EDGAR 10-K Filing

Company CIK: 1600626
Filing Year: 2021
Filename: 1600626_10-K_2021_0001600626-21-000071.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
The use herein of the words “GCEAR,” “the Company,” “we,” “us,” and “our” refer to Griffin Capital Essential Asset REIT, Inc, a Maryland corporation, and its subsidiaries, including Griffin Capital Essential Asset Operating Partnership, L.P., our operating partnership (the “GCEAR Operating Partnership”), except where the context otherwise requires.
Overview
We are an internally managed, publicly-registered, non-traded real estate investment trust (“REIT”). We own and operate a geographically diversified portfolio of strategically-located, high-quality corporate office and industrial properties that are primarily net-leased to single tenants that we have determined to be creditworthy.
The GCEAR 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 returns for our stockholders by combining the durability of high-quality corporate tenants, the stability of net leases and the power of proactive management. To achieve this mission, we leverage the skills and expertise of our employees who have expertise 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 commercial real estate experience averaging approximately 30 years.
As of December 31, 2020, we owned 98 properties (including one land parcel held for future development) in 25 states. Our contractual net rent for the 12-month period subsequent to December 31, 2020 is expected to be approximately $289.3 million, with approximately 64.3% expected to be generated by properties leased and/or guaranteed, directly or indirectly, by companies that have investment grade credit ratings or what management believes are generally equivalent ratings. As of December 31, 2020, our portfolio was approximately 88.5% leased (based on square footage), with a weighted average remaining lease term of 6.83 years and weighted average annual rent increases of approximately 2.1%.
On October 29, 2020, we entered into an Agreement and Plan of Merger with Cole Office & Industrial REIT (CCIT II), Inc. (“CCIT II”) and certain other parties (the “CCIT II Merger Agreement”) pursuant to which we will acquire CCIT II for approximately $1.2 billion in a stock-for-stock transaction (the “CCIT II Merger”). This transaction is a continuation of our strategy since inception to strategically grow the portfolio with assets consistent with our investment strategy, improve our portfolio statistics, strengthen the balance sheet, and maximize stockholder value. 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 will be converted into the right to receive 1.392 shares of our Class E common stock. The CCIT II Merger is expected to close in March 2021. After the closing of the CCIT II Merger, we expect to have a combined portfolio consisting of 123 properties (including one land parcel held for future development) in 26 states.
History and Structure
The GCEAR platform was founded in 2009 with the launch of Griffin Capital Essential Asset REIT, Inc. (“EA-1”), a publicly-registered, non-traded REIT that acquired a geographically diversified portfolio of strategically-located, high-quality corporate office and industrial properties primarily net-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 ownership 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 million in gross equity proceeds and had a portfolio of 27 properties with an acquisition value of approximately $1.12 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 GCEAR OP Units (as defined below). 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”). The internalization and EA Merger generated significant benefits for stockholders, including a material improvement in combined cash flows and earnings, superior alignment of interests, increased size and scale, improved portfolio demographics and significant operating efficiencies. Following the EA Merger, the surviving company was renamed Griffin Capital Essential Asset, REIT, Inc.
We utilize a structure known as an “UPREIT” structure, pursuant to which we conduct all of our business through the GCEAR Operating Partnership, with the GCEAR Operating Partnership, directly or indirectly through subsidiaries, owning all of our assets and liabilities. As of December 31, 2020, GCEAR, as the sole general partner, controlled the GCEAR Operating Partnership and owned approximately 87.8% of its outstanding common limited partnership units (“GCEAR OP Units”). The remaining 12.2% of GCEAR OP Units are owned by GCC and other affiliates of the Company, as well as unaffiliated, third-party limited partners.
Our Competitive Strengths
We believe the following competitive strengths distinguish us from other owners and operators of net-leased office and industrial properties:
•Diverse, High-Quality Property Portfolio: As of December 31, 2020, our portfolio was comprised of 98 properties (including one land parcel held for future development) located in 25 states with 113 tenants throughout the United States, and after the closing of the CCIT II Merger, we expect to have a combined portfolio consisting of 123 properties in 26 states with approximately 136 tenants throughout the United States. As of December 31, 2020, our portfolio was approximately 88.5% leased (based on square footage). Our properties offer strong geographic distribution, with no state accounting for more than approximately 11.8% of our portfolio, measured by percentage of our contractual net rent for the 12-month period subsequent to December 31, 2020.
•Diverse Portfolio of Creditworthy Tenants: We have a diverse tenant base, with no single tenant accounting for more than approximately 4.1% of our contractual net rent for the 12-month period subsequent to December 31, 2020 and our ten largest tenants accounting for approximately 28.7% of our contractual net rent for the 12-month period subsequent to December 31, 2020. Further, no single industry represents more than approximately 14.1% of our contractual net rent for the 12-month period subsequent to December 31, 2020. As of December 31, 2020, our portfolio had a weighted average remaining lease term of 6.83 years, with weighted average annual rent increases of approximately 2.1% through the remainder of the lease terms. Our contractual net rent for the 12-month period subsequent to December 31, 2020 is expected to be approximately $289.3 million, with approximately 64.3% 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 Asset Management: We employ a proactive and diligent approach to managing our assets in order to mitigate risks and identify opportunities to maintain 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 typical passive net-lease strategy.
•Proven and Experienced Management Team: Our senior management team has an average of approximately 30 years of commercial real estate experience and a proven ability to acquire and proactively manage properties in order to maximize their value.
