31, 2018.2021 and 2020.
The following tables settable sets forth the assets/(liabilities)assets and liabilities that the Company measures at fair value on a recurring basis by level within the fair value hierarchy as of December 31, 20182021 and 2017:2020:
|
| | | | | | | | | | | | |
| | Total Fair Value | Quoted Prices in Active Markets for Identical Assets and Liabilities | Significant Other Observable Inputs | Significant Unobservable Inputs |
| Interest Rate Swaps at: | | | | |
| December 31, 2018 | $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| December 31, 2017 | $ | 1,032 |
| $ | — |
| $ | 1,032 |
| $ | — |
|
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II,REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20182021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Assets/(Liabilities) | | Total Fair Value | | Quoted Prices in Active Markets for Identical Assets and Liabilities | | Significant Other Observable Inputs | | Significant Unobservable Inputs |
| December 31, 2021 | | | | | | | | |
| Interest Rate Swap Asset | | $ | 3,456 | | | $ | — | | | $ | 3,456 | | | $ | — | |
| Interest Rate Swap Liability | | $ | (25,108) | | | $ | — | | | $ | (25,108) | | | $ | — | |
| Corporate Owned Life Insurance Asset | | $ | 6,875 | | | $ | — | | | $ | 6,875 | | | $ | — | |
| Mutual Funds Asset | | $ | 5,543 | | | $ | 5,543 | | | $ | — | | | $ | — | |
| | | | | | | | |
| December 31, 2020 | | | | | | | | |
| Interest Rate Swap Liability | | $ | (53,975) | | | $ | — | | | $ | (53,975) | | | $ | — | |
| Corporate Owned Life Insurance Asset | | $ | 4,454 | | | $ | — | | | $ | 4,454 | | | $ | — | |
| Mutual Funds Asset | | $ | 6,643 | | | $ | 6,643 | | | $ | — | | | $ | — | |
Real Estate
For the year ended December 31, 2021, the Company determined that 2 of the Company's properties were impaired based on expected hold period and selling price. The Company considered these inputs as Level 3 measurements within the fair value hierarchy. The following table is a summary of the quantitative information related to the non-recurring fair value measurement for the impairment of the Company's real estate properties for the year-ended December 31, 2021:
| | | | | | | | | | | | | | | | | |
| | Range of Inputs or Inputs |
| Unobservable Inputs: | | 2200 Channahon Road | | Houston Westway I | |
| | | | | |
| | | | | |
| Expected selling price per square foot | | $8.30 | | $72.90 | |
| Estimated hold period | | Less than one year | | Less than one year | |
Financial Instruments Disclosed at Fair Value
Financial instruments as of December 31, 20182021 and December 31, 2020 consisted of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, other accrued expenses and borrowings.other liabilities, and mortgage payable and other borrowings, as defined in Note 5, Debt. With the exception of the mortgage loanloans in the table below, the amounts of the financial instruments presented in the consolidated financial statements substantially approximate their fair value as of December 31, 2018.2021 and 2020. The fair value of the 10 mortgage loanloans in the table below is estimated by discounting theeach 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 loandebt valuation in its entirety is classified in Level 2 of the fair value hierarchy, as the fair value is based on current pricing for debt with similar terms as the in-place debt, and there were no transfers into and out of fair value measurement levels during the years ended December 31, 2018 and 2017.debt.
|
| | | | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| | Fair Value | | Carrying Value (1) | | Fair Value | | Carrying Value (1) |
| AIG Loan | $ | 120,599 |
| | $ | 126,970 |
| | $ | 122,928 |
| | $ | 126,970 |
|
| |
(1) | The carrying value of the AIG Loan does not include deferred financing costs as of December 31, 2018 and 2017 . See Note 4, Debt, for details.
|
7. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following as of December 31, 2018 and 2017: |
| | | | | | | | |
| | | Year Ended December 31, |
| | | 2018 | | 2017 |
| Redemptions payable | | $ | 4,866 |
| | $ | 2,181 |
|
| Prepaid rent | | 4,709 |
| | 4,304 |
|
| Other liabilities | | 3,788 |
| | 3,132 |
|
| Accrued property taxes | | 2,955 |
| | 3,490 |
|
| Interest expense payable | | 2,805 |
| | 3,013 |
|
| Leasing commission payable | | 1,900 |
| | 3,783 |
|
| Total | | $ | 21,023 |
| | $ | 19,903 |
|
8. Equity
Status of Offerings
On January 20, 2017, the Company closed the primary portion of the IPO; however, the Company continued to offer shares pursuant to the DRP under the IPO registration statement through May 2017.
On September 20, 2017, the Company commenced the Follow-On Offering of up to $2.2 billion of shares, consisting of up to $2.0 billion of shares in the Company's primary offering and $0.2 billion of shares pursuant to the DRP. The Company reclassified all Class T and Class I shares sold in the IPO as "Class AA" and "Class AAA" shares, respectively. The Company offered Class T shares, Class S shares, Class D shares and Class I shares in the primary portion of the Follow-On Offering and all seven of its share classes pursuant to the DRP.
On August 16, 2018, the Company’s Board approved the temporary suspension of the primary portion of the Company's Follow-On Offering, effective August 17, 2018, to allow the special committee of the board to evaluate a potential strategic alternative. On December 12, 2018, in connection with the Merger Agreement, the Board of the Company approved the temporary suspension of the DRP and SRP. Redemptions submitted for the fourth quarter of 2018 were honored in accordance with the terms of the SRP, and the SRP was officially suspended as of January 19, 2019. The DRP officially was suspended as of December 30, 2018. Beginning in January 2019, all distributions by the Company were paid in cash. The DRP and SRP shall remain suspended until such time, if any, as the Board of the Company may approve the resumption of the DRP and SRP.
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II,REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20182021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| | 2021 | | 2020 |
| | Fair Value | | Carrying Value (1) | | Fair Value | | Carrying Value (1) |
| BOA Loan | $ | 349,082 | | | $ | 375,000 | | | $ | 355,823 | | | $ | 375,000 | |
| BOA/KeyBank Loan | 260,378 | | | 250,000 | | | 263,454 | | | 250,000 | |
| AIG Loan II | 120,141 | | | 124,606 | | | 121,011 | | | 126,792 | |
| AIG Loan | 99,697 | | | 101,884 | | | 102,033 | | | 103,870 | |
| Midland Mortgage Loan | 95,720 | | | 95,792 | | | 97,709 | | | 98,155 | |
| Samsonite Loan | 19,366 | | | 19,114 | | | 21,030 | | | 20,165 | |
| HealthSpring Mortgage Loan | 19,639 | | | 19,669 | | | 20,462 | | | 20,208 | |
| Pepsi Bottling Ventures Loan | 18,262 | | | 18,218 | | | 18,942 | | | 18,587 | |
| Highway 94 Loan | 13,360 | | | 13,732 | | | 14,447 | | | 14,689 | |
| Emporia Partners Mortgage Loan | — | | | — | | | 1,654 | | | 1,627 | |
| Total | $ | 995,645 | | | $ | 1,018,015 | | | $ | 1,016,565 | | | $ | 1,029,093 | |
Share (1)The carrying values do not include the debt premium/(discount) or deferred financing costs as of December 31, 2021 and 2020. See Note 5, Debt, for details.
9. Equity
Classes
Class T shares, Class S shares, Class D shares, Class I shares, Class A shares, Class AA shares, Class AAA and Class AAAE shares vote together as a single class, and each share is entitled to one1 vote on each matter submitted to a vote at a meeting of the Company's stockholders; provided that with respect to any matter that would only have a material adverse effect on the rights of a particular class of common stock, only the holders of such affected class are entitled to vote.
The following table summarizes shares issued and gross proceeds received for each share classsets forth the classes of outstanding common stock as of December 31, 20182021 and outstanding shares as of December 31, 2018 and 2017:2020: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Class | | |
| | | T | | S | | D | | I | | A | | AA | | AAA | | Total |
| Gross proceeds from primary portion of offerings | | $ | 2,245 |
| | $ | 3 |
| | $ | 182 |
| | $ | 7,538 |
| | $ | 240,780 |
| | $ | 474,858 |
| | $ | 8,381 |
| | $ | 733,987 |
|
| Gross proceeds from DRP | | $ | 26 |
| | $ | — |
| | $ | 3 |
| | $ | 187 |
| | $ | 26,535 |
| | $ | 34,656 |
| | $ | 545 |
| | $ | 61,952 |
|
| Shares issued in primary portion of offerings | | 224,647 |
| | 264 |
| | 18,921 |
| | 786,573 |
| | 24,199,764 |
| | 47,562,870 |
| | 901,225 |
| | 73,694,264 |
|
| DRP shares issued | | 2,664 |
| | 15 |
| | 347 |
| | 19,441 |
| | 2,794,547 |
| | 3,650,017 |
| | 57,433 |
| | 6,524,464 |
|
| Stock distribution shares issued | | — |
| | — |
| | — |
| | — |
| | 263,642 |
| | 300,166 |
| | 4,677 |
| | 568,485 |
|
| Restricted stock issued | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 36,000 |
| | 36,000 |
|
| Total redemptions | | — |
| | — |
| | — |
| | — |
| | (1,528,918 | ) | | (1,744,366 | ) | | (23,956 | ) | | (3,297,240 | ) |
| Total shares outstanding as of December 31, 2018 | | 227,311 |
| | 279 |
| | 19,268 |
| | 806,014 |
| | 25,729,035 |
| | 49,768,687 |
| | 975,379 |
| | 77,525,973 |
|
| Total shares outstanding as of December 31, 2017 | | 4,148 |
| | 268 |
| | 268 |
| | 267,476 |
| | 25,995,943 |
| | 49,942,471 |
| | 964,709 |
| | 77,175,283 |
|
| | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
| Class A | 24,509,573 | | | 24,325,680 | |
| Class AA | 47,592,118 | | | 47,304,097 | |
| Class AAA | 926,936 | | | 920,920 | |
| Class D | 42,013 | | | 41,095 | |
| Class E | 249,088,676 | | | 155,272,273 | |
| Class I | 1,911,731 | | | 1,896,696 | |
| Class S | 1,800 | | | 1,800 | |
| Class T | 565,265 | | | 558,107 | |
Organizational and Offering CostsCommon Equity
Pursuant to the Advisory Agreement, in no event will the Company be obligated to reimburse the Advisor for organizational and offering costs incurred in connection with the Follow-On Offering totaling in excess of 15.0% (including selling commissions, dealer manager fees, distribution fees and non-accountable due diligence expense allowance but excluding acquisition expenses or any fees, if ever applicable) of the gross proceeds raised in the Follow-On Offering (excluding gross proceeds from the DRP). If the organizational and offering costs exceed such limits discussed above, within 60 days after the end of the month in which the Follow-On Offering terminates or is completed, the Advisor is obligated to reimburse the Company for any excess amounts. As long as the Company is subject to the Statement of Policy Regarding Real Estate Investment Trusts published by the North American Securities Administrators Association (“NASAA REIT Guidelines”), such limitation discussed above will also apply to any future public offerings. As of December 31, 2018, organizational and offering costs relating to2021, the Follow-On Offering were 35.2% (approximately $3.5 million) ofCompany had received aggregate gross offering proceeds ($10.0 million)of approximately $2.8 billion from the sale of shares in the private offering, the public offerings, the DRP offerings and mergers (includes EA-1 offerings and EA-1 merger with Signature Office REIT, Inc., including selling commissions, dealer manager feesthe EA Mergers and distribution fees. Therefore, if the Follow-On Offering had been terminated on December 31, 2018,CCIT II Merger), as discussed in Note 1, Organization. As part of the $2.8 billion from the sale of shares, the Company would oweissued approximately 43,772,611 shares of its common stock upon the Advisor $1.5 millionconsummation of the merger of Signature Office REIT, Inc. in June 2015 and 174,981,547 Class E shares (in exchange for all outstanding shares of EA-1's common stock at the Advisor would be liabletime of the EA Mergers) in April 2019 upon the consummation of the EA Mergers and 93,457,668 Class E shares (in exchange for organizational and offering costs incurred byall the Companyoutstanding shares of approximately $2.0 million. Approximately $0.8 millionCCIT II's common stock at the time of organizational and offering costs the Advisor is liable for asCCIT II Merger). As of December 31, 2018 is deducted from "Due to Affiliates" and the remaining $1.2 million is included in "Due from Affiliates" on the consolidated balance sheet.
Organizational and offering costs incurred as of December 31, 2018, including those incurred by the Company and due to the Advisor, for the Follow-On Offering are as follows:
2021, there were 324,638,112 shares outstanding,
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II,REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20182021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
including shares issued pursuant to the DRP, less shares redeemed pursuant to the SRP and the self-tender offer, which occurred in May 2019.
Termination of Follow-On Offering |
| | | |
| | December 31, 2018 |
|
| Cumulative offering costs | $ | 2,975 |
|
| Cumulative organizational costs | $ | 535 |
|
| Organizational and offering costs advanced by the Advisor | $ | 2,125 |
|
| Organizational and offering costs paid by the Company | 1,385 |
|
| Adjustment to organizational and offering costs pursuant to the limitation: | |
| Costs in excess of limit | (2,015 | ) |
| Organizational and offering costs incurred | $ | 1,495 |
|
Distribution Reinvestment Plan (DRP)
The Company has adopted the DRP, which allows stockholders to have dividends and other distributions otherwise distributable to them invested in additional shares of common stock of the same class.stock. No sellingsales commissions or dealer manager fees or stockholder servicing fees arewill be paid on shares sold through the DRP, but the DRP shares will be charged the applicable distribution fee payable with respect to all shares of the applicable class. The purchase price per share under the DRP is equal to the NAVnet asset value ("NAV") per share applicable to the class of shares purchased, calculated asusing the most recently published NAV available at the time of the distribution date.reinvestment. The Company may amend or terminate the DRP for any reason at any time upon 10 days' prior written notice to stockholders, which may be provided through the Company's filings with the SEC. On December 12, 2018, in
In connection with the Merger Agreement,a potential strategic transaction, on February 26, 2020, the Board of the Company approved the temporary suspension of the DRP. DRP, effective March 8, 2020. On July 16, 2020, the Board approved the reinstatement of the DRP, effective July 27, 2020 and an amendment of the DRP to allow for the use of the most recently published NAV per share of the applicable share class available at the time of reinvestment as the DRP purchase price for each share class.
On July 17, 2020, the Company filed a registration statement on Form S-3 for the registration of up to $100 million in shares pursuant to the Company's DRP (the “DRP Offering”).The DRP officially was suspendedOffering may be terminated at any time upon 10 days’ prior written notice to stockholders.