Our Business Strategy
Our primary business objectives are to provide regular cash distributions to our stockholders. We also seek to achieve sustainable growth in our distributions over time while maximizing stockholder value. We seek to achieve these objectives by pursuing the following business and growth strategies:
•Own and Operate Well-Located, Business-Essential, Single-Tenant Assets Leased to High-Quality Tenants: We seek to own properties that are essential to our tenants’ business operations and are leased to tenants that we have determined to be creditworthy, as we believe such assets offer greater relative default protection. Our properties are generally new or recent Class A construction quality and condition and are located in primary, secondary and select tertiary metropolitan statistical areas. They are typically subject to long-term leases with defined rental rate increases, offering a consistent and predictable income stream across market cycles, or short-term leases that we have determined have a high probability of renewal and potential for increasing rent, offering income appreciation upon renewal.
•Achieve Stable and Predictable Cash Flows: We focus on generating durable cash flows for our investors. We seek to achieve this by focusing on high-quality properties and tenants that are subject to “net” leases with primarily annual contractual rental rate increases. When acquiring properties or entering into any new leases, 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 tenant pays certain operating expenses of the property in addition to “base rent,” which may include real estate taxes, 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 respect to the property. Our leases typically provide contractual rent increases, enabling potential distribution growth and a potential hedge against inflation, insulation from short-term economic cycles resulting from the long-term nature of the underlying leases, enhanced stability resulting from diversified credit characteristics of corporate 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 also proactively seek to add value to our portfolio through strategic property improvements, dynamic re-leasing strategies and other value-add strategies.
•Utilize Highly Selective Acquisition 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. In selecting a potential property for acquisition, we consider many factors, including, but not limited to, the following:
•tenant creditworthiness;
•whether a property is essential to the business operations of the tenant(s);
•terms of the lease(s), including length of lease term, scope of landlord responsibilities, presence and frequency of contractual rental increases, renewal option provisions, purchase options, and termination options;
•historical financial performance;
•geographic location and property type;
•projected demand in the area;
•demographics of the area, neighborhood growth patterns, economic conditions, and local market conditions;
•the potential for the construction of new properties in the area;
•new or recent Class A construction quality and condition;
•physical location, visibility, curb appeal and access;
•potential capital and tenant improvements and reserves required to maintain the property;
•proposed purchase price, terms and conditions;
•projected net cash flow yield and internal rates of return;
•potential for capital appreciation;
•prospects for liquidity through sale, financing or refinancing of the property;
•ascertainable physical condition risks, such as environmental contamination; and
•treatment under applicable federal, state and local tax and other laws and regulations and evaluation of title.
In addition, we perform comprehensive diligence in connection with each potential acquisition which includes, among other things: obtaining and/or reviewing Phase I environmental assessments and histories; soil reports, seismic studies and flood zone studies; ATLA surveys; building plans and specifications; licenses, permits, governmental approvals; tenant estoppel certificates; tenant financial statements and information, as permitted; historical financial statements and tax statement summaries; proof of marketable title, subject to such liens and encumbrances as are acceptable to us; liability and title insurance policies; property zoning reports; UCC searches; and other property related items that we believe are relevant.
We make acquisitions directly or indirectly through the GCEAR Operating Partnership. We may issue GCEAR OP Units as consideration in transactions, which may facilitate more tax efficient transactions for sellers.
•Prudent Use of Leverage: We may incur indebtedness in the form of bank borrowings, purchase money obligations to the sellers of properties and publicly or privately placed debt instruments or financing from institutional investors or other lenders. We have 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 obtain separate loans for each acquisition. Our indebtedness may be unsecured or may be secured by mortgages, other interests in our properties, guarantees and/or pledges of membership interests. We may use borrowing proceeds to finance acquisitions of new properties, to pay for capital improvements, repairs or buildouts, to refinance existing indebtedness, to pay distributions, to fund redemptions of our shares or to provide working capital.
We plan to use modest leverage in connection with our acquisition strategy. We may re-evaluate and change our debt strategy and policies in the future. Factors that we may 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 maximizes the value of our portfolio. We may also seek to make significant 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 into opportunities with superior risk-adjusted return prospects, in each case 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, 2020, we had sold 14 properties and one land parcel since our inception, including two properties during the year ended December 31, 2020.
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 charter, 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.
Although we have no plans at this time to change any of our investment objectives or policies, 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 the 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 a potential liquidity event in the future (e.g., a merger, listing of our shares on a national securities exchange, sale of assets, etc.) (a “Strategic Transaction”). We are not prohibited by our charter or otherwise from engaging in such a Strategic Transaction 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 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 a Strategic Transaction or otherwise if it believes such a change is in the best interest of our stockholders.
Competition
The commercial real estate markets in which we operate are highly competitive. As we evaluate new properties for our portfolio, we are in competition with other potential buyers for the same properties, and such buyers may have greater financial resources or access to capital than we do or be willing to acquire properties in transactions that are more highly leveraged or are less attractive from a financial standpoint than we are willing to pursue. These factors may require us 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, the leasing of real estate is 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 properties, 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 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 GCEAR Operating Partnership, 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 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. 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 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. 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.
Other Regulations
The properties we acquire generally will 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 acquire 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”). We regularly review our investment activity to attempt to ensure that we do not come within the application of the 1940 Act. Among other things, we 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 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.
Our Securities
We may purchase or otherwise reacquire our shares of common stock or any of our other securities. We have no present intention to repurchase any of our shares of common stock except pursuant to our share redemption program (“SRP”) or pursuant to “net settlement” of shares to satisfy withholding obligations of our employees in connection with annual incentive awards.
We may in the future offer common stock or other debt or equity securities (including GCEAR OP Units) in exchange for cash, real estate assets or other investment targets or repurchase or otherwise reacquire common stock or other debt or equity securities.
We would only take such actions in conformity with applicable federal and state laws and the requirements for qualifying as a REIT under the Internal Revenue Code (the “Code”).
Human Capital Management
GCEAR is internally managed by an experienced and proven team that specializes in net-leased office and industrial properties. As of December 31, 2020, we employed 42 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 and their 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) matching 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, 2020, approximately 45% of our employees were people of color/minorities and approximately 45% were women. In addition, as of December 31, 2020, a majority of our seven 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. For this reason, we co-founded the Griffin Charitable Initiative, a program through which we actively contribute our time and resources to support charitable causes.
Available Information
We make available on the “SEC Filings” subpage of our website (www.gcear.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 “Corporate Governance” subpage of our website.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
Stockholders should carefully consider the following risks in evaluating our company and our 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 affected, which we refer 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 the section entitled “Cautionary Note Regarding Forward-Looking Statements" for additional information regarding these forward-looking statements.
Risks Related to COVID-19
The current outbreak of COVID-19, and the future outbreak of other highly infectious or contagious diseases, could have a material adverse effect on us.
The current outbreak of COVID-19 has had, and another outbreak in the future could have, repercussions across regional and global economies and financial markets. The COVID-19 outbreak in many countries has had a significant adverse impact on global economic activity and has contributed to significant volatility and negative pressure in financial markets. The global impact of the pandemic has been rapidly evolving and, as cases of COVID-19 have continued to be identified, many countries, including the United States, have reacted by instituting various levels of quarantines, business and school closures and travel restrictions. Certain states and cities, including those where we own properties and where our principal place of business is located, have instituted similar measures, including various levels of “shelter in place” rules, and restrictions on the types of business that may continue to operate at full capacity. We cannot predict when restrictions currently in place will be lifted to some extent or entirely. As a result, the COVID-19 outbreak is negatively impacting almost every industry 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 and an increased incidence of defaults under existing leases. 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 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 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 teleworking arrangements and cost cutting resulting from the pandemic, which could lead to lower office occupancy. The significance, extent, and duration of the overall operational and financial impact of the COVID-19 outbreak on our business will depend on future developments, which are 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 roll-out, effectiveness and willingness of people to take COVID-19 vaccines, the duration of associated immunity and their 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 real estate properties and it may have a material adverse effect on us.
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. As of February 24, 2021, we received October-February rent payments from approximately 100% of our portfolio. In addition, during the year ended December 31, 2020, we received a number of short-term rent relief inquiries from our tenants, most often in the form of rent deferral inquiries, or requests for further discussion from tenants. We believe some of these inquiries were opportunistic in nature and may not have been as a result of a direct financial need due to the outbreak. As of February 24, 2021, we granted two of these deferral requests that deferred three months of rent to be collected during 2021 without interest and represented less than 1.0% of total revenue for the year ended December 31, 2020. While there are no current active short-term rent relief inquiries, we are unable to predict the amount of future rent relief inquiries and the October-February collections and rent relief requests to-date may not be indicative of collections or requests in any future period. Additionally, not all tenant inquiries will ultimately result in lease concessions.
Risks Related to the CCIT II Merger
The exchange ratio payable in connection with the CCIT II Merger is fixed and will not be adjusted in the event of any change in the relative values of CCIT II and the Company.
Upon the consummation of the CCIT II Merger, each issued and outstanding share of CCIT II’s common stock (other than certain excluded shares) will be converted into the right to receive 1.392 shares of our Class E common stock, in accordance with the CCIT II Merger Agreement. Such exchange ratio will not be adjusted, other than in the limited circumstances as expressly contemplated in the CCIT II Merger Agreement in connection with stock splits, combinations, reorganizations, or other similar events affecting the outstanding CCIT II common stock or the Company’s common stock. Except as expressly contemplated in the CCIT II Merger Agreement, no change in the merger consideration will be made for any reason, including the following:
•changes in the respective businesses, operations, assets, liabilities and prospects of CCIT II or the Company;
•changes in the estimated NAV per share of either the shares of CCIT II’s common stock or our Class E common stock (or any other class of our common stock);
•interest rates, general market and economic conditions and other factors generally affecting the businesses of CCIT II or the Company;
•federal, state and local legislation, governmental regulation and legal developments in the businesses in which CCIT II or the Company operate;
•dissident stockholder activity, including any stockholder litigation challenging the CCIT II Merger;
•other factors beyond the control of CCIT II and the Company, including those described or referred to elsewhere in this “Risk Factors” section; and
•acquisitions, dispositions or other changes in CCIT II's or our portfolio.
Any such changes may materially alter or affect the relative values of CCIT II and the Company and, as a result, the merger consideration may be more or less than the value of our Class E common stock negotiated in the CCIT II Merger Agreement.
Completion of the CCIT II Merger is subject to many conditions and if these conditions are not satisfied or waived, the CCIT II Merger will not be completed, which could result in the CCIT II Merger being terminated and the expenditure of significant unrecoverable transaction costs. Additionally, in the event that the CCIT II Merger closes, the Company expects to incur substantial costs related to completion and integration of the CCIT II Merger.