The following table summarizes the DRP offerings, by share class, as of December 30, 2018,31, 2021:
| | | | | | | | | | | | | | |
| Share Class | | Amount | | Shares |
| Class A | | $ | 9,687 | | | 1,052,170 |
| Class AA | | 19,047 | | 2,068,367 |
| Class AAA | | 290 | | 31,521 |
| Class D | | 21 | | 2,231 |
| Class E | | 311,405 | | 32,299,377 |
| Class I | | 437 | | 47,028 |
| Class S | | 0 | | 12 |
| Class T | | 177 | | 19,090 |
| Total | | $ | 341,064 | | | 35,519,796 | |
As of December 31, 2021 and shall remain suspended until such time, if any, as2020, the Company had issued approximately $341.1 million and $318.2 million in shares pursuant to the DRP offerings, respectively.
DRP Suspension
On October 1, 2021, the Board approved a temporary suspension of the Company may approve the resumption of the DRP.DRP, effective October 11, 2021.
IPO Share Redemption Program (SRP)
The Company had a share redemption program for holders of Class A, Class AA, and Class AAA shares ("IPO Shares") who held their shares for less than four years, which enabled IPOhas adopted the SRP that enables stockholders to sell their shares backstock to the Company in limited circumstances ("IPO Share Redemption Program")(see section below for details on the suspension of the SRP). On June 4, 2018, the Board of the Company approved the termination of the IPO Share Redemption Program effective as of July 5, 2018. In addition, effective as of such date,August 8, 2019, the Board amended and restated theits SRP, effective as of September 12, 2019, in order to allow(i) clarify that only those stockholders of the IPO Shares to utilize the SRP. Accordingly, beginning in July 2018, stockholders of IPO Shares are able to continue to redeem at 100% of the NAV of the applicable share class, subject to the other limitations and conditions of the amended and restated SRP, as noted below.
During the years ended December 31, 2018 and 2017, the Company redeemedwho purchased their shares of its outstanding common stock under the IPO Share Redemption Program as follows: |
| | | | | | | | |
| | | Year Ended December 31, |
| Period | | 2018 | | 2017 |
| Shares of common stock redeemed | | 1,306,834 |
| | 623,499 |
|
| Weighted average price per share | | $ | 9.36 |
| | $ | 9.21 |
|
During the year ended December 31, 2017, the Company redeemed 623,499 shares of common stock under the IPO Share Redemption Program for approximately $5.7 million at a weighted average price per share of $9.21. During the year ended December 31, 2018, the Company redeemed 1,306,834 shares of common stock under the IPO Share Redemption Program for approximately $12.2 million at a weighted average price per share of $9.36. Since inception, the Company has honored all redemption requests related to the IPO Share Redemption Program and has redeemed a total of 2,097,775 shares of common stock for approximately $19.6 million at a weighted average price per share of $9.34 under this program. The Company has funded all redemptions using proceeds from the sale of IPO Shares pursuant to the DRP.
us or
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II,REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20182021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
received their shares from the Company (directly or indirectly) through one or more non-cash transactions (including transfers to trusts, family members, etc.) may participate in the SRP; (ii) allocate capacity within each class of common stock such that the Company may redeem up to 5% of the aggregate NAV of each class of common stock; (iii) treat all unsatisfied redemption requests (or portion thereof) as a request for redemption the following quarter unless otherwise withdrawn; and (iv) make certain other clarifying changes.
Share Redemption Program
In connection with the Follow-On Offering, the Company’s Board adopted the SRP for the New Shares (and IPO Shares that have been held for four years or longer). As noted above, subsequently, on June 4, 2018,On November 7, 2019, the Board amended and restated the SRP, to allow stockholders of the IPO Shares to utilize the SRP, effective as of July 5, 2018. On December 12, 2018,2019, in order to (i) provide for redemption sought upon a stockholder’s determination of incompetence or incapacitation; (ii) clarify the circumstances under which a determination of incompetence or incapacitation will entitle a stockholder to such redemption; and (iii) make certain other clarifying changes.
In connection with the Merger Agreement,a potential strategic transaction, on February 26, 2020, the Board of the Company approved the temporary suspension of the SRP. The SRP, officially was suspendedeffective March 28, 2020. On July 16, 2020, the Board approved the partial reinstatement of the SRP, effective August 17, 2020, subject to the following limitations: (A) redemptions will be limited to those sought upon a stockholder’s death, qualifying disability, or determination of incompetence or incapacitation in accordance with the terms of the SRP, and (B) the quarterly cap on aggregate redemptions will be equal to the aggregate NAV, as of December 30, 2018, and shall remain suspended until such time, if any, as the Boardlast business day of the Company may approve the resumptionprevious quarter, of the SRP. shares issued pursuant to the DRP during such quarter. Settlements of share redemptions will be made within the first three business days of the following quarter. Redemption activity during the quarter is listed below.
Under the SRP, the Company will redeem shares as of the last business day of each quarter. The redemption price will be equal to the NAV per share for the applicable class generally on the 13th day of the month prior to quarter end.end (which will be the most recently published NAV). Redemption requests must be received by 4:00 p.m. (Eastern time) on the second to last business day of the applicable quarter. Redemption requests exceeding the quarterly cap will be filled on a pro rata basis. With respect to any pro rata treatment, redemption requests following the death or qualifying disability of a stockholder will be considered first, as a group, followed by requests where pro rata redemption would result in a stockholder owning less than the minimum balance of $2,500 of shares of the Company's common stock, which will be redeemed in full to the extent there are available funds, with any remaining available funds allocated pro rata among all other redemption requests. All unsatisfied redemption requests must be resubmitted after the start of the next quarter, or upon the recommencement of the SRP, as applicable.
There are several restrictions under the SRP. Stockholders generally have tomust hold their shares for one year before submitting their shares for redemption under the program; however, the Company will waive the one-year holding period in the event of the death or qualifying disability of a stockholder. Shares issued pursuant to the DRP are not subject to the one-year holding period. In addition, the SRP generally imposes a quarterly cap on aggregate redemptions of the Company's shares equal to a value of up to 5% of the aggregate NAV of the outstanding shares as of the last business day of the previous quarter. quarter, subject to the further limitations as indicated in the August 8, 2019 amendments discussed above.
As the value on the aggregate redemptions of the Company's shares is outside the Company's control, the 5% quarterly cap is considered to be temporary equity and is presented as common stock subject to redemption on the accompanying consolidated balance sheets. As of December 31, 2018,
The following table summarizes share redemption (excluding the quarterly cap was approximately $37.4 million and $4.9 million of common stock was reclassified from common stock to accrued expenses and other liabilities on the consolidated balance sheet as of December 31, 2018.
Duringself-tender offer) activity during the years ended December 31, 20182021 and 2017, the Company redeemed shares of its outstanding common stock under the SRP as follows: |
| | | | | | |
| | | Year Ended December 31, |
| Period | | 2018 | | 2017 |
| Shares of common stock redeemed | | 1,199,464 |
| | — |
|
| Weighted average price per share | | 9.62 |
| | — |
|
Since inception, the Company has honored all redemption requests related to the SRP and has redeemed a total of 1,199,464 shares of common stock for approximately $11.5 million at a weighted average price per share of $9.62 under this program.
The Company’s Board has the right to modify or suspend the SRP upon 30 days' notice at any time if it deems such action to be in the Company’s best interest. Any such modification or suspension will be communicated to stockholders through the Company’s filings with the SEC. On December 12, 2018, the Company’s Board temporarily suspended the SRP, effective as of January 19, 2019.
Share-Based Compensation
The Company’s Board adopted an Employee and Director Long-Term Incentive Plan (the “Plan”), which provides for the grant of awards to the Company's directors and full-time employees (should the Company ever have employees), directors and full-time employees of the Advisor and affiliate entities that provide services to the Company, and certain consultants that provide services to the Company, the Advisor, or affiliate entities. Awards granted under the Plan may consist of stock options, restricted stock, stock appreciation rights, distribution equivalent rights and other equity-based awards. The stock-based payment will be measured at fair value and recognized as compensation expense over the vesting period. The term of the Plan is ten years and the total number of shares of common stock reserved for issuance under the Plan will be equal to 10% of the
2020: | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
| Shares of common stock redeemed | 2,232,476 | | | 1,841,887 | |
| Weighted average price per share | $ | 9.03 | | | $ | 9.01 | |
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II,REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20182021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
Since July 31, 2014 and through December 31, 2021, the Company had redeemed 28,304,928 shares (excluding the self-tender offer) of common stock for approximately $265.5 million at a weighted average price per share of $9.38 pursuant to the SRP. Since July 31, 2014 and through December 31, 2019, the Company had honored all outstanding redemption requests. During the three months ended September 30, 2019, redemption requests for Class E shares exceeded the quarterly 5% per share class limitation by 2,872,488 shares or approximately $27.4 million. The Class E shares not redeemed during that quarter, or 25% of the shares submitted, were treated as redemption requests for the quarter ended December 31, 2019. All outstanding requests for the quarter ended September 30, 2019 and all new requests for the quarter ended December 31, 2019 were honored on January 2, 2020. Redemptions sought upon a stockholder's death, qualifying disability, or determination of incompetence or incapacitation in the first quarter of 2020 were honored in accordance with the terms of the SRP, and the SRP officially was suspended as of March 28, 2020 for regular redemptions and subsequent redemptions for death, qualifying disability, or determination of incompetence or incapacitation after those honored in the first quarter of 2020. As described above, the SRP was partially reinstated, effective August 17, 2020, for redemptions sought upon a stockholder’s death, qualifying disability, or determination of incompetence or incapacitation in accordance with the terms of the SRP, subject to a quarterly cap on aggregate redemptions equal to the aggregate NAV, as of the last business day of the previous quarter, of the shares issued pursuant to the DRP during such quarter.
outstandingSRP Suspension
On October 1, 2021, the Company announced that it will suspend the SRP beginning with the next cycle, which commenced during fourth quarter 2021.
Series A Preferred Shares
On August 8, 2018, EA-1 entered into a purchase agreement (the "Purchase Agreement") with SHBNPP Global Professional Investment Type Private Real Estate Trust No. 13(H) (acting through Kookmin Bank as trustee) (the "Purchaser") and Shinhan BNP Paribas Asset Management Corporation, as an asset manager of the Purchaser, pursuant to which the Purchaser agreed to purchase an aggregate of 10,000,000 shares of EA-1 Series A Cumulative Perpetual Convertible Preferred Stock at a price of $25.00 per share (the "EA-1 Series A Preferred Shares") in 2 tranches, each comprising 5,000,000 EA-1 Series A Preferred Shares. On August 8, 2018 (the "First Issuance Date"), EA-1 issued 5,000,000 Series A Preferred Shares to the Purchaser for a total purchase price of $125.0 million (the "First Issuance"). EA-1 paid transaction fees totaling 3.5% of the First Issuance purchase price and incurred approximately $0.4 million in transaction-related expenses to unaffiliated third parties. EA-1's former external advisor incurred transaction-related expenses of approximately $0.2 million, which was reimbursed by EA-1.
Upon consummation of the Mergers, the Company issued 5,000,000 Series A Preferred Shares to the Purchaser. Pursuant to the Purchase Agreement, the Purchaser has agreed to purchase an additional 5,000,000 Series A Preferred Shares (the "Second Issuance") at a later date (the "Second Issuance Date") for an additional purchase price of $125.0 million subject to approval by the Purchaser’s internal investment committee and the satisfaction of certain conditions set forth in the Purchase Agreement. Pursuant to the Purchase Agreement, the Purchaser is generally restricted from transferring the Series A Preferred Shares or the economic interest in the Series A Preferred Shares for a period of five years from the applicable closing date.
The Company's Series A Preferred Shares are not registered under the Securities Act and are not listed on a national securities exchange. The articles supplementary filed by the Company related to the Series A Preferred Shares set forth the key terms of such shares as follows:
Distributions
Subject to the terms of the applicable articles supplementary, the holders of the Series A Preferred Shares are entitled to receive distributions quarterly in arrears at a rate equal to one-fourth (1/4) of the applicable varying rate, as follows:
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
| | | | | |
| i. | 6.55% from and after the First Issuance Date, or if the Second Issuance occurs, 6.55% from and after the Second Issuance Date until the five year anniversary of the First Issuance Date, or if the Second Issuance occurs, the five year anniversary of the Second Issuance Date (the “Reset Date”), subject to paragraphs (iii) and (iv) below; |
| ii. | 6.75% from and after the Reset Date, subject to paragraphs (iii) and (iv) below; |
| iii. | if a listing of the Company's shares of Class E Common Stock or the Series A Preferred Shares on a national securities exchange registered under Section 6(a) of the Exchange Act, does not occur by August 1, 2020 (the “First Triggering Event”), 7.55% from and after August 2, 2020 and 7.75% from and after the Reset Date, subject to (iv) below and certain conditions as set forth in the articles supplementary; or |
| iv. | if such a listing does not occur by August 1, 2021, 8.05% from and after August 2, 2021 until the Reset Date, and 8.25% from and after the Reset Date. |
Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the Series A Preferred Shares will be entitled to be paid out of the Company's assets legally available for distribution to the stockholders, after payment of or provision for the Company's debts and other liabilities, liquidating distributions, in cash or property at its fair market value as determined by the Company's Board, in the amount, for each outstanding Series A Preferred Share equal to $25.00 per Series A Preferred Share (the "Liquidation Preference"), plus an amount equal to any accumulated and unpaid distributions to the date of payment, before any distribution or payment is made to holders of shares of common stock or any other class or series of equity securities ranking junior to the Series A Preferred Shares but subject to the preferential rights of holders of any class or series of equity securities ranking senior to the Series A Preferred Shares. After payment of the full amount of the Liquidation Preference to which they are entitled, plus an amount equal to any accumulated and unpaid distributions to the date of payment, the holders of Series A Preferred Shares will have no right or claim to any of the Company's remaining assets.
Company Redemption Rights
The Series A Preferred Shares may be redeemed by the Company, in whole or in part, at the Company's option, at a per share redemption price in cash equal to $25.00 per Series A Preferred Share (the "Redemption Price"), plus any accumulated and unpaid distributions on the Series A Preferred Shares up to the redemption date, plus, a redemption fee of 1.5% of the Redemption Price in the case of a redemption that occurs on or after the date of the First Triggering Event, but before the date that is five years from the First Issuance Date.
Holder Redemption Rights
In the event the Company fails to effect a listing of the Company’s shares of common stock or Series A Preferred Shares by August 1, 2023, the holder of any Series A Preferred Shares has the option to request a redemption of such shares on or on any date following August 1, 2023, at the Redemption Price, plus any accumulated and unpaid distributions up to the redemption date (the "Redemption Right"); provided, however, that no holder of the Series A Preferred Shares shall have a Redemption Right if such a listing occurs prior to or on August 1, 2023.