The CCIT II Merger is subject to many conditions that must be satisfied, or to the extent permitted by law, waived, in order to complete the CCIT II Merger. There can be no assurance that such conditions will be satisfied or waived or that the CCIT II Merger will be completed. In addition, CCIT II or the Company may terminate the CCIT II Merger Agreement under certain circumstances, including, among other reasons, if the CCIT II Merger is not completed by May 30, 2021. Failure to consummate the CCIT II Merger may adversely affect the Company’s results of operations and the Company’s ongoing business could be adversely affected because the Company has incurred and will continue to incur certain transaction costs, regardless of whether the CCIT II Merger closes, which could have a material adverse effect on us.
Additionally, the Company expects to incur substantial costs in connection with completing the CCIT II Merger and integrating the properties and operations of CCIT II with the Company. While the Company has assumed that a certain level of transaction costs would be incurred, there are a number of factors beyond the Company’s control that could affect the total amount or the timing of such costs. As a result, following the completion of the CCIT II Merger, the transaction costs associated with the CCIT II Merger could diminish a portion of the cost savings that the Company expects to achieve from the elimination of duplicative costs and the realization of economies of scale.
The pendency of the CCIT II Merger, including as a result of the restrictions on the operation of the Company’s business during the period between signing the CCIT II Merger Agreement and the completion of the CCIT II Merger and the diversion of our management's attention , could have a material adverse effect on us.
In connection with the pending CCIT II Merger, some of the Company’s or CCIT II’s tenants may delay or defer decisions relating to their leases, which could negatively impact the Company’s revenues, earnings, cash flows and expenses, regardless of whether the CCIT II Merger is completed. In addition, due to operating covenants in the CCIT II Merger Agreement, the Company may be unable, during the pendency of the CCIT II Merger, to pursue certain strategic transactions, undertake certain significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions that are not in the ordinary course of business, even if such actions would prove beneficial. Additionally, the pending CCIT II Merger may divert the attention and resources of the Company’s management from the ongoing business activities and the pursuit of other opportunities that could be beneficial to the Company. If any of these risks were to materialize, it could have a material adverse effect on us
The issuance of our common stock as merger consideration in the CCIT II Merger will result in CCIT II’s stockholders having an ownership stake in the combined company, which will dilute the ownership position of our current stockholders.
The issuance of our common stock as merger consideration in the CCIT II Merger will result in CCIT II stockholders having an ownership in the combined company, which will dilute the ownership position of our current stockholders. Based on
the number of shares of our common stock and CCIT II common stock outstanding on December 31, 2020, our current stockholders would hold approximately 72% of the issued and outstanding shares of our common stock following the CCIT II Merger. Consequently, our current stockholders, as a general matter, will have less influence over the management and policies of the combined company following the CCIT II Merger than they currently have over our management and policies.
Litigation challenging the CCIT II Merger may increase costs and prevent the CCIT II Merger from becoming effective within the expected timeframe, or from being completed at all, which could have a material adverse effect on us.
If one or more stockholders files a lawsuit challenging the CCIT II Merger, the Company cannot provide any assurance as to the outcome of any such lawsuit, including the costs associated with defending these claims or any other liabilities that may be incurred in connection with the litigation or settlement of these claims. If plaintiffs are successful in obtaining an injunction prohibiting the parties from completing the CCIT II Merger on the agreed-upon terms, such an injunction may prevent the completion of the CCIT II Merger in the expected time frame, or may prevent it from being completed at all. Whether or not any such plaintiffs’ claims are successful, this type of litigation is often expensive and diverts management’s attention and resources, which could have a material adverse effect on us.
Our anticipated indebtedness will increase upon completion of the CCIT II Merger, which could have a material adverse effect on us.
In connection with the CCIT II Merger, we plan to refinance certain indebtedness of CCIT II using our Revolving Credit Facility (defined below) and will be subject to risks associated with debt financing, including a risk that our cash flow could be insufficient to meet required payments on our debt. As of December 31, 2020, we had approximately $2.1 billion of outstanding indebtedness and approximately $390.9 million of liquidity (including amounts available to be drawn under our Revolving Credit Facility). After giving effect to the CCIT II Merger, our total pro forma consolidated indebtedness as of December 31, 2020 would be approximately $2.5 billion and our liquidity would be approximately $542.0 million (cash and cash equivalents and amounts available to be drawn under our Revolving Credit Facility). Our indebtedness could have a material adverse effect on us, as discussed elsewhere in this “Risk Factors” section.
Our future results will suffer if we do not effectively manage our expanded operations following the CCIT II Merger.
Following the CCIT II Merger, we expect to continue to expand our operations, including through strategic transactions, some of which may involve complex challenges. Our future success will depend, in part, upon our ability to manage our expansion and to integrate new operations into our existing business in an efficient and timely manner, and upon our ability to successfully monitor our operations, costs, regulatory compliance and service quality, and to maintain other necessary internal controls. There is no assurance that our strategic opportunities will be successful, or that we will realize its expected operating efficiencies, cost savings, revenue enhancements, or other benefits.
Following the consummation of the CCIT II Merger, we will assume certain potential liabilities relating to CCIT II.
Following the consummation of the CCIT II Merger, we assume certain potential liabilities relating to CCIT II. These liabilities could have a material adverse effect on us to the extent we have not identified such liabilities or have underestimated the scope of such liabilities.
We may incur adverse tax consequences if, prior to the CCIT II Merger, CCIT II fails to qualify as a REIT for federal income tax purposes, which could have a material adverse effect on us.
CCIT II has operated in a manner that it believes has allowed it to qualify as a REIT for federal income tax purposes under the Code and intends to continue to do so through the time of the CCIT II Merger, and we intend to continue operating in such a manner following the CCIT II Merger. CCIT II has not requested and does not plan to request a ruling from the IRS that it qualifies as a REIT. Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The determination of various factual matters and circumstances not entirely within the control of CCIT II may affect its ability to qualify as a REIT. In order to qualify as a REIT, CCIT II must satisfy a number of requirements, including requirements regarding the ownership of its stock and the composition of its gross income and assets. Also, a REIT must make distributions to stockholders aggregating annually at least 90% of its REIT taxable income, excluding any net capital gains.
If CCIT II (or, following the CCIT II Merger, the Company) loses its REIT status, or is determined to have lost its REIT status in a prior year, it will face serious tax consequences that would substantially reduce its cash available for distribution, including cash available to pay dividends to its stockholders, because:
•it would be subject to federal corporate income tax on its net income for the years it did not qualify for taxation as a REIT (and, for such years, would not be allowed a deduction for dividends paid to stockholders in computing its taxable income);
•it could possibly be subject to increased state and local taxes for such periods;
•unless it is entitled to relief under applicable statutory provisions, neither it nor any “successor” company could elect to be taxed as a REIT until the fifth taxable year following the year during which it was disqualified; and
•for five years following re-election of REIT status, upon a taxable disposition of an asset owned as of such re-election, it could be subject to corporate level tax with respect to any built-in gain inherent in such asset at the time of re-election.
Following the CCIT II Merger, we will inherit any liability with respect to unpaid taxes of CCIT II for any periods prior to the CCIT II Merger. In addition, as described above, if CCIT II fails to qualify as a REIT as of the CCIT II Merger we nevertheless qualified as a REIT, in the event of a taxable disposition of a former CCIT II asset during the five years following the CCIT II Merger we would be subject to corporate tax with respect to any built-in gain inherent in such asset as of the CCIT II Merger.
As a result of all these factors, CCIT II's or the Company’s failure to qualify as a REIT could have a material adverse effect on us and could have other adverse effects on us, including material ones. In addition, for years in which we do not qualify as a REIT, we would not otherwise be required to make distributions to stockholders.
Risks Related to an Investment in Our Common Stock
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 SRP 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 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.
There is currently no public market for shares of our common stock and there may never be one.
Furthermore, our SRP includes numerous restrictions that limit a stockholder’s ability to sell their shares to us. Our SRP may provide stockholders with a limited opportunity to sell their shares to us after they have held them for a period of one year if would-be redeeming stockholders comply with significant restrictions and limitations. Generally, our SRP imposes a quarterly cap on aggregate redemptions of shares of our common stock equal to a value (based on the applicable redemption price per share on the day the redemption is effected) of up to 5% of the aggregate NAV of the outstanding shares as of the last business day of the previous quarter; provided, however, that every quarter each class of our common stock will be allocated capacity within such aggregate limit to allow us to redeem shares equal to a value of up to 5% of the aggregate NAV of each class of common stock as of the last calendar day of the previous quarter.
Our Board may limit, suspend, terminate or amend any provision of our SRP upon 30 days’ notice and our Board did previously suspend our SRP effective March 28, 2020 and could do so again. Under the partial reinstatement of our SRP on July 16, 2020, redemptions of shares of our common stock are 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 are also subject to a quarterly cap on aggregate redemptions equal to amount of the aggregate NAV, as of the last business day of the previous quarter, of the shares issued pursuant to our distribution reinvestment plan (“DRP”) during such quarter. Additionally, the vast majority of our assets consist of properties which cannot generally be readily liquidated on short notice without impacting our ability to realize full value upon their disposition. As a result, we may not always have a sufficient amount of cash to immediately satisfy redemption requests. Furthermore, 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. As a result of the foregoing, a stockholder’s ability to have their shares redeemed by us pursuant to our SRP may be limited.
Furthermore, to ensure that we do not fail to qualify as a REIT, our charter 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 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 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 stockholders, and could impose further impediments to a stockholder’s ability to sell shares of our common stock.
Our published NAV per share amounts may change materially if the appraised values of our properties materially change from prior appraisals or the actual operating results differ from our historical and/or anticipated results.
Furthermore, the NAV per share that we publish will not reflect changes in our NAV, including potentially material changes, that are not immediately quantifiable.
We update our NAV per share on a quarterly basis based on third-party appraisals of our properties, which are impacted by real estate market events that are known to be material to our NAV. The valuations reflect information provided to the appraisers with a reasonable time to analyze the event and document the new market value. Annual third-party appraisals of our properties using an appraisal report format are conducted on a rolling basis, such that properties will be appraised at different times throughout any given year with each property generally appraised at least once per calendar year. These appraisals involve subjective judgements and are not necessarily representative of the price at which an asset or liability would sell pursuant to negotiation between an arms’ length buyer and seller. We will not retroactively adjust the NAV per share of any 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 assumed, the adjustment to reflect the new appraisal or actual operating results may cause the NAV per share for any class of our common stock to increase or decrease, and such increase or decrease will occur on the day the adjustment is made. Additionally, notification of property and real estate market events may lag the actual event and events may be missed, unknown or difficult to value. Furthermore, the NAV per share that we publish will not reflect changes in NAV, including potentially material changes, that are not immediately quantifiable, 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 in our NAV may inure to the benefit of redeeming stockholders or non-redeeming stockholders and new purchasers of our common stock, depending on whether our published NAV per share for a given class is overstated or understated.
Our NAV is not a GAAP measure and involves certain subjective judgments by the Company, the independent valuation management firms and other parties involved in valuing our assets and liabilities.