Conversion Rights
Subject to the Company's redemption rights and certain conditions set forth in the articles supplementary, a holder of the Series A Preferred Shares, at his or her option, will have the right to convert such holder's Series A Preferred Shares into shares of the Company's common stock any time not to exceed 10,000,000 sharesafter the earlier of (i) five years from the First Issuance Date, or if the Second Issuance occurs, five years from the Second Issuance Date or (ii) a Change of Control (as defined in the aggregate. articles supplementary) at a per share conversion rate equal to the Liquidation Preference divided by the then Common Stock Fair Market Value (as defined in the articles supplementary).
Issuance of Restricted Stock Units to Executive Officers, Employees and Board of Directors
On May 1, 2019, the Company issued 1,009,415 restricted stock units (“RSUs") to the Company's officers under the Employee and Director Long-Term Incentive Plan of Griffin Capital Essential Asset REIT II, Inc. ("LTIP") Each RSU represents a contingent right to receive 1 share of the Company’s Class E common stock when settled in accordance with the terms of the respective restricted stock unit award agreement and will vest in equal, 25% installments on each of December 31, 2019, 2020, 2021 and 2022, provided that such executive officer remains continuously employed by the Company on each such
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
date, subject to certain accelerated vesting provisions as provided in the restricted stock unit award agreements. The shares of Class E common stock underlying the RSUs will not be delivered upon vesting, but instead will be deferred for delivery on May 1, 2023, or, if sooner, upon the executive officer's termination of employment. The fair value of grants issued was approximately $9.7 million.
On January 15, 2020, the Company issued 589,248 RSUs to Company employees, including officers, under the LTIP. Each RSU represents a contingent right to receive 1 share of the Company’s Class E common stock when settled in accordance with the terms of the respective restricted stock award agreement. The remaining RSUs are scheduled to vest in equal, 25% installments on each of December 31, 2021, 2022 and 2023 provided that the employee continues to be employed by the Company on each such date, subject to certain accelerated vesting provisions as provided in the respective restricted stock unit award agreement. The fair value of grants issued was approximately $5.5 million. Forfeitures on the Company's restricted stock units are recognized as they occur.
On January 22, 2021, the Company issued 1,071,347 RSUs to Company employees, including officers, under the Griffin Realty Trust, Inc. Amended and Restated Employee and Director Long-Term Incentive Plan (the “Amended and Restated LTIP”). Each RSU represents a contingent right to receive 1 share of the Company’s Class E common stock when settled in accordance with the terms of the respective RSU agreement and 1/3 of the RSUs are scheduled to vest equally on each of December 31, 2021, 2022, and 2023 provided that the employee continues to be employed by the Company on each such date, subject to certain accelerated vesting provisions as provided in the respective RSU agreement. The fair value of grants issued was approximately $9.6 million.
On March 1, 2021, the Company issued 3,901 shares of restricted stock as an initial equity grant to each of the 3 former directors of CCIT II who were appointed to the Board in connection with the CCIT II Merger. The shares of restricted stock vested fully upon issuance.
On March 25, 2021, the Company issued 547,908 RSUs to Company employees, including officers, under the Amended and Restated LTIP. Each RSU represents a contingent right to receive 1 share of the Company’s Class E common stock when settled in accordance with the terms of the respective RSU agreement and 1/4 of the RSUs are scheduled to vest equally on each of March 25, 2022, 2023, 2024, and 2025, provided that the employee continues to be employed by the Company on each such date, subject to certain accelerated vesting provisions as provided in the respective RSU agreement. The fair value of grants issued was approximately $4.9 million.
On June 15, 2021, the Company issued 49,614 shares of restricted stock to each of the Company’s independent directors. The fair value of grants issued was approximately $0.4 million. The shares of restricted stock vested 50% upon issuance and the remaining will vest one year from the grant date.
As of December 31, 2018,2021, there was $13.1 million of unrecognized compensation expense remaining, which vests between two and four years.
Total compensation expense for the year ended December 31, 2021 and 2020 was approximately 7,752,597 shares were available for future issuance under the Plan.$7.5 million and $5.2 million, respectively.
| | | | | | | | | | | | | | |
| | Number of Unvested Shares of RSU Awards | | Weighted-Average Grant Date Fair Value per Share |
| Balance at December 31, 2019 | | 757,061 | | | |
| Granted | | 589,248 | | | $ | 9.35 | |
| Forfeited | | (3,744) | | | $ | 9.35 | |
| Vested | | (398,729) | | | $ | 9.48 | |
| Balance at December 31, 2020 | | 943,836 | | | |
| Granted | | 1,619,255 | | | $ | 8.97 | |
| Forfeited | | (222,367) | | | $ | 9.10 | |
| Vested | | (812,111) | | | $ | 9.24 | |
| Balance at December 31, 2021 | | 1,528,613 | | | |
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
Distributions
Earnings and profits, which determine the taxability of distributions to stockholders, may differ from income reported for financial reporting purposes due to the differences for federal income tax purposes in the treatment of loss on debt, revenue recognition and compensation expense and in the basis of depreciable assets and estimated useful lives used to compute depreciation expense.
The following unaudited table summarizes the federal income tax treatment for all distributions per share for the years ended December 31, 2018, 20172021, 2020, and 20162019 reported for federal tax purposes and serves as a designation of capital gain distributions, if applicable, pursuant to Code Section 857(b)(3)(c) of the Code(C) and Treasury Regulation § 1.857-6(e)§1.857-6(e).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Ordinary income | | $ | 0.03 | | 9 | % | | $ | 0.13 | | 33 | % | | $ | 0.22 | | 37 | % |
| Capital gain | | — | | — | % | | — | | — | % | | 0.08 | | 13 | % |
| Return of capital | | 0.32 | | 91 | % | | 0.27 | | 67 | % | | 0.30 | | 50 | % |
| Total distributions paid | | $ | 0.35 | | 100 | % | | $ | 0.40 | | 100 | % | | $ | 0.60 | | 100 | % |
|
| | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2018 | | 2017 | | 2016 |
| Ordinary income | | $ | 0.06 |
| 10.78 | % | | $ | 0.04 |
| 7.90 | % | | $ | 0.31 |
| 57.10 | % |
| Return of capital | | 0.49 |
| 89.22 | % | | 0.51 |
| 92.10 | % | | 0.24 |
| 42.90 | % |
| Total distributions paid | | $ | 0.55 |
| 100.00 | % | | $ | 0.55 |
| 100.00 | % | | $ | 0.55 |
| 100.00 | % |
9. 10.Noncontrolling Interests
Noncontrolling interests represent limited partnership interests in the Operating Partnership, ofGRT OP in which the Company is the general partner. The Operating Partnership issued 20,000 Class AGeneral partnership units and limited partnership units for $10.00 per unit on February 11, 2014 toof the Advisor in exchange forGRT OP were issued as part of the initial capitalization of the Operating Partnership. On February 16, 2018, as elected by the Advisor, the Company issued 123,779GRT OP and GCEAR II Operating Partnership, units for $9.57 per unit toin conjunction with members of management's contribution of certain assets, other contributions, and in connection with the Advisor for the 50.0% of the 2017 performance distribution allocation that the Advisor elected to receiveself-administration transaction as discussed in Class I limited partnership units. The remaining balance was paid in cash.Note 1, Organization.
As of December 31, 2018,2021, noncontrolling interests were approximately 0.19%9.0% of total shares outstanding and 0.16%9.2% of weighted average shares outstanding (both measures assuming limited partnership unitsGRT OP Units were converted to common stock). The Company has evaluated the terms of the limited partnership interests in the GRT OP, and as a result, has classified limited partnership interests issued in the initial capitalization, in conjunction with the contributed assets and in connection with the self-administration transaction, 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 will behas 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.
As of December 31, 2021, the limited partners of the GRT OP owned approximately $31.8 million GRT OP Units, which were issued to affiliated parties and unaffiliated third parties in exchange for the contribution of certain properties to the Company, and in connection with the self-administration transaction and other services In addition, 0.2 million GRT OP Units were issued to unaffiliated third parties unrelated to property contributions. To the extent the contributors should elect to redeem all or a portion of their GRT OP 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 GRT OP Units in the respective transaction.
The limited partners of the Operating PartnershipGRT OP, other than those related to the Will Partners REIT, LLC ("Will Partners") property contribution, will have the right to cause the Operating Partnershipgeneral partner of the GRT OP, the Company, to redeem their limited partnership unitsGRT OP Units for cash equal to the value of an equivalent number of shares, or, at the Company’s option, the Company may purchase such limited partners' limited partnership unitstheir GRT OP Units by issuing one1 share of the Company’s common stock for the original redemption value of each limited partnership unit redeemed. The Company has the control and ability to settle such requests in shares. These rights may not be exercised under certain circumstances which could cause the Company to lose its REIT election. Furthermore, limited partners may exercise their redemption rights only after their limited partnership units have been outstanding for one year. The limited partnership units are reported on the consolidated balance sheets as noncontrolling interests.
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II,REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20182021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
The following summarizes the activity for noncontrolling interests recorded as equity for the years ended December 31, 2018, 20172021 and 2016:2020:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Beginning balance | $ | 226,550 | | | $ | 245,040 | |
| | | |
| Reclass of noncontrolling interest subject to redemption | (159) | | | 224 | |
| Repurchase of noncontrolling interest | — | | | (1,137) | |
| Issuance of stock dividend for noncontrolling interest | — | | | 1,068 | |
| Distributions to noncontrolling interests | (10,942) | | | (13,306) | |
| Allocated distributions to noncontrolling interests subject to redemption | (18) | | | (29) | |
| Net income (loss) | 66 | | | (1,732) | |
| Other comprehensive loss | 3,156 | | | (3,578) | |
| Ending balance | $ | 218,653 | | | $ | 226,550 | |
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 GRT OP 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.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Beginning balance | $ | 76 |
| | $ | 84 |
| | $ | 98 |
|
| Issuance of limited partnership units | 1,185 |
| | — |
| | — |
|
| Distributions to noncontrolling interests | (70 | ) | | (11 | ) | | (11 | ) |
| Net (loss) income allocation | (6 | ) | | 3 |
| | (3 | ) |
| Other comprehensive loss | (3 | ) | | — |
| | — |
|
| Ending balance | $ | 1,182 |
| | $ | 76 |
| | $ | 84 |
|
10. 11. Related Party Transactions
Summarized below are the related-partyrelated party transaction costs incurred by the Company for the years ended December 31, 2018, 20172021, 2020 and 2016,2019, respectively, and any related amounts receivable and payable as of December 31, 20182021 and 2017: |
| | | | | | | | | | | | | | | | | | | |
| | Incurred as of December 31, | | Payable as of December 31, |
| | 2018 | | 2017 | | 2016 | | 2018 | | 2017 |
| Expensed | | | | | | | | | |
| Acquisition fees and expenses | $ | — |
| | $ | — |
| | $ | 6,324 |
| | $ | — |
| | $ | — |
|
| Corporate operating expenses | 3,011 |
| | 2,336 |
| | 1,622 |
| | 63 |
| | 658 |
|
Other operating expenses (1) | 215 |
| | — |
| | — |
| | 215 |
| | — |
|
Asset management fees (2) | — |
| | 8,027 |
| | 6,413 |
| | — |
| | — |
|
| Property management fees | 1,832 |
| | 1,799 |
| | 1,052 |
| | 157 |
| | 158 |
|
| Performance distributions | 7,783 |
| | 2,394 |
| | — |
| | 7,807 |
| | 2,394 |
|
| Advisory Fees | 9,316 |
| | 2,550 |
| | — |
| | 781 |
| | 762 |
|
| Capitalized/Offering | | | | | | | | | |
Acquisition fees and expenses (3) | — |
| | 1,099 |
| | 7,606 |
| | — |
| | — |
|
| Organization and offering expense | 1,120 |
| | 192 |
| | — |
| | 1,312 |
| (7) | 192 |
|
| Other costs advanced by the Advisor | 1,233 |
| | 662 |
| | 304 |
| | 367 |
| | 285 |
|
Selling commissions (4) | 66 |
| | 1,128 |
| | 11,397 |
| | — |
| | — |
|
| Dealer manager fees | 11 |
| | 393 |
| | 3,949 |
| | — |
| | — |
|
Stockholder servicing fee (5) | 175 |
| | 660 |
| | 17,449 |
| | 8,302 |
| | 12,377 |
|
| Distribution fee | 10 |
| | — |
| | — |
| | — |
| | — |
|
Advisor Advances: (6) | | | | | | | | | |
| Organization and offering expenses | 45 |
| | 179 |
| | 2,634 |
| | 44 |
| | 8 |
|
Dealer manager fees | — |
| | 853 |
| | 8,069 |
| | — |
| | 62 |
|
| Total | $ | 24,817 |
| | $ | 22,272 |
| | $ | 66,819 |
| | $ | 19,048 |
| | $ | 16,896 |
|
| |
(1) | Other operating expenses include costs incurred by the Company's former sponsor, GCC, related to acquisition transactions that failed to close. |
| |
(2) | As part of the Follow-On Offering, the Company's new management compensation structure no longer includes asset management fees. |
| |
(3) | Effective September 20, 2017, the Advisor is not entitled to acquisition fees, disposition fees or financing fees. |
| |
(4) | On September 18, 2017, the Company and the Dealer Manager entered into a dealer manager agreement for the Follow-On Offering. See the "DealerManager Agreement" section below for details regarding selling commissions and dealer manager fees.