Our valuation procedures are not subject to GAAP and our NAV is not a GAAP measure. Our NAV may differ from prior appraisals and/or actual operating results, even if we are required to adopt a fair value basis of accounting for GAAP financial statement purposes. In addition, the implementation and coordination of our valuation procedures include certain subjective judgments of the Company, such as whether the independent valuation management firms should be notified of events specific to our properties that could affect their valuations, as well as of the independent valuation management 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.
Our calculation of NAV may be different from the NAV calculations used by other public REITs, which could mean that our NAV is not 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 our valuation procedures.
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. 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, reviews the appropriateness of its valuation procedures and may, at any time, adopt changes to the valuation procedures. During such review, our Board may change aspects of our valuation procedures, which changes may have an adverse effect on our NAV and the price at which our stockholders may sell shares to us under our SRP or invest in additional shares of our common stock under our DRP. Because our calculation of NAV may be different from the NAV calculations used by other public REITs, our NAV is not comparable to NAV reported by other public REITs.
We may be unable to maintain cash distributions or increase distributions over time.
We may be unable to maintain cash distributions or increase distributions over time. The amount of cash available for distribution will be affected by many factors, such as our ability to acquire properties and our operating expense levels, as well as 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 our stockholders. Our actual results may differ significantly from the assumptions used by our Board in establishing the distribution rate to our stockholders.
Our stockholders are subject to the risk that our business and operating plans may change, including that we may pursue a Strategic Transaction.
We may consider a Strategic Transaction in the future. We are not prohibited by our charter or otherwise from engaging in a Strategic Transaction 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 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 a Strategic Transaction or otherwise if it believes such a change is in the best interest of our stockholders. There can be no assurance, however that any such Strategic Transaction will occur. Our Board may also change our investment objectives, targeted investments, borrowing policies or other corporate policies without stockholder approval.
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 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-current published NAV price per share. Furthermore, because we have a large number of stockholders and our common stock is not listed on a national securities exchange, there may be significant pent-up demand to sell shares of our common stock. Significant sales of shares of our common stock, or the perception that significant sales of such shares could occur, may cause the market price of our common stock to decline significantly.
In the event that we complete a Strategic Transaction, the value of our shares in connection with such Strategic Transaction may be lower than our published NAV. 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 and could impair our ability to raise additional capital through the sale of equity securities in the future. Even if a substantial number of sales of our shares of common stock are not effected, the mere perception of the possibility of these sales could depress the market price of our common stock, have a negative effect on our ability to raise capital in the future and have a material adverse effect on us.
Risks Related to Our Conflicts of Interest
Conflicts of interest could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and the GCEAR Operating Partnership or any partner thereof, on other hand. Additionally, the chairman of our Board is a controlling person of entities that have received GCEAR OP Units, and therefore may face conflicts with regard to his fiduciary duties to the Company and those entities.
Conflicts of interest could arise in the future as a result of the relationships between us and our affiliates, on one hand, and the GCEAR Operating Partnership or any partner thereof, on the other. Our directors and officers have duties to the Company and our stockholders under applicable Maryland law in connection with their management of the Company. At the same time, we have fiduciary duties, as a general partner, to the GCEAR Operating Partnership and to the limited partners under Delaware law in connection with the management of the GCEAR Operating Partnership. Our duties as a general partner to the GCEAR Operating Partnership and its partners may come into conflict with the duties of our directors and officers to the Company and our stockholders. Further, Delaware law generally requires a general partner of a Delaware limited partnership to adhere to fiduciary duty standards under which it owes its limited partners the highest duties of good faith, fairness and loyalty and which generally prohibit such general partner from taking any action or engaging in any transaction as to which it has a conflict of interest. Additionally, the chairman of our Board is a controlling person of entities that have received GCEAR OP Units which may be exchanged for our common stock in the future. The chairman of our Board may also make decisions on behalf of those entities. Furthermore, 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 those entities entity should elect to redeem shares in a given quarter, the limitations on redemption contained in our SRP may be met or exceeded.
Risks Related to Our Corporate Structure
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:
•any person who beneficially owns 10% or more of the voting power of the corporation’s shares; or
•an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation.
These prohibitions are intended to prevent a change of control by interested stockholders who do not have the support of our Board. Since our charter contains limitations on ownership of 9.8% or more of our common stock, we opted out of the business combinations statute in our charter and, therefore, we will not be afforded the protections of this statute. However, there is no guarantee that the ownership limitations in our charter would provide the same measure of protection as the business combinations statute and prevent an undesired change of control by an interested stockholder.
Our charter and bylaws and Maryland law contain provisions that may delay or prevent a change of control transaction.
Our charter 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 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 Shares (as defined in our charter), unless waived by our Board. The ownership limits and the other restrictions on ownership and transfer of our stock contained in our charter may delay or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
Our stockholders’ investment return would be reduced if we were required to register as an investment company under the 1940 Act and we would not be able to continue our business unless and until we registered under the 1940 Act.
We conduct our operations so that we and our subsidiaries are not required to register as an investment company under the 1940 Act. We regularly review our investment activity to attempt to ensure that we do not come within the application of the 1940 Act. Among other things, we 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. In order to avoid falling within the definition of an “investment company” under the 1940 Act, we engage primarily in the business of owning real estate. As of December 31, 2020, we owned 98 properties, and it is our intention that investments in real estate properties will represent the substantial majority of our total asset mix.
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, we may be required to acquire additional income- or loss-generating assets that we might not otherwise acquire or forgo opportunities to acquire interests in companies that we would otherwise want to acquire. 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 alternatively, register as an investment company under the 1940 Act. If we were required to register as an investment company but failed 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 the Company and liquidate our business.