|
| |
(5) | The Dealer Manager continues to receive a stockholder servicing fee with respect to Class AA shares as detailed in the Company's IPO prospectus. The stockholder servicing fee is paid quarterly and accrues daily in an amount equal to 1/365th of 1% of the NAV per share of the Class AA shares, up to an aggregate of 4% of the gross proceeds of Class AA shares sold. The Company will cease paying the stockholder servicing fee with respect to the Class AA shares at the earlier of: (i) the date at which the aggregate underwriting compensation from all sources equals 10% of the gross proceeds from the sale of shares in the Company's IPO (excluding proceeds from sales pursuant to the related DRP); (ii) the fourth anniversary of the last day of the fiscal quarter in which the Company's IPO terminated; (iii) the date that such Class AA share is redeemed or is no longer outstanding; and (iv) the occurrence of a merger, listing on a national securities exchange, or an extraordinary transaction. |
| |
(6) | Pursuant to the original advisory agreement, commencing November 2, 2015, the Company remained obligated to reimburse the Advisor for organizational and offering costs incurred after such date. Terms of the organizational and offering costs are included in the Company's 2016 Annual Report on Form 10-K filed on March 15, 2017. |
2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Incurred for the Year Ended December 31, | | Receivable as of December 31, |
| 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| Assets Assumed through the Self-Administration Transaction | | | | | | | | | |
| Cash to be received from an affiliate related to deferred compensation and other payroll costs | $ | — | | | $ | — | | | $ | 658 | | | $ | — | | | $ | — | |
| Other fees | — | | | 243 | | | — | | | — | | | 293 | |
| Due from GCC | | | | | | | | | |
| Reimbursable Expense Allocation | 20 | | | 15 | | | 4 | | | 11 | | | 4 | |
| Payroll/Expense Allocation | 19 | | | 653 | | | 481 | | | 260 | | | 1,114 | |
| Due from Affiliates | | | | | | | | | |
| Payroll/Expense Allocation | — | | | — | | | 1,217 | | | — | | | — | |
| O&O Costs (including payroll allocated to O&O) | — | | | — | | | 157 | | | — | | | — | |
Other Fees | — | | | — | | | 6,375 | | | — | | | — | |
| Total incurred/receivable | $ | 39 | | | $ | 911 | | | $ | 8,892 | | | $ | 271 | | | $ | 1,411 | |
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II,REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20182021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
| |
(7) | Excludes amounts in excess of the 15% organization and offering costs limitation. See Note 8, Equity, for additional details.
|
On September 20, 2017, an affiliated entity of the Company purchased 264 Class T shares, 264 Class S shares, 264 Class D shares, and 263,200 Class I shares in the Follow-On Offering for $2.5 million. As of December 31, 2018, the total outstanding shares owned by affiliates (including DRP) was 279 Class T shares, 279 Class S shares, 282 Class D shares, 281,789 Class I shares, and 286,192 Class A shares. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Incurred for the Year Ended December 31, | | Payable as of December 31, |
| 2021 | | 2020 | | 2019 | | 2021 | | 2020 |
| Expensed | | | | | | | | | |
| Operating expenses | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,085 | |
| Asset management fees | — | | | — | | | — | | | — | | | 695 | |
| | | | | | | | | |
| Disposition fees | — | | | — | | | 641 | | | — | | | — | |
| Costs advanced by the advisor | 2,275 | | | 2,000 | | | 3,771 | | | 929 | | | — | |
| Consulting fee - shared services | 2,520 | | | 2,500 | | | 2,500 | | | 461 | | | — | |
| Capitalized | | | | | | | | | |
| Acquisition fees | — | | | — | | | 942 | | | — | | | — | |
| Leasing commissions | — | | | — | | | 2,540 | | | — | | | — | |
| Assumed through Self- Administration Transaction/EA Mergers | | | | | | | | | |
| Earn-out | — | | | — | | | — | | | 197 | | | 262 | |
| Other Fees | — | | | — | | | 20 | | | — | | | — | |
| Stockholder Servicing Fee | — | | | — | | | 692 | | | 92 | | | 494 | |
| Other | | | | | | | | | |
| Distributions | 8,688 | | | 10,537 | | | 14,138 | | | 739 | | | 736 | |
| Total incurred/payable | $ | 13,483 | | | $ | 15,037 | | | $ | 25,244 | | | $ | 2,418 | | | $ | 3,272 | |
Advisory Agreement
In connection with the Follow-On Offering, on September 20, 2017, the Company entered into the Advisory Agreement with the Advisor and the Operating Partnership. The Advisory Agreement is substantially similar to the Original Advisory Agreement, except that the Company will not pay the Advisor any acquisition, financing or other similar fees from proceeds raised in the Follow-On Offering in connection with making investments and will instead pay the Advisor an advisory fee that will be payable in arrears on a monthly basis and accrues daily in an amount equal to 1/365th of 1.25% of the NAV for each class of common stock for each day.
Performance Distribution
So long as the Advisory Agreement has not been terminated (including by means of non-renewal), the Advisor will hold a special limited partnership interest in the Operating Partnership that entitles it to receive a distribution from the Operating Partnership equal to 12.5% of the total return, subject to a 5.5% hurdle amount and a high water mark, with a catch-up (terms of the performance distribution allocation are included in the Company's 2017 Annual Report on Form 10-K filed on March 9, 2018). Such distribution will be made annually and accrue daily. On February 16, 2018, the Company paid in cash approximately $1.2 million and issued approximately $1.2 million in Class I limited partnership units to the Advisor. The Advisor elected to receive 50% in cash and the remaining in Class I limited partnership units.
Operating Expenses
The Advisor and its affiliates are entitled to reimbursement for certain expenses incurred on behalf of the Company in connection with providing administrative services, including related personnel costs; provided, however, the Advisor must reimburse the Company for the amount, if any, by which total operating expenses (as defined), including advisory fees, paid during the previous 12 months then ended exceeded the greater of: (i) 2% of the Company’s average invested assets for that 12 months then ended; or (ii) 25% of the Company’s net income, before any additions to reserves for depreciation, bad debts or other expenses connected with the acquisition and disposition of real estate interests and before any gain from the sale of the Company’s assets, for that fiscal year, unless the Company’s Board has determined that such excess expenses were justified based on unusual and non-recurring factors. The Advisor may waive or defer all or a portion of these reimbursements or elect to receive Class I shares or Class I units of the Operating Partnership in lieu of these reimbursements at any time and from time to time, in its sole discretion. For the years ended December 31, 2018 and 2017, the Company’s total operating expenses did not exceed the 2%/25% guideline.
The Company reimbursed the Advisor and its affiliates a portion of the compensation paid by the Advisor and its affiliates for the Company's principal financial officer, Javier F. Bitar, executive vice president, David C. Rupert, and vice president and secretary, Howard S. Hirsch of approximately $0.8 million and $0.7 million, which is partially included in offering costs with the remaining amount included in corporate operating expenses to affiliates for the years ended December 31, 2018 and 2017, respectively, 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 $0.2 million in reimbursable expenses to the Advisor for services provided to the Company by certain of its other executive officers for the years ended December 31, 2018 and 2017, respectively. The reimbursable expenses include components of salaries, bonuses, benefits and other overhead charges and are based on the percentage of time each executive officer spends on the Company's affairs.
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)
Dealer Manager Agreement
The Company entered into a dealer manager agreement and associated form of participating dealer agreement (the "Dealer“Dealer Manager Agreement"Agreement”) with the Dealer Manager. Pursuant todealer manager for the Follow-On Offering. The terms of the Dealer Manager Agreement the Company will payare substantially similar to the Dealer Manager selling commissions of up to 3.0%terms of the total purchase price for each sale of Class T shares and selling commissions of up to 3.5% ofdealer manager agreement from the total purchase price for each sale of Class S shares. The Company will not payCompany's initial public offering (“IPO”), except as it relates to the Dealer Manager any selling commissions in respect ofshare classes offered and the purchase of any Class D shares, Class I shares or DRP shares. The Company also will payfees to the Dealer Manager dealer manager fees of up to 0.5% of the total purchase price for each sale of Class T shares. The Company will not pay to the Dealer Manager any dealer manager fees in respect of the purchase of any Class S shares, Class D shares, Class I shares or DRP shares. Substantially all of the selling commissions and dealer manager fees may be reallowedreceived by the Dealer Managerdealer manager. The Follow-On Offering terminated on September 20, 2020. See Note 9, Equity.
Subject to the participating broker-dealers who sold the shares giving rise to such selling commissions and dealer manager fees.
Distribution Fees
Subject toFinancial Industry Regulatory Authority, Inc.'s limitations on underwriting compensation, under the Dealer Manager Agreement the Company will payrequired payment to the Dealer Managerdealer manager of a distribution fee for ongoing services rendered to stockholders by participating broker-dealers or broker-dealers servicing investors’ accounts, referred to as servicing broker-dealers. The fee accruesaccrued daily, and is paid monthly in arrears, and is calculated based on the average daily NAV for the applicable month (the “Average NAV”). The distribution fees formonth.
Conflicts of Interest
Affiliated Former Dealer Manager
Since Griffin Capital Securities, LLC, the different share classes are as follows: (i) with respect to the outstanding Class T shares equal to 1/365th of 1.0% of the Average NAV of the outstanding Class T shares for each day, consisting of an advisor distribution fee of 1/365th of 0.75% and a dealer distribution fee of 1/365th of 0.25% of the Average NAV of the Class T shares for each day; (ii) with respect to the outstanding Class S shares equal to 1/365th of 1.0% of the Average NAV of the outstanding Class S shares for each day; and (iii) with respect to the outstanding Class D shares equal to 1/365th of 0.25% of the Average NAV of the outstanding Class D shares for each day. The Company will not pay a distribution fee with respect to the outstanding Class I shares.
The distribution fees will accrue daily and be paid monthly in arrears. The Dealer Manager will reallow the distribution fees to participating broker-dealers and servicing broker-dealers for ongoing services performed by such broker-dealers, and will retain any such distribution fees to the extent a broker-dealer is not eligible to receive them for failure to provide such services. The Dealer Manager will waive the distribution fees for any purchases by affiliates of the Company.
The Company will cease paying the distribution fee with respect to any Class T share, Class S share or Class D share held in a stockholder's account at the end of the month in which the Dealer Manager in conjunction with the transfer agent determines that total selling commissions,Company's former dealer manager, fees and distribution fees paid with respect to all shares from the Follow-On Offering held by such stockholder within such account would exceed, in the aggregate, 9.0% (or a lower limit as set forth in any applicable agreement between the Dealer Manager and a participating broker-dealer) of the gross proceeds from the sale of such shares (including the gross proceeds of any shares issued under the DRP with respect thereto). At the end of such month, such Class T share, Class S share or Class D share (and any shares issued under the DRP with respect thereto) will convert into a number of Class I shares (including any fractional shares) withis an equivalent NAV as such share.
In addition, the Company will cease paying the distribution fee on the Class T shares, Class S shares and Class D shares on the earlier to occur of the following: (i) a listingaffiliate of the Company's shares; (ii) a merger or consolidation with or into another entity, orformer sponsor, the sale or other dispositionCompany did not have the benefit of all or substantially allan independent due diligence review and investigation of the Company's assets, including any liquidation of the Company; or (iii) the date following the completion of the primary portion of the Follow-On Offering on which, in the aggregate, underwriting compensation from all sourcestype normally performed by an unaffiliated, independent underwriter in connection with the Follow-On Offering, including selling commissions,offering of securities. The Company's former dealer manager fees,is also serving as the distribution fee and other underwriting compensation, is equal to 9.0% of the gross proceeds from the Company's primary offering.
Property Management Agreement
In the event that the Company contracts directly with non-affiliated third party property managers with respect to its individual properties, the Company pays the Property Manager an oversight fee equal to 1.0% of the gross revenues of the property managed, plus reimbursable costs as applicable. Reimbursable costs and expenses include wages and salaries and other expenses of employees engaged in operating, managing and maintaining the Company's properties, as well as certain
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)
allocations of office, administrative, and supply costs. The Property Manager may waive or defer all or a portion of these reimbursements or elect to receive Class I shares or Class I units of the Operating Partnership in lieu of these reimbursements at any time and from time to time, in its sole discretion. In the event that the Company contracts directly with the Property Manager with respect to a particular property, the Company pays the Property Manager aggregate property management fees of up to 3.0%, or greater if the lease so allows, of gross revenues receiveddealer manager for management of the Company's properties, plus reimbursable costs as applicable. These property management fees may be paid or re-allowed to third party property managers if the Property Manager contracts with a third party. In no event will the Company pay both a property management fee to the Property Manager and an oversight fee to the Property Manager with respect to a particular property.
In addition, the Company may pay the Property Manager or its designees a leasing fee in an amount equal to the fee customarily charged by others rendering similar services in the same geographic area. The Company may also pay the Property Manager or its designees a construction management fee for planning and coordinating the construction of any tenant directed improvements for which the Company is responsible to perform pursuant to lease concessions, including tenant-paid finish-out or improvements. The Property Manager shall also be entitled to a construction management fee of 5.0% of the cost of improvements. In the event that the Property Manager assists with the development or redevelopment of a property, the Company may pay a separate market-based fee for such services.
Conflicts of Interest
The Sponsor, Advisor, Property Manager and their officers and certain of their key personnel and their respective affiliates currently serve as key personnel, advisors and managers to GCEAR. Certain of the Company's officers are also officers to some or all of 12 other programs affiliated with the Company's former sponsor, including, Griffin-American Healthcare REIT III, Inc. ("GAHR III"), Phillips Edison Grocery Center REIT III, Inc. ("PECO III"), and Griffin-American Healthcare REIT IV, Inc. ("GAHR IV"), alleach of which are publicly-registered, non-traded real estate investment trusts, andREITs, as wholesale marketing agent for 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 Investment1940 Act, and as dealer manager or master placement agent for various private offerings.
Administrative Services Agreement
In connection with the EA Mergers, the Company Actassumed, as the successor of 1940, as amendedEA-1 and the GRT OP, an Administrative Services Agreement (the "1940 Act"“Administrative Services Agreement”). Because these persons have competing demands on their time, pursuant to which Griffin Capital Company, LLC (“GCC”) and resources, they may have conflicts of interest in allocating their time between the Company’s businessGriffin Capital, LLC (“GC LLC”) continue to provide office space and these other activities.
Some of the material conflicts that the Advisor or its affiliates will face are: (1) competing demand for time of the Advisor’s executive officerscertain operational and other key personnel from the Sponsor and other affiliated entities; (2) determining if certain investment opportunities should be recommendedadministrative services at cost to the GRT OP, Griffin Capital Essential Asset TRS, Inc., and Griffin Capital Real Estate Company, or GCEAR; and (3) influence of the fee structure under the Advisory Agreement and distribution structure of the operating partnership agreement that could result in actions not necessarily in the long-term best interest of the Company's stockholders. The Board has adopted the Sponsor’s acquisition allocation policy as to the allocation of acquisition opportunities among GCEAR and the Company, which is as follows:
The Sponsor will allocate potential investment opportunities to the Company and GCEAR 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 investment 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, 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.
LLC (“GRECO”),
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II,REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20182021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
which may include, without limitation, the shared information technology, human resources, legal, due diligence, marketing, customer service, events, operations, accounting and administrative support services set forth in the Administrative Services Agreement. The Company pays GCC a monthly amount based on the actual costs anticipated to be incurred by GCC for the provision of such office space and services until the Company elects to provide such space and/or services for itself or through another provider, which amount is initially $0.2 million per month, based on an approved budget. Such costs are reconciled quarterly and a full review of the costs will be performed at least annually. In addition, the Company will directly pay or reimburse GCC for the actual cost of any reasonable third-party expenses incurred in connection with the provision of such services.