Our stockholders’ interest in the Company will be diluted as we issue additional shares and our stockholders’ interest in our assets will also be diluted if the GCEAR Operating Partnership issues additional units.
Our stockholders do not have preemptive rights to any shares issued by us in the future. Subject to Maryland law, our Board may increase the number of authorized shares of stock, increase or decrease the number of 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 in the Company as we (i) sell additional shares in future public offerings and pursuant to our DRP, (ii) sell securities that are convertible into shares of our common stock, (iii) issue shares of our common stock in one or more private offerings of securities to institutional investors, (iv) issue shares of restricted common stock or restricted stock units (“RSUs”) to our independent directors and executive officers, (v) issue shares in connection with
an exchange of limited partnership interests of the GCEAR Operating Partnership, or (vi) convert 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 are obligated to issue under certain circumstances. Furthermore, because we own all of our assets and liabilities through the GCEAR Operating Partnership, directly or indirectly through subsidiaries, to the extent we issue additional GCEAR OP Units, our stockholders' percentage ownership interests in our assets 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 requires us to indemnify our directors and officers to the maximum extent permitted under Maryland law. Additionally, our charter limits the liability of our directors and officers for monetary damages to the maximum extent permitted under Maryland law. 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 officer of EA-1. Further, our 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.
Holders of our Series A Preferred Shares will 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 would require 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 shareholders. Furthermore, we may be obligated to issue a second tranche of such securities, increasing the holder’s interest in our Company. 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 common 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 the 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 voluntary or 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. 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 will have 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 cash or when we would prefer 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 the Series A Preferred Shares held by the holder into shares of our common stock beginning 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 stockholders, and, in the event of the issuance of a second tranche and the conversion of both tranches, would result in the holder of the Series A Preferred Shares owning approximately 8.0% of our common stock on a pro formas basis following the completion of the CCIT II Merger on a fully diluted basis.
If we fail to pay distributions on the Series A Preferred Shares for six quarters (whether or not consecutive), the holder will be entitled to elect two additional directors of the 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 Preferred Stock Directors shall continue until all distributions accumulated on the Series A Preferred Shares have been paid in full for all past distribution periods and the accumulated 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 the foregoing risks were to 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.
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. 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 Our Business
We are primarily dependent on single-tenant leases for our revenue, and the bankruptcy, insolvency, or downturn in the business of, or a lease termination or election not to renew by a single tenant could have a material adverse effect on us.
Our properties are primarily leased to single tenants or will derive a majority of their rental income from single 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 guaranteed such properties. Lease payment defaults, including those caused by the current economic climate, could cause us to reduce the amount of distributions we pay and/or force us to find an alternative source of revenue to meet a debt payment and prevent a foreclosure if the property is subject to a mortgage. In the event of a default, 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, a premature termination of a lease, or a tenant’s election not to extend a lease upon its expiration, could have a material adverse effect on us. Additionally, in certain instances, we may agree to enter into or assume leases that vary from our normal lease parameters. Moreover, we can provide no assurance that our strategy of owning and operating office and industrial properties that are primarily net-leased to single tenants will be successful or that we will attain our investment and portfolio management objectives. Furthermore, although we have no current intention to do so, we may also invest in single-tenant, net-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.
We currently rely on five tenants for a meaningful amount of revenue and adverse effects to their business could have a material adverse effect on us.
Our five largest tenants, based on contractual net rent for the 12-month period subsequent to December 31, 2020, were General Electric Company located in Georgia, Ohio and Texas (approximately 4.1%), Wood Group Mustang, Inc., located in Texas (approximately 3.4%), Southern Company Services, Inc. located in Alabama (approximately 3.1%), McKesson Corporation, located in Arizona (approximately 3.0%) and LPL Holdings, Inc., located in South Carolina (approximately 2.9%). The revenues generated by the properties leased and/or guaranteed by these companies are substantially reliant upon the financial condition of such 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’s rental payments, which could have a material adverse effect on us.
We may experience concentrations of lease expiration dates in the future, which may (i) cause a loss in the value of our stockholders’ investment until the affected properties are re-leased or sold, (ii) 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 re-leasing or sale period, any of which could have a material adverse effect on us.
Our lease expirations by year based on contractual net rent for the 12-month period subsequent to December 31, 2020 are as follows (dollars in thousands):
Year of Lease Expiration (1)
Contractual Net Rent
(unaudited)
Number of Lessees Approx. Square Feet Percentage of Contractual Net Rent
2021 $ 2,855 4 759,200 1.0 %
2022 12,628 8 978,900 4.4
2023 22,935 9 1,233,000 7.9
2024 46,967 16 3,950,800 16.2
2025 35,795 19 2,644,700 12.4
2026 24,112 8 2,102,000 8.3
>2027 144,050 49 12,072,054 49.8
Vacant - - 3,093,059 -
Total $ 289,342 113 26,833,713 100.0 %
(1) Expirations that occur on the last day of the month are shown as expiring in the subsequent month.
We may experience 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 or sold upon expiration of the existing lease or may not be re-leased on terms as favorable as those of the current lease(s). Therefore, if we were to liquidate any of these assets prior to the favorable re-leasing of the space, we may suffer a loss on our investment. Our stockholders may also suffer a loss (and a reduction in distributions) after the expiration of the lease terms 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. To meet our need for cash during these times, we may have to increase borrowings or reduce our distributions, or both. Any of the foregoing risks could have a material adverse effect on us.