Economic DependencyCertain Conflict Resolution Procedures
Every transaction that the Company enters into with affiliates is subject to an inherent conflict of interest. The Board may encounter conflicts of interest in enforcing the Company's rights against any affiliate in the event of a default by or disagreement with an affiliate or in invoking powers, rights or options pursuant to any agreement between the Company and affiliates. See the Company's Code of Ethics available at the “Governance Documents” subpage of the investors section of the Company's website at www.grtreit.com for a detailed description of the Company's conflict resolution procedures.
12.Leases
Lessor
The Company willleases commercial and industrial space to tenants primarily under non-cancelable operating leases that generally contain provisions for minimum base rents plus reimbursement for certain operating expenses. Total minimum lease payments are recognized in rental income on a straight-line basis over the term of the related lease and estimated reimbursements from tenants for real estate taxes, insurance, common area maintenance and other recoverable operating expenses are recognized in rental income in the period that the expenses are incurred.
The Company recognized $378.3 million, $314.1 million and $291.4 million of lease income related to operating lease payments for the year ended December 31, 2021, 2020 and 2019, respectively.
The Company's current leases have expirations ranging from 2022 to 2044. The following table sets forth the undiscounted cash flows for future minimum base rents to be dependent onreceived under operating leases as of December 31, 2021.
| | | | | |
| As of December 31, 2021 |
| 2022 | $ | 380,040 | |
| 2023 | 372,142 | |
| 2024 | 331,657 | |
| 2025 | 289,267 | |
| 2026 | 264,413 | |
| Thereafter | 1,012,429 | |
| Total | $ | 2,649,948 | |
The future minimum base rents in the Advisortable above excludes tenant reimbursements of operating expenses, amortization of adjustments for deferred rent receivables and the Dealer Manager for certain services that are essential to the Company, including the saleamortization of the Company's shares of common stock available for issue, the identification, evaluation, negotiation, purchase and disposition of properties and other investments, management of the daily operationsabove/below-market lease intangibles.
Lessee
Certain of the Company’s real estate portfolio, and other general and administrative responsibilities. Inare subject to ground leases. The Company’s ground leases are classified as either operating leases or financing leases based on the event that these companies are unable to provide the respective services,characteristics of each lease. As of December 31, 2021, the Company will be requiredhad 5 ground leases classified as operating and 2 ground leases classified as financing. Each of the Company’s ground leases were acquired as part of the acquisition of real estate and no incremental costs were incurred for such ground leases. The Company’s ground leases are non-cancelable, and contain no renewal options. The Company's Chicago office space lease has a remaining lease term of approximately four years and no option to obtain such services from other resources.renew.
11.The Company incurred operating lease costs of approximately $3.7 million for the years ended December 31, 2021 and 2020 respectively, which are included in "Property Operating Expense" in the accompanying consolidated statement of
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
operations. Total cash paid for amounts included in the measurement of operating lease liabilities was $1.6 million for the years ended December 31, 2021 and 2020, respectively.
The following table sets forth the weighted-average for the lease term and the discount rate as of December 31, 2021 and 2020:
| | | | | | | | | | | |
| As of December 31, |
| Lease Term and Discount Rate | 2021 | | 2020 |
| Weighted-average remaining lease term in years | 73.7 | | 80.1 |
Weighted-average discount rate (1) | 4.83 | % | | 4.98 | % |
(1) Because the rate implicit in each of the Company's leases was not readily determinable, the Company used an incremental borrowing rate. In determining the Company's incremental borrowing rate for each lease, the Company considered recent rates on secured borrowings, observable risk-free interest rates and credit spreads correlating to the Company's creditworthiness, the impact of collateralization and the term of each of the Company's lease agreements.
Maturities of lease liabilities as of December 31, 2021 were as follows: | | | | | | | | | | | |
| As of December 31, 2021 |
| Operating | | Financing |
| 2022 | $ | 1,730 | | | $ | 591 | |
| 2023 | 1,796 | | | 355 | |
| 2024 | 1,831 | | | 360 | |
| 2025 | 1,783 | | | 370 | |
| 2026 | 1,716 | | | 375 | |
| Thereafter | 284,459 | | | 3,820 | |
| Total undiscounted lease payments | 293,315 | | | 5,871 | |
| Less imputed interest | (246,085) | | | (2,205) | |
| Total lease liabilities | $ | 47,230 | | | $ | 3,666 | |
13. Commitments and Contingencies
Litigation
From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. The Company is not a party to any material legal proceedings, nor is the Company aware of any pending or threatened litigation that would have a material adverse effect on the Company’s business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
Proposed Merger with GCEARCapital Expenditures and Tenant Improvement Commitments
On December 14, 2018, the Company, the Operating Partnership, Merger Sub, GCEAR, and the GCEAR Operating Partnership, entered into the Merger Agreement.
Subject to the terms and conditions of the Merger Agreement, (i) GCEAR will merge with and into Merger Sub, with Merger Sub surviving as a direct, wholly owned subsidiary of the Company (the “Company Merger”) and (ii) the Operating Partnership will merge with and into the GCEAR Operating Partnership (the “Partnership Merger” and, together with the Company Merger, the “Mergers”), with the GCEAR Operating Partnership surviving the Partnership Merger. At such time, (x) in accordance with the applicable provisions of the MGCL, the separate existence of GCEAR shall cease and (y) in accordance with the Delaware Revised Uniform Limited Partnership Act, the separate existence of the Operating Partnership shall cease.
At the effective time of the Company Merger, each issued and outstanding share of GCEAR’s common stock (or fraction thereof), $0.001 par value per share (the “GCEAR Common Stock”), will be converted into the right to receive 1.04807 shares of the Company’s newly created Class E common stock, $0.001 par value per share (the “Class E Common Stock”), and each issued and outstanding share of GCEAR’s Series A cumulative perpetual convertible preferred stock will be converted into the right to receive one share of the Company’s newly created Series A cumulative perpetual convertible preferred stock.
At the effective time of the Partnership Merger, each GCEAR Operating Partnership unit (“OP Units”) outstanding immediately prior to the effective time of the Partnership Merger will convert into the right to receive 1.04807 Class E OP Units in the surviving partnership and each Operating Partnership unit outstanding immediately prior to the effective time of the Partnership Merger will convert into the right to receive one OP Unit of like class in the surviving partnership. The special limited partnership interest of the Operating Partnership will be automatically redeemed, canceled and retired as described in the Merger Agreement.
The Merger Agreement provides certain termination rights for the Company and GCEAR. In connection with the termination of the Merger Agreement, under certain specified circumstances, GCEAR may be required to pay the Company a termination fee of $52.2 million and the Company may be required to pay GCEAR a termination fee of $52.2 million.
The Mergers will be accounted for by using the business combination accounting rules, which requires the application of a screen test to evaluate if substantially all the fair value of the acquired properties is concentrated in a single identifiable asset or group of similar identifiable assets to determine whether a transaction is accounted for as an asset acquisition or business combination. In addition, the rules require the identification of the acquirer, the determination of the acquisition date, and the recognition and measurement, at fair value, of the identifiable assets acquired, liabilities assumed and any noncontrolling interest in the consolidated subsidiaries of the acquiree. After consideration of all applicable factors pursuant to the business combination accounting rules, the Mergers are expected to be treated as an asset acquisition under GAAP. As of December 31, 2018,2021, the Company has incurred expenses (ashad an aggregate remaining contractual commitment for repositioning, capital expenditure projects, leasing commissions and tenant improvements of approximately $25.4 million.
14. Declaration of Distributions
On March 25, 2021, the Company isBoard (i) approved the acquiree)declaration of $1.9 milliondistributions on a quarterly basis, as opposed to monthly, beginning with distributions for the period commencing on April 1, 2021 and ending on June 30, 2021; and (ii) declared an all-cash distribution rate, based on 365 days in costs related to the Mergers.
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding$0.000958904 per day ($0.35 per share amounts)
12. Declaration of Distributions
The Company paid cash distributions in the amount of $0.00150684932 per day, beforeannualized), subject to adjustments offor class-specific expenses, per Class E share, Class T share, Class S share, Class D share, Class I share, Class A share, Class AA share and Class AAA share on the outstanding shares of common stock, payable tofor stockholders of record at the close of each business on each day duringfor the period from Octobercommencing on April 1, 2018 through December 31, 2018. Such2021 and ending on June 30, 2021. The Company paid such distributions payable to each stockholder of record were paid on such date after the end of each month during the period as determined by the Company's Chief Executive Officer.May 3, 2021, June 1, 2021 and July 1, 2021, respectively.
On December 12, 2018,June 15, 2021, the Company’s Board declared cash distributionsan all-cash distribution rate, based on 365 days in the amountcalendar year, of $0.00150684932$0.000958904 per day ($0.35 per share annualized), subject to adjustments for class-specific expenses, per Class E share, Class
GRIFFIN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Dollars in thousands unless otherwise noted and excluding per share amounts)
S share, Class D Share, Class I share, Class AA share and Class AAA share of common stock, for stockholders of record at the close of each business day for the period commencing on July 1, 2021 and ending on September 30, 2021. The Company paid such distributions to each stockholder of record on August 2, 2021, September 1, 2021 and October 12, 2021, respectively.
On August 5, 2021, the Board declared an all-cash distribution rate, based on 365 days in the calendar year, of $0.000958904 per day ($0.35 per share annualized), subject to adjustments for class-specific expenses, per Class E share, Class T share, Class S share, Class D share, Class I share, Class A share, Class AA share and Class AAA share on the outstanding shares of common stock, payable tofor stockholders of record at the close of each business on each day duringfor the period Januarycommencing on October 1, 2019 through the earlier of March2021 and ending on December 31, 2019 or the date of consummation of the2021. The Company Merger. Suchpaid such distributions payable to each stockholder of record will be paid on such date after the end of each month during the period as determined by the Company's Chief Executive Officer.
13. Selected Quarterly Financial Data (Unaudited)
Presented below is a summary of the unaudited quarterly financial information for the years endedNovember 1, 2021, December 31, 20181 2021, and 2017: |
| | | | | | | | | | | | | | | | |
| | | 2018 |
| | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Total revenue | | $ | 26,789 |
| | $ | 26,297 |
| | $ | 26,713 |
| | $ | 26,595 |
|
| Net income (loss) | | $ | 804 |
| | $ | (478 | ) | | $ | (757 | ) | | $ | (2,856 | ) |
| Net income (loss) attributable to common stockholders | | $ | 803 |
| | $ | (477 | ) | | $ | (756 | ) | | $ | (2,851 | ) |
Net income (loss) per share (1) | | $ | 0.01 |
| | $ | (0.01 | ) | | $ | (0.01 | ) | | $ | (0.03 | ) |
| | | 2017 |
| | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Total revenue | | $ | 25,972 |
| | $ | 26,546 |
| | $ | 27,349 |
| | $ | 27,514 |
|
| Net income | | $ | 3,124 |
| | $ | 3,365 |
| | $ | 3,099 |
| | $ | 1,531 |
|
| Net income attributable to common stockholders | | $ | 3,123 |
| | $ | 3,364 |
| | $ | 3,098 |
| | $ | 1,531 |
|
Net income per share (1) | | $ | 0.04 |
| | $ | 0.04 |
| | $ | 0.04 |
| | $ | 0.03 |
|
| |
(1) | Amounts were retroactively adjusted to reflect stock dividends. (See Note 2, Basis of Presentation and Summary of Significant Accounting Policies, for additional detail).
|
14. Subsequent Events
Status of the Offering
As of March 11, 2019, the Company had issued 6,689,813 and 1,030,404 shares of the Company’s common stock pursuant to the DRP and Follow-On Offering, respectively, for approximately $63.5 million and $10.0 million,January 3, 2022, respectively.
Declaration of Distributions
On March 13, 2019,November 2, 2021, the Company’s Board declared cash distributionsan all-cash distribution rate, based on 365 days in the amountcalendar year, of $0.00150684932$0.000958904 per day ($0.35 per share annualized), subject to adjustments for class-specific expenses, per Class E share, Class T share, Class S share, Class D share, Class I share, Class A share, Class AA share and Class AAA on the outstanding sharesshare of common stock, payable tofor stockholders of record at the close of each business on each day duringfor the period commencing on AprilJanuary 1, 20192022 and ending on the earlier of (a) June 30, 2019 or (b) the date of the closing of the mergers. SuchMarch 31, 2022. The Company intends to pay such distributions payable to each stockholder of record will be paid onat such datetime after the end of each month during the period as determined by the Company's Chief Executive Officer.
15. Subsequent Events
Cash Distributions
On November 2, 2021 the Board declared an all-cash distribution rate, based on 365 days in the calendar year, of $0.000958904 per day ($0.35 per share annualized), subject to adjustments for class-specific expenses, per Class E share, Class T share, Class S share, Class D share, Class I share, Class A share, Class AA share and Class AAA share of common stock, for stockholders of such classes as of the close of each business day of the period from January 1, 2021 and ending on March 31, 2022. The Company paid such January distributions to each stockholder of record on February 1, 2022, and intends to pay such February and March distributions to each stockholder of record at such time in March 2022 and April 2022, respectively, as determined by the Company’s Chief Executive Officer.
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)
DRP
On February 15, 2019, the Company's board of directors determined it was in the best interests of the Company to reinstate the DRP effective with the February distribution paid on or around March 1, 2019.
Issuance of Directors Stock
On March 14, 2019, the Company issued 7,000 shares of restricted stock to each of the Company's independent directors upon each of their respective re-elections to the Company’s board of directors. Half of the restricted shares vested upon issuance, and the remaining half will vest upon the first anniversary of the grant date, subject to the independent director’s continued service as a director during such vesting period.
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II,REALTY TRUST, INC.
SCHEDULE III
REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION AND AMORTIZATION
(Dollars in thousands unless otherwise noted)thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Initial Cost to Company (1) | | Total Adjustment to Basis (2) | | Gross Carrying Amount at
December 31, 2021 | | | | | | | | Life on
which
depreciation
in latest
income
statement is
computed |
| Property | | Property Type | | State | | Encumbrances (3) | | Land | | Building and Improvements | | Building and Improvements | | Land | | Building and Improvements (2) | | Total | | Accumulated Depreciation and Amortization | | Date of Construction | | Date of Acquisition | |
| Plainfield | | Office | | IL | | $ | — | | | $ | 3,709 | | | $ | 22,209 | | | $ | 7,344 | | | $ | 3,709 | | | $ | 29,553 | | | $ | 33,262 | | | $ | 16,703 | | | N/A | | 6/18/2009 | | 5 -40 years |
| Renfro | | Industrial | | SC | | 12,247 | | | 1,400 | | | 18,182 | | | 2,012 | | | 1,400 | | | 20,194 | | | 21,594 | | | 9,987 | | | N/A | | 6/18/2009 | | 5-40 years |
| Emporia Partners | | Industrial | | KS | | — | | | 274 | | | 7,567 | | | 962 | | | 274 | | | 8,529 | | | 8,803 | | | 3,366 | | | N/A | | 8/27/2010 | | 5-40 years |
| AT&T | | Office | | WA | | 23,585 | | | 6,770 | | | 32,420 | | | 718 | | | 6,770 | | | 33,138 | | | 39,908 | | | 11,934 | | | N/A | | 1/31/2012 | | 5-40 years |
| Westinghouse | | Office | | PA | | 19,957 | | | 2,650 | | | 26,745 | | | 54 | | | 2,650 | | | 26,799 | | | 29,449 | | | 10,104 | | | N/A | | 3/22/2012 | | 5-40 years |
| TransDigm | | Industrial | | NJ | | 4,173 | | | 3,773 | | | 9,030 | | | 411 | | | 3,773 | | | 9,441 | | | 13,214 | | | 3,272 | | | N/A | | 5/31/2012 | | 5-40 years |
| Atrium II | | Office | | CO | | 8,618 | | | 2,600 | | | 13,500 | | | 10,643 | | | 2,600 | | | 24,143 | | | 26,743 | | | 7,770 | | | N/A | | 6/29/2012 | | 5-40 years |
| Zeller Plastik | | Industrial | | IL | | 8,164 | | | 2,674 | | | 13,229 | | | 651 | | | 2,674 | | | 13,880 | | | 16,554 | | | 4,767 | | | N/A | | 11/8/2012 | | 5-40 years |
| Northrop Grumman | | Office | | OH | | 9,945 | | | 1,300 | | | 16,188 | | | 39 | | | 1,300 | | | 16,227 | | | 17,527 | | | 7,232 | | | N/A | | 11/13/2012 | | 5-40 years |
| Health Net | | Office | | CA | | 12,246 | | | 4,182 | | | 18,072 | | | 324 | | | 4,182 | | | 18,396 | | | 22,578 | | | 9,969 | | | N/A | | 12/18/2012 | | 5-40 years |
| Comcast | | Office | | CO | | 14,105 | | '(5) | 3,146 | | | 22,826 | | | 1,927 | | | 3,146 | | | 24,753 | | | 27,899 | | | 12,378 | | | N/A | | 1/11/2013 | | 5-40 years |
| 500 Rivertech | | Office | | WA | | — | | | 3,000 | | | 9,000 | | | 6,784 | | | 3,000 | | | 15,784 | | | 18,784 | | | 6,142 | | | N/A | | 2/15/2013 | | 5-40 years |
| Schlumberger | | Office | | TX | | 27,681 | | | 2,800 | | | 47,752 | | | 1,285 | | | 2,800 | | | 49,037 | | | 51,837 | | | 15,455 | | | N/A | | 5/1/2013 | | 5-40 years |
| UTC | | Office | | NC | | 21,879 | | | 1,330 | | | 37,858 | | | — | | | 1,330 | | | 37,858 | | | 39,188 | | | 12,989 | | | N/A | | 5/3/2013 | | 5-40 years |
| Avnet | | Industrial | | AZ | | 18,288 | | | 1,860 | | | 31,481 | | | 47 | | | 1,860 | | | 31,528 | | | 33,388 | | | 8,792 | | | N/A | | 5/29/2013 | | 5-40 years |
| Cigna | | Office | | AZ | | 39,000 | | '(5) | 8,600 | | | 48,102 | | | 133 | | | 8,600 | | | 48,235 | | | 56,835 | | | 16,633 | | | N/A | | 6/20/2013 | | 5-40 years |
| Amazon - Arlington Heights | | Industrial | | IL | | — | | | 7,697 | | | 21,843 | | | 5,879 | | | 7,697 | | | 27,722 | | | 35,419 | | | 8,208 | | | N/A | | 8/13/2013 | | 5-40 years |
| Verizon | | Office | | NJ | | 24,089 | | | 5,300 | | | 36,768 | | | 14,063 | | | 5,300 | | | 50,831 | | | 56,131 | | | 19,501 | | | N/A | | 10/3/2013 | | 5-40 years |
| Fox Head | | Office | | CA | | — | | | 3,672 | | | 23,230 | | | — | | | 3,672 | | | 23,230 | | | 26,902 | | | 6,740 | | | N/A | | 10/29/2013 | | 5-40 years |
| 2500 Windy Ridge | | Office | | GA | | — | | | 5,000 | | | 50,227 | | | 18,247 | | | 5,000 | | | 68,474 | | | 73,474 | | | 19,957 | | | N/A | | 11/5/2013 | | 5-40 years |
| General Electric | | Office | | GA | | — | | | 5,050 | | | 51,396 | | | 132 | | | 5,050 | | | 51,528 | | | 56,578 | | | 14,528 | | | N/A | | 11/5/2013 | | 5-40 years |
| Atlanta Wildwood | | Office | | GA | | — | | | 4,241 | | | 23,414 | | | 9,051 | | | 4,241 | | | 32,465 | | | 36,706 | | | 11,175 | | | N/A | | 11/5/2013 | | 5-40 years |
| Community Insurance | | Office | | OH | | — | | | 1,177 | | | 22,323 | | | 3,725 | | | 1,177 | | | 26,048 | | | 27,225 | | | 7,124 | | | N/A | | 11/5/2013 | | 5-40 years |
| Anthem | | Office | | OH | | — | | | 850 | | | 8,892 | | | 175 | | | 850 | | | 9,067 | | | 9,917 | | | 3,224 | | | N/A | | 11/5/2013 | | 5-40 years |
| JPMorgan Chase | | Office | | OH | | — | | | 5,500 | | | 39,000 | | | 1,335 | | | 5,500 | | | 40,335 | | | 45,835 | | | 13,540 | | | N/A | | 11/5/2013 | | 5-40 years |
| Sterling Commerce Center | | Office | | OH | | — | | | 4,750 | | | 32,769 | | | 5,460 | | | 4,750 | | | 38,229 | | | 42,979 | | | 14,032 | | | N/A | | 11/5/2013 | | 5-40 years |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Initial Cost to Company | | Cost Capitalized Subsequent to Acquisition | | Gross Carrying Amount at
December 31, 2018 | | | | | | | | Life on which depreciation in latest income statement is computed |
| Property | | Property Type | | ST | | Encumbrances | | Land | | Building and Improvements(1) | | Building and
Improvements | | Land | | Building and Improvements(1) | | Total | | Accumulated Depreciation and Amortization | | Date of Construction | | Date of Acquisition | |
| Owens Corning | | Industrial | | NC | | $ | 3,300 |
| | $ | 575 |
| | $ | 5,167 |
| | $ | — |
| | $ | 575 |
| | $ | 5,167 |
| | $ | 5,742 |
| | $ | 657 |
| | N/A | | 3/9/2015 | | 5-40 years |
| Westgate II | | Office | | TX | | 34,200 |
| | 3,732 |
| | 55,101 |
| | — |
| | 3,732 |
| | 55,101 |
| | 58,833 |
| | 8,842 |
| | N/A | | 4/1/2015 | | 5-40 years |
| Administrative Office of Pennsylvania Courts | | Office | | PA | | 6,070 |
| | 1,207 |
| | 8,936 |
| | — |
| | 1,207 |
| | 8,936 |
| | 10,143 |
| | 1,362 |
| | N/A | | 4/22/2015 | | 5-40 years |
| American Express Center | | Data Center/Office | | AZ | | 54,900 |
| | 5,750 |
| | 113,670 |
| | — |
| | 5,750 |
| | 113,670 |
| | 119,420 |
| | 24,395 |
| | N/A | | 5/11/2015 | | 5-40 years |
| MGM Corporate Center | | Office | | NV | | 18,180 |
| | 4,260 |
| | 28,705 |
| | 536 |
| | 4,260 |
| | 29,241 |
| | 33,501 |
| | 4,729 |
| | N/A | | 5/27/2015 | | 5-40 years |
| American Showa | | Industrial | | OH | | 10,320 |
| | 1,453 |
| | 15,747 |
| | — |
| | 1,453 |
| | 15,747 |
| | 17,200 |
| | 2,042 |
| | N/A | | 5/28/2015 | | 5-40 years |
| Huntington Ingalls | | Industrial | | VA | | — |
| | 5,415 |
| | 29,836 |
| | 18 |
| | 5,415 |
| | 29,854 |
| | 35,269 |
| | 3,881 |
| | N/A | | 6/26/2015 | | 5-40 years |
| Wyndham | | Office | | NJ | | — |
| | 5,696 |
| | 76,532 |
| | — |
| | 5,696 |
| | 76,532 |
| | 82,228 |
| | 9,219 |
| | N/A | | 6/26/2015 | | 5-40 years |
| Exel | | Distribution Center | | OH | | — |
| | 1,988 |
| | 13,958 |
| | — |
| | 1,988 |
| | 13,958 |
| | 15,946 |
| | 2,043 |
| | N/A | | 6/30/2015 | | 5-40 years |
| Rapiscan Systems | | Office | | MA | | — |
| | 2,350 |
| | 9,482 |
| | — |
| | 2,350 |
| | 9,482 |
| | 11,832 |
| | 1,584 |
| | N/A | | 7/1/2015 | | 5-40 years |
| FedEx Freight | | Industrial | | OH | | — |
| | 2,774 |
| | 25,913 |
| | — |
| | 2,774 |
| | 25,913 |
| | 28,687 |
| | 3,283 |
| | N/A | | 7/22/2015 | | 5-40 years |
| Aetna | | Office | | AZ | | — |
| | 1,853 |
| | 20,481 |
| | — |
| | 1,853 |
| | 20,481 |
| | 22,334 |
| | 1,755 |
| | N/A | | 7/29/2015 | | 5-40 years |
| Bank of America I | | Office | | CA | | — |
| | 5,491 |
| | 23,514 |
| | 216 |
| | 5,491 |
| | 23,730 |
| | 29,221 |
| | 5,294 |
| | N/A | | 8/14/2015 | | 5-40 years |
| Bank of America II | | Office | | CA | | — |
| | 9,206 |
| | 20,204 |
| | 14 |
| | 9,206 |
| | 20,218 |
| | 29,424 |
| | 5,214 |
| | N/A | | 8/14/2015 | | 5-40 years |
| Atlas Copco | | Office | | MI | | — |
| | 1,480 |
| | 16,490 |
| | — |
| | 1,480 |
| | 16,490 |
| | 17,970 |
| | 2,347 |
| | N/A | | 10/1/2015 | | 5-40 years |
| Toshiba TEC | | Office | | NC | | — |
| | 4,130 |
| | 36,821 |
| | — |
| | 4,130 |
| | 36,821 |
| | 40,951 |
| | 4,072 |
| | N/A | | 1/21/2016 | | 5-40 years |
| NETGEAR | | Office | | CA | | — |
| | 20,726 |
| | 25,887 |
| | 43 |
| | 20,726 |
| | 25,930 |
| | 46,656 |
| | 3,470 |
| | N/A | | 5/17/2016 | | 5-40 years |
| Nike | | Office | | OR | | — |
| | 5,988 |
| | 42,397 |
| | 81 |
| | 5,988 |
| | 42,478 |
| | 48,466 |
| | 7,583 |
| | N/A | | 6/16/2016 | | 5-40 years |
| Zebra Technologies | | Office | | IL | | — |
| | 5,238 |
| | 56,526 |
| | — |
| | 5,238 |
| | 56,526 |
| | 61,764 |
| | 6,759 |
| | N/A | | 8/1/2016 | | 5-40 years |
| WABCO | | Industrial | | SC | | — |
| | 1,302 |
| | 12,598 |
| | — |
| | 1,302 |
| | 12,598 |
| | 13,900 |
| | 1,208 |
| | N/A | | 9/14/2016 | | 5-40 years |
| IGT | | Office | | NV | | 45,300 |
| | 6,325 |
| | 64,441 |
| | 40 |
| | 6,325 |
| | 64,481 |
| | 70,806 |
| | 4,837 |
| | N/A | | 9/27/2016 | | 5-40 years |
| 3M | | Industrial | | IL | | 43,600 |
| | 5,320 |
| | 62,247 |
| | — |
| | 5,320 |
| | 62,247 |
| | 67,567 |
| | 4,561 |
| | N/A | | 10/25/2016 | | 5-40 years |
| Amazon | | Industrial | | OH | | 61,500 |
| | 5,331 |
| | 85,770 |
| | — |
| | 5,331 |
| | 85,770 |
| | 91,101 |
| | 5,493 |
| | N/A | | 11/18/2016 | | 5-40 years |
| Zoetis | | Office | | NJ | | — |
| | 3,375 |
| | 42,265 |
| | — |
| | 3,375 |
| | 42,265 |
| | 45,640 |
| | 3,425 |
| | N/A | | 12/16/2016 | | 5-40 years |
| Southern Company | | Office | | AL | | 99,600 |
| | 6,605 |
| | 125,602 |
| | 48 |
| | 6,605 |
| | 125,650 |
| | 132,255 |
| | 6,902 |
| | N/A | | 12/22/2016 | | 5-40 years |
| Allstate | | Office | | CO | | — |
| | 1,808 |
| | 14,090 |
| | 342 |
| | 1,808 |
| | 14,432 |
| | 16,240 |
| | 1,428 |
| | N/A | | 1/31/2017 | | 5-40 years |
| MISO | | Office | | IN | | — |
| | 3,104 |
| | 26,014 |
| | — |
| | 3,104 |
| | 26,014 |
| | 29,118 |
| | 2,185 |
| | N/A | | 5/15/2017 | | 5-40 years |
Total (2) | | | | | | $ | 376,970 |
| | $ | 122,482 |
| | $ | 1,058,394 |
| | $ | 1,338 |
| | $ | 122,482 |
| | $ | 1,059,732 |
| | $ | 1,182,214 |
| | $ | 128,570 |
| | | | | | |
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION
(Dollars in thousands unless otherwise noted)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Initial Cost to Company (1) | | Total Adjustment to Basis (2) | | Gross Carrying Amount at
December 31, 2021 | | | | | | | | Life on
which
depreciation
in latest
income
statement is
computed |
| Property | | Property Type | | State | | Encumbrances (3) | | Land | | Building and Improvements | | Building and Improvements | | Land | | Building and Improvements (2) | | Total | | Accumulated Depreciation and Amortization | | Date of Construction | | Date of Acquisition | |
| Aetna (Arlington) | | Office | | TX | | 36,199 | | '(5) | 3,000 | | | 12,330 | | | 1,793 | | | 3,000 | | | 14,123 | | | 17,123 | | | 5,277 | | | N/A | | 11/5/2013 | | 5-40 years |
| CHRISTUS Health | | Office | | TX | | — | | | 1,950 | | | 46,922 | | | 377 | | | 1,950 | | | 47,299 | | | 49,249 | | | 18,025 | | | N/A | | 11/5/2013 | | 5-40 years |
| Roush Industries | | Industrial | | MI | | — | | | 875 | | | 11,375 | | | 2,615 | | | 875 | | | 13,990 | | | 14,865 | | | 4,283 | | | N/A | | 11/5/2013 | | 5-40 years |
| Parkland Center | | Office | | WI | | — | | | 3,100 | | | 26,348 | | | 11,063 | | | 3,100 | | | 37,411 | | | 40,511 | | | 19,098 | | | N/A | | 11/5/2013 | | 5-40 years |
| 1200 Morris | | Office | | PA | | — | | | 2,925 | | | 18,935 | | | 2,798 | | | 2,925 | | | 21,733 | | | 24,658 | | | 8,759 | | | N/A | | 11/5/2013 | | 5-40 years |
| United HealthCare | | Office | | MO | | — | | | 2,920 | | | 23,510 | | | 9,243 | | | 2,920 | | | 32,753 | | | 35,673 | | | 10,384 | | | N/A | | 11/5/2013 | | 5-40 years |
| Intermec (Northpointe Corporate Center II) | | Office | | WA | | — | | | 1,109 | | | 6,066 | | | 4,576 | | | 1,109 | | | 10,642 | | | 11,751 | | | 5,806 | | | N/A | | 11/5/2013 | | 5-40 years |
| Comcast (Northpointe Corporate Center I) | | Office | | WA | | 39,650 | | '(5) | 2,292 | | | 16,930 | | | 2,324 | | | 2,292 | | | 19,254 | | | 21,546 | | | 6,141 | | | N/A | | 11/5/2013 | | 5-40 years |
| Farmers | | Office | | KS | | — | | | 2,750 | | | 17,106 | | | 816 | | | 2,750 | | | 17,922 | | | 20,672 | | | 7,430 | | | N/A | | 12/27/2013 | | 5-40 years |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Digital Globe | | Office | | CO | | — | | | 8,600 | | | 83,400 | | | — | | | 8,600 | | | 83,400 | | | 92,000 | | | 25,498 | | | N/A | | 1/14/2014 | | 5-40 years |
| Waste Management | | Office | | AZ | | — | | | — | | | 16,515 | | | 82 | | | — | | | 16,597 | | | 16,597 | | | 7,126 | | | N/A | | 1/16/2014 | | 5- 40 years |
| Wyndham Worldwide | | Office | | NJ | | — | | | 6,200 | | | 91,153 | | | 2,494 | | | 6,200 | | | 93,647 | | | 99,847 | | | 22,527 | | | N/A | | 4/23/2014 | | 5-40 years |
| ACE Hardware Corporation HQ | | Office | | IL | | 22,750 | | '(5) | 6,900 | | | 33,945 | | | — | | | 6,900 | | | 33,945 | | | 40,845 | | | 9,992 | | | N/A | | 4/24/2014 | | 5-40 years |
| Equifax | | Office | | MO | | — | | | 1,850 | | | 12,709 | | | 578 | | | 1,850 | | | 13,287 | | | 15,137 | | | 5,355 | | | N/A | | 5/20/2014 | | 5-40 years |
| American Express | | Office | | AZ | | — | | | 15,000 | | | 45,893 | | | 18,372 | | | 15,000 | | | 64,265 | | | 79,265 | | | 19,934 | | | N/A | | 5/22/2014 | | 5-40 years |
| Circle Star | | Office | | CA | | — | | | 22,789 | | | 68,950 | | | 5,272 | | | 22,789 | | | 74,222 | | | 97,011 | | | 26,884 | | | N/A | | 5/28/2014 | | 5-40 years |
| Vanguard | | Office | | NC | | — | | | 2,230 | | | 31,062 | | | 838 | | | 2,230 | | | 31,900 | | | 34,130 | | | 10,067 | | | N/A | | 6/19/2014 | | 5-40 years |
| Parallon | | Office | | FL | | 6,803 | | | 1,000 | | | 16,772 | | | — | | | 1,000 | | | 16,772 | | | 17,772 | | | 5,206 | | | N/A | | 6/25/2014 | | 5-40 years |
| TW Telecom | | Office | | CO | | — | | | 10,554 | | | 35,817 | | | 1,663 | | | 10,554 | | | 37,480 | | | 48,034 | | | 12,727 | | | N/A | | 8/1/2014 | | 5-40 years |
| Equifax II | | Office | | MO | | — | | | 2,200 | | | 12,755 | | | 234 | | | 2,200 | | | 12,989 | | | 15,189 | | | 4,559 | | | N/A | | 10/1/2014 | | 5-40 years |
| Mason I | | Office | | OH | | — | | | 4,777 | | | 18,489 | | | 746 | | | 4,777 | | | 19,235 | | | 24,012 | | | 3,502 | | | N/A | | 11/7/2014 | | 5-40 years |
| Wells Fargo (Charlotte) | | Office | | NC | | 26,975 | | '(5) | 2,150 | | | 40,806 | | | 46 | | | 2,150 | | | 40,852 | | | 43,002 | | | 11,353 | | | N/A | | 12/15/2014 | | 5-40 years |
| GE Aviation | | Office | | OH | | — | | | 4,400 | | | 61,681 | | | — | | | 4,400 | | | 61,681 | | | 66,081 | | | 17,230 | | | N/A | | 2/19/2015 | | 5-40 years |
| Westgate III | | Office | | TX | | — | | | 3,209 | | | 75,937 | | | — | | | 3,209 | | | 75,937 | | | 79,146 | | | 18,948 | | | N/A | | 4/1/2015 | | 5-40 years |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Franklin Center | | Office | | MD | | — | | | 6,989 | | | 46,875 | | | 1,441 | | | 6,989 | | | 48,316 | | | 55,305 | | | 11,157 | | | N/A | | 6/10/2015 | | 5-40 years |
| 4650 Lakehurst Court | | Office | | OH | | — | | | 2,943 | | | 22,651 | | | 808 | | | 2,943 | | | 23,459 | | | 26,402 | | | 9,831 | | | N/A | | 6/10/2015 | | 5-40 years |
| Miramar | | Office | | FL | | — | | | 4,488 | | | 19,979 | | | 2,233 | | | 4,488 | | | 22,212 | | | 26,700 | | | 6,020 | | | N/A | | 6/10/2015 | | 5-40 years |
| Royal Ridge V | | Office | | TX | | 21,385 | | '(5) | 1,842 | | | 22,052 | | | 3,667 | | | 1,842 | | | 25,719 | | | 27,561 | | | 6,639 | | | N/A | | 6/10/2015 | | 5-40 years |
| Duke Bridges | | Office | | TX | | 27,475 | | '(5) | 8,239 | | | 51,395 | | | 8,291 | | | 8,239 | | | 59,686 | | | 67,925 | | | 13,122 | | | N/A | | 6/10/2015 | | 5-40 years |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Initial Cost to Company (1) | | Total Adjustment to Basis (2) | | Gross Carrying Amount at
December 31, 2021 | | | | | | | | Life on
which
depreciation
in latest
income
statement is
computed |
| Property | | Property Type | | State | | Encumbrances (3) | | Land | | Building and Improvements | | Building and Improvements | | Land | | Building and Improvements (2) | | Total | | Accumulated Depreciation and Amortization | | Date of Construction | | Date of Acquisition | |
| Houston Westway II | | Office | | TX | | — | | | 3,961 | | | 78,668 | | | 1,612 | | | 3,961 | | | 80,280 | | | 84,241 | | | 22,120 | | | N/A | | 6/10/2015 | | 5-40 years |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Atlanta Perimeter | | Office | | GA | | 69,461 | | '(5) | 8,382 | | | 96,718 | | | 900 | | | 8,382 | | | 97,618 | | | 106,000 | | | 36,514 | | | N/A | | 6/10/2015 | | 5-40 years |
| South Lake at Dulles | | Office | | VA | | — | | | 9,666 | | | 74,098 | | | 26,512 | | | 9,666 | | | 100,610 | | | 110,276 | | | 22,333 | | | N/A | | 6/10/2015 | | 5-40 years |
| Four Parkway | | Office | | IL | | — | | | 4,339 | | | 37,298 | | | 6,584 | | | 4,339 | | | 43,882 | | | 48,221 | | | 13,197 | | | N/A | | 6/10/2015 | | 5-40 years |
| Highway 94 | | Industrial | | MO | | 13,732 | | | 5,637 | | | 25,280 | | | — | | | 5,637 | | | 25,280 | | | 30,917 | | | 7,528 | | | N/A | | 11/6/2015 | | 5-40 years |
| Heritage III | | Office | | TX | | — | | | 1,955 | | | 15,540 | | | 6,719 | | | 1,955 | | | 22,259 | | | 24,214 | | | 4,629 | | | N/A | | 12/11/2015 | | 5-40 years |
| Heritage IV | | Office | | TX | | — | | | 2,330 | | | 26,376 | | | 4,909 | | | 2,330 | | | 31,285 | | | 33,615 | | | 7,207 | | | N/A | | 12/11/2015 | | 5-40 years |
| Samsonite | | Industrial | | FL | | 19,114 | | | 5,040 | | | 42,490 | | | 11 | | | 5,040 | | | 42,501 | | | 47,541 | | | 9,234 | | | N/A | | 12/11/2015 | | 5-40 years |
| Restoration Hardware | | Industrial | | CA | | 78,000 | | '(5) | 15,463 | | | 36,613 | | | 37,693 | | | 15,463 | | | 74,306 | | | 89,769 | | | 21,857 | | | N/A | | 1/14/2016 | | 5-40 years |
| HealthSpring | | Office | | TN | | 19,669 | | | 8,126 | | | 31,447 | | | 43 | | | 8,126 | | | 31,490 | | | 39,616 | | | 8,346 | | | N/A | | 4/27/2016 | | 5-40 years |
| LPL | | Office | | SC | | — | | | 4,612 | | | 86,352 | | | — | | | 4,612 | | | 86,352 | | | 90,964 | | | 10,351 | | | N/A | | 11/30/2017 | | 5-40 years |
| LPL | | Office | | SC | | — | | | 1,274 | | | 41,509 | | | — | | | 1,273 | | | 41,509 | | | 42,782 | | | 4,976 | | | N/A | | 11/30/2017 | | 5-40 years |
| Quaker | | Industrial | | FL | | — | | | 5,433 | | | 55,341 | | | — | | | 5,433 | | | 55,341 | | | 60,774 | | | 6,455 | | | N/A | | 3/13/2018 | | 5-40 years |
| McKesson | | Office | | AZ | | — | | | 312 | | | 69,760 | | | — | | | 312 | | | 69,760 | | | 70,072 | | | 13,496 | | | N/A | | 4/10/2018 | | 5-40 years |
| Shaw Industries | | Industrial | | GA | | — | | | 5,465 | | | 57,116 | | | — | | | 5,465 | | | 57,116 | | | 62,581 | | | 6,512 | | | N/A | | 5/3/2018 | | 5-40 years |
| GEAR Entities | | Land | | WA | | — | | | 1,584 | | | — | | | — | | | 1,584 | | | — | | | 1,584 | | | — | | | N/A | | 3/17/2016 | | N/A |
| Owens Corning | | Industrial | | NC | | 3,239 | | | 867 | | | 4,418 | | | 1,101 | | | 867 | | | 5,519 | | | 6,386 | | | 825 | | | N/A | | 5/1/2019 | | 5-40 years |
| Westgate II | | Office | | TX | | 33,563 | | | 7,716 | | | 48,422 | | | 870 | | | 7,716 | | | 49,292 | | | 57,008 | | | 8,062 | | | N/A | | 5/1/2019 | | 5-40 years |
| Administrative Office of Pennsylvania Courts | | Office | | PA | | 5,957 | | | 1,246 | | | 9,626 | | | 781 | | | 1,246 | | | 10,407 | | | 11,653 | | | 1,631 | | | N/A | | 5/1/2019 | | 5-40 years |
| American Express Center | | Office | | AZ | | 53,878 | | | 10,595 | | | 82,098 | | | 3,109 | | | 10,595 | | | 85,207 | | | 95,802 | | | 15,274 | | | N/A | | 5/1/2019 | | 5-40 years |
| MGM Corporate Center | | Office | | NV | | 17,842 | | | 4,546 | | | 25,825 | | | 1,827 | | | 4,546 | | | 27,652 | | | 32,198 | | | 4,531 | | | N/A | | 5/1/2019 | | 5-40 years |
| American Showa | | Industrial | | OH | | 10,128 | | | 1,214 | | | 16,538 | | | 2,484 | | | 1,214 | | | 19,022 | | | 20,236 | | | 2,537 | | | N/A | | 5/1/2019 | | 5-40 years |
| Huntington Ingalls | | Industrial | | VA | | — | | | 6,213 | | | 29,219 | | | 2,674 | | | 6,213 | | | 31,893 | | | 38,106 | | | 4,332 | | | N/A | | 5/1/2019 | | 5-40 years |
| Wyndham | | Office | | NJ | | — | | | 9,677 | | | 71,316 | | | 1,742 | | | 9,677 | | | 73,058 | | | 82,735 | | | 9,070 | | | N/A | | 5/1/2019 | | 5-40 years |
| Exel | | Industrial | | OH | | — | | | 978 | | | 14,137 | | | 2,568 | | | 978 | | | 16,705 | | | 17,683 | | | 3,100 | | | N/A | | 5/1/2019 | | 5-40 years |
| Rapiscan Systems | | Office | | MA | | — | | | 2,006 | | | 10,270 | | | 484 | | | 2,006 | | | 10,754 | | | 12,760 | | | 1,618 | | | N/A | | 5/1/2019 | | 5 40 years |
| Aetna | | Office | | AZ | | — | | | 2,332 | | | 18,486 | | | 1,598 | | | 2,332 | | | 20,084 | | | 22,416 | | | 3,199 | | | N/A | | 5/1/2019 | | 5-40 years |
| Atlas Copco | | Industrial | | MI | | — | | | 1,156 | | | 18,297 | | | 1,505 | | | 1,156 | | | 19,802 | | | 20,958 | | | 2,763 | | | N/A | | 5/1/2019 | | 5-40 years |
| Toshiba TEC | | Office | | NC | | — | | | 1,916 | | | 36,374 | | | 2,423 | | | 1,916 | | | 38,797 | | | 40,713 | | | 5,186 | | | N/A | | 5/1/2019 | | 5-40 years |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Initial Cost to Company (1) | | Total Adjustment to Basis (2) | | Gross Carrying Amount at
December 31, 2021 | | | | | | | | Life on
which
depreciation
in latest
income
statement is
computed |
| Property | | Property Type | | State | | Encumbrances (3) | | Land | | Building and Improvements | | Building and Improvements | | Land | | Building and Improvements (2) | | Total | | Accumulated Depreciation and Amortization | | Date of Construction | | Date of Acquisition | |
| NETGEAR | | Office | | CA | | — | | | 22,600 | | | 28,859 | | | 1,700 | | | 22,600 | | | 30,559 | | | 53,159 | | | 6,071 | | | N/A | | 5/1/2019 | | 5-40 years |
| Nike | | Office | | OR | | — | | | 8,186 | | | 41,184 | | | 2,330 | | | 8,187 | | | 43,514 | | | 51,701 | | | 7,610 | | | N/A | | 5/1/2019 | | 5-40 years |
| Zebra Technologies | | Office | | IL | | — | | | 5,927 | | | 58,688 | | | 1,255 | | | 5,927 | | | 59,943 | | | 65,870 | | | 9,853 | | | N/A | | 5/1/2019 | | 5-40 years |
| WABCO | | Industrial | | SC | | — | | | 1,226 | | | 13,902 | | | 1,038 | | | 1,226 | | | 14,940 | | | 16,166 | | | 1,394 | | | N/A | | 5/1/2019 | | 5-40 years |
| IGT | | Office | | NV | | 45,300 | | '(6) | 5,673 | | | 67,610 | | | 2,021 | | | 5,673 | | | 69,631 | | | 75,304 | | | 7,191 | | | N/A | | 5/1/2019 | | 5-40 years |
| 3M | | Industrial | | IL | | 43,600 | | '(6) | 5,802 | | | 75,758 | | | 6,391 | | | 5,802 | | | 82,149 | | | 87,951 | | | 7,010 | | | N/A | | 5/1/2019 | | 5-40 years |
| Amazon - Etna | | Industrial | | OH | | 61,500 | | '(6) | 4,773 | | | 95,475 | | | 11,546 | | | 4,773 | | | 107,021 | | | 111,794 | | | 10,861 | | | N/A | | 5/1/2019 | | 5-40 years |
| Zoetis | | Office | | NJ | | — | | | 3,718 | | | 44,082 | | | 735 | | | 3,718 | | | 44,817 | | | 48,535 | | | 5,221 | | | N/A | | 5/1/2019 | | 5-40 years |
| Southern Company | | Office | | AL | | 99,600 | | '(6) | 7,794 | | | 157,724 | | | 1,457 | | | 7,794 | | | 159,181 | | | 166,975 | | | 12,166 | | | N/A | | 5/1/2019 | | 5-40 years |
| Allstate | | Office | | CO | | — | | | 3,109 | | | 13,096 | | | 553 | | | 3,109 | | | 13,649 | | | 16,758 | | | 2,164 | | | N/A | | 5/1/2019 | | 5-40 years |
| MISO | | Office | | IN | | — | | | 3,725 | | | 25,848 | | | 971 | | | 3,725 | | | 26,819 | | | 30,544 | | | 3,313 | | | N/A | | 5/1/2019 | | 5-40 years |
| McKesson II | | Office | | AZ | | — | | | — | | | 36,959 | | | 4,681 | | | — | | | 41,640 | | | 41,640 | | | 5,021 | | | N/A | | 9/20/2019 | | 5-40 years |
| Pepsi Bottling Ventures | | Industrial | | NC | | 18,218 | | | 3,407 | | | 31,783 | | | 954 | | | 3,407 | | | 32,737 | | | 36,144 | | | 2,186 | | | N/A | | 2/5/2020 | | 5-40 years |
| State of Alabama | | Office | | AL | | — | | | 8,126 | | | 39,248 | | | 458 | | | 8,126 | | | 39,706 | | | 47,832 | | | 2,041 | | | N/A | | 3/1/2021 | | 5-40 years |
| CAS, Inc. | | Office | | AL | | — | | | 5,007 | | | 23,327 | | | 1,494 | | | 5,007 | | | 24,821 | | | 29,828 | | | 1,741 | | | N/A | | 3/1/2021 | | 5-40 years |
| Freeport McMoRan | | Office | | AZ | | — | | | 4,264 | | | 120,604 | | | 82 | | | 4,264 | | | 120,686 | | | 124,950 | | | 5,192 | | | N/A | | 3/1/2021 | | 5-40 years |
| Avnet HQ | | Office | | AZ | | — | | | 5,394 | | | 31,021 | | | 1,862 | | | 5,394 | | | 32,883 | | | 38,277 | | | 2,089 | | | N/A | | 3/1/2021 | | 5-40 years |
| Terraces at Copley Point | | Office | | CA | | — | | | 23,897 | | | 87,430 | | | 1,250 | | | 23,897 | | | 88,680 | | | 112,577 | | | 4,696 | | | N/A | | 3/1/2021 | | 5-40 years |
| County of Santa Clara | | Office | | CA | | — | | | 16,068 | | | 18,359 | | | 1,126 | | | 16,068 | | | 19,485 | | | 35,553 | | | 1,274 | | | N/A | | 3/1/2021 | | 5-40 years |
| ProteinSimple | | Office | | CA | | — | | | 12,674 | | | 48,553 | | | 1,417 | | | 12,674 | | | 49,970 | | | 62,644 | | | 2,184 | | | N/A | | 3/1/2021 | | 5-40 years |
| Traveler's Insurance | | Office | | CA | | — | | | 5,069 | | | 11,715 | | | 590 | | | 5,069 | | | 12,305 | | | 17,374 | | | 744 | | | N/A | | 3/1/2021 | | 5-40 years |
| Anadarko | | Office | | CO | | — | | | 6,841 | | | 24,702 | | | 1,794 | | | 6,841 | | | 26,496 | | | 33,337 | | | 1,057 | | | N/A | | 3/1/2021 | | 5-40 years |
| DuPont | | Office | | IA | | — | | | 6,412 | | | 39,299 | | | 1,624 | | | 6,412 | | | 40,923 | | | 47,335 | | | 1,917 | | | N/A | | 3/1/2021 | | 5-40 years |
| Mercury Systems | | Office | | MA | | — | | | 6,969 | | | 37,739 | | | 900 | | | 6,969 | | | 38,639 | | | 45,608 | | | 1,737 | | | N/A | | 3/1/2021 | | 5-40 years |
| Draeger Medical Systems | | Office | | MA | | — | | | 4,985 | | | 30,143 | | | 1,114 | | | 4,985 | | | 31,257 | | | 36,242 | | | 1,515 | | | N/A | | 3/1/2021 | | 5-40 years |
| Keurig - Phase I | | Office | | MA | | — | | | 5,111 | | | 48,464 | | | 812 | | | 5,111 | | | 49,276 | | | 54,387 | | | 1,683 | | | N/A | | 3/1/2021 | | 5-40 years |
| Keurig - Phase II | | Office | | MA | | — | | | 3,262 | | | 169,233 | | | 628 | | | 3,262 | | | 169,861 | | | 173,123 | | | 5,165 | | | N/A | | 3/1/2021 | | 5-40 years |
| JMT | | Office | | MD | | — | | | 2,873 | | | 50,619 | | | 1,060 | | | 2,873 | | | 51,679 | | | 54,552 | | | 1,490 | | | N/A | | 3/1/2021 | | 5-40 years |
| Fidelity Building Services | | Industrial | | MD | | — | | | 1,662 | | | 10,746 | | | 435 | | | 1,662 | | | 11,181 | | | 12,843 | | | 354 | | | N/A | | 3/1/2021 | | 5-40 years |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Initial Cost to Company (1) | | Total Adjustment to Basis (2) | | Gross Carrying Amount at
December 31, 2021 | | | | | | | | Life on
which
depreciation
in latest
income
statement is
computed |
| Property | | Property Type | | State | | Encumbrances (3) | | Land | | Building and Improvements | | Building and Improvements | | Land | | Building and Improvements (2) | | Total | | Accumulated Depreciation and Amortization | | Date of Construction | | Date of Acquisition | |
| United Rentals | | Office | | NC | | — | | | 2,847 | | | 30,163 | | | 726 | | | 2,847 | | | 30,889 | | | 33,736 | | | 1,262 | | | N/A | | 3/1/2021 | | 5-40 years |
| QORVO | | Office | | NC | | — | | | 2,436 | | | 18,473 | | | 645 | | | 2,436 | | | 19,118 | | | 21,554 | | | 990 | | | N/A | | 3/1/2021 | | 5-40 years |
| Ultra Electronics Ocean Systems | | Office | | NC | | — | | | 1,802 | | | 9,996 | | | 523 | | | 1,802 | | | 10,519 | | | 12,321 | | | 584 | | | N/A | | 3/1/2021 | | 5-40 years |
| Amcor Rigid Plastics | | Industrial | | OH | | — | | | 4,962 | | | 42,377 | | | 1,340 | | | 4,962 | | | 43,717 | | | 48,679 | | | 2,055 | | | N/A | | 3/1/2021 | | 5-40 years |
| Express Scripts | | Office | | PA | | — | | | 4,725 | | | 18,756 | | | 2,080 | | | 4,725 | | | 20,836 | | | 25,561 | | | 1,033 | | | N/A | | 3/1/2021 | | 5-40 years |
| International Paper | | Office | | TN | | — | | | 1,376 | | | 69,048 | | | 8,488 | | | 1,376 | | | 77,536 | | | 78,912 | | | 2,468 | | | N/A | | 3/1/2021 | | 5-40 years |
| Lennar Homes | | Office | | TX | | — | | | 1,759 | | | 17,546 | | | 715 | | | 1,759 | | | 18,261 | | | 20,020 | | | 798 | | | N/A | | 3/1/2021 | | 5-40 years |
| Dow Chemical | | Office | | TX | | — | | | 685 | | | 71,064 | | | 1,565 | | | 685 | | | 72,629 | | | 73,314 | | | 2,288 | | | N/A | | 3/1/2021 | | 5-40 years |
| Tech Data Corp. | | Office | | TX | | — | | | 3,138 | | | 12,987 | | | 671 | | | 3,138 | | | 13,658 | | | 16,796 | | | 648 | | | N/A | | 3/1/2021 | | 5-40 years |
| Fresenius Medical Care | | Office | | TX | | — | | | 1,380 | | | 28,924 | | | 1,401 | | | 1,380 | | | 30,325 | | | 31,705 | | | 972 | | | N/A | | 3/1/2021 | | 5-40 years |
Total all properties (4) | | | | | | $ | 1,018,015 | | | $ | 584,291 | | | $ | 4,633,517 | | | $ | 352,352 | | | $ | 584,291 | | | $ | 4,985,869 | | | $ | 5,570,160 | | | $ | 993,323 | | | | | | | |
| | |
(1) | Building and improvements include tenant origination and absorption costs. |
| |
(2) | As of December 31, 2018, the aggregate cost of real estate the Company and consolidated subsidiaries own for federal income tax purposes was approximately $1.1 billion (unaudited). |
(1)Building and improvements include tenant origination and absorption costs.
(2)Consists of capital expenditure, real estate development costs, and impairment charges.
(3)Amount does not include the net loan valuation discount of $1.0 million related to the debt assumed in the Highway 94, Samsonite and HealthSpring property acquisitions, as well as Owens Corning, Westgate II, AOPC, IPC/TRWC (AMEX), MGM, American Showa, BAML and Pepsi Bottling Ventures.
(4)As of December 31, 2021, the aggregate cost of real estate the Company and consolidated subsidiaries owned for federal income tax purposes was approximately $5.0 billion (unaudited).
(5)The BOA Loan is secured by cross-collateralized and cross-defaulted first mortgage liens on the properties.
(6)The BOA/KeyBank Loan is secured by cross-collateralized and cross-defaulted first mortgage liens on the properties.
| | | | Activity for the year ended December 31, | | Activity for the Year Ended December 31, |
| | 2018 | | 2017 | | 2016 | | 2021 | | 2020 | | 2019 |
| Real estate facilities | | | | | | Real estate facilities | | | | | |
| Balance at beginning of year | $ | 1,178,866 |
| | $ | 1,133,055 |
| | $ | 516,965 |
| Balance at beginning of year | $ | 4,310,302 | | | 4,278,433 | | | $ | 3,073,364 | |
| Acquisitions | 2,923 |
| | 45,016 |
| | 615,972 |
| Acquisitions | 1,289,296 | | | 36,144 | | | 1,305,998 | |
| Improvements | 580 |
| | 576 |
| | 38 |
| |
| Construction-in-progress, net | (155 | ) | | 219 |
| | 80 |
| |
| Construction costs and improvements | | Construction costs and improvements | 29,042 | | | 72,306 | | | 51,440 | |
| Other adjustments | | Other adjustments | (2,976) | | | — | | | — | |
| Write down of tenant origination and absorption costs | | Write down of tenant origination and absorption costs | (422) | | | — | | | — | |
| Impairment provision | | Impairment provision | (4,242) | | | (23,472) | | | (30,734) | |
| Sale of real estate assets | | Sale of real estate assets | (50,840) | | | (53,109) | | | (121,635) | |
| Balance at end of year | $ | 1,182,214 |
| | $ | 1,178,866 |
| | $ | 1,133,055 |
| Balance at end of year | $ | 5,570,160 | | | $ | 4,310,302 | | | $ | 4,278,433 | |
| | Accumulated depreciation | | | | | | Accumulated depreciation | |
| Balance at beginning of year | $ | 83,905 |
| | $ | 39,955 |
| | $ | 12,061 |
| Balance at beginning of year | $ | 817,773 | | | $ | 668,104 | | | $ | 538,412 | |
| Depreciation and amortization expense | 44,665 |
| | 43,950 |
| | 27,894 |
| Depreciation and amortization expense | 209,638 | | | 161,056 | | | 153,425 | |
| Write down of tenant origination and absorption costs | | Write down of tenant origination and absorption costs | (422) | | | — | | | — | |
| Less: Non-real estate assets depreciation expense | | Less: Non-real estate assets depreciation expense | (5,860) | | | (4,619) | | | (7,769) | |
| Less: Sale of real estate assets depreciation expense | | Less: Sale of real estate assets depreciation expense | (27,806) | | | (6,768) | | | (15,964) | |
| Balance at end of year | $ | 128,570 |
| | $ | 83,905 |
| | $ | 39,955 |
| Balance at end of year | $ | 993,323 | | | $ | 817,773 | | | $ | 668,104 | |
| Real estate facilities, net | $ | 1,053,644 |
| | $ | 1,094,961 |
| | $ | 1,093,100 |
| Real estate facilities, net | $ | 4,576,837 | | | $ | 3,492,529 | | | $ | 3,610,329 | |