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 characterized by (1) longer lease terms and (2) fixed rental rate increases during the primary term of the lease and there is an increased risk that these contractual lease terms will fail to result in fair market rental rates. As a result, our income and distributions to our stockholders could be lower than they would otherwise be if we did not engage in net leases, which could have a material adverse effect on us..
Our real estate investments may include special use single tenant properties, and, as such, it may be difficult to retain existing tenants or to sell or re-lease these properties if the existing tenant defaults or terminates its lease early, which could have a material adverse effect on us.
We focus our investments on commercial and industrial properties, a number of which may include manufacturing facilities and/or special use properties. These types of properties are relatively illiquid compared to other types of real estate and financial assets. This illiquidity will limit our ability to quickly change our portfolio in response to changes in economic, market or other conditions. With these properties, we may be required to renovate a vacant property in order to try to re-lease or sell it,
grant rent or other concessions and/or make significant capital expenditures to improve properties 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 company that has leased and/or guaranteed 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 retain existing tenants or to sell or re-lease these properties if the existing tenant defaults or terminates its lease early, 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. As we evaluate new properties for our portfolio, we are in competition with other potential buyers for the same properties that may have greater financial resources or access to capital than we may or be willing to acquire properties in transactions that are more highly leveraged or are less attractive from a financial standpoint than we are willing to pursue. This competition may require us 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, the leasing of real estate is often highly competitive, and we may experience competition for tenants from owners and managers of competing properties. As a result, we may have to provide free rent, incur charges for tenant improvements, offer other inducements, or we might not be able to timely lease the space, any of which could have a material adverse effect on us. 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 incentive payments 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, which could have a material adverse effect on us. 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.
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.
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 senior 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 sellers, lenders, companies that may lease of 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 senior 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 sellers, 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.
Key employees of the Company may depart either before or after the CCIT II Merger because of a desire not to remain with the Company following the CCIT II Merger. Accordingly, no assurance can be given that we will be able to retain such key personnel to the same extent as in the past.
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 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 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. If any of the foregoing risks materialize, it could have a material adverse effect on us.
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. As of December 31, 2020, our real estate portfolio consisted of 98 properties in 25 states and 113 lessees consisting substantially of office, warehouse, and manufacturing facilities and one land parcel held for future development. Our operating results will be subject to risks generally incident to the ownership of real estate. These include, among others, and including those described elsewhere in this "Risk Factors" section:
•the value of real estate fluctuates depending on conditions in the general economy and the real estate business. Additionally, adverse changes in these 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 buy and sell real estate quickly, or we or potential buyers of our properties may experience difficulty in obtaining financing, which may limit our ability to acquire or dispose of properties promptly in response to changes in economic or other conditions. Additionally, we may be unable to identify, negotiate, finance or consummate acquisitions of new properties or dispositions of our properties, on favorable terms, or at all;
•our properties may be subject to impairment losses, which could have a material adverse effect on us;
•changes in tax, real estate, environmental or zoning laws and regulations;
•changes in property tax assessments and insurance costs;
•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
•we may from time to time be subject to litigation, which may significantly divert the attention and resources of 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 risks could have a material adverse effect on us and may prevent us 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” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements typically contain limited warranties, representations and indemnifications that will only survive for a limited period after the closing. Also, most sellers of large commercial properties are special purpose entities without significant assets other than the property itself and there is often no credit behind the surviving provisions of a purchase agreement. The purchase of properties with limited warranties 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 and could expose us to unknown liabilities.
We may 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. We may finance properties with lock-out provisions, which 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 our 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 the Company to sell the property could increase substantially. 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’ best interests. Any of the foregoing could have a material adverse effect on us.
If we suffer losses that are not covered by insurance or that are in excess of insurance coverage, it could have a material adverse effect on us.
We can provide no assurance that we will not suffer losses that are not covered by insurance or that are in excess of insurance. 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. Generally, our 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. Tenants are required to provide 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 our entire risk. We cannot assure stockholders that we will have adequate coverage for losses. If we suffer losses that are not covered by insurance or that are in excess of insurance coverage, it could have a 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. Climate change and natural disasters, including rising sea levels, flooding, extreme weather, and changes in precipitation and temperature, may result in physical 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) affecting an area in which we have a significant concentration of properties, such as in Texas, California, Ohio, Arizona, Georgia, Illinois or New Jersey, could have a material adverse effect on us. 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 could have a material adverse effect on us.
Our 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 contractors’ ability to build in conformity with plans, specifications, budgets and timetables. If a contractor fails to perform, we may resort to legal action relating to the contract or the construction contract, as applicable, or to compel performance which may lead to additional costs and delays.
Developing and constructing properties also exposes us to risks such as cost over-runs, carrying costs, completion guarantees, availability and costs of materials and labor issues, weather conditions and government regulation. 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 distributions attributable to those particular real properties. We may incur additional risks when we make periodic progress payments or other advances to contractors 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 and the ADA, may have a material adverse effect on us.
All real property we acquire, and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and zoning and 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 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. 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.
Additionally, our tenants’ operations, the existing condition of land when we buy 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. There 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, which could result in material 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.
Under the ADA all public accommodations and commercial facilities are required to meet certain federal requirements related to access and use by disabled persons. The ADA generally requires that buildings and services, including restaurants and retail stores, be made accessible and available to people with disabilities. The ADA’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 aim to acquire properties that comply with the ADA or may place the burden on the seller or other 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. 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, it could have a material adverse effect on us.
Furthermore, the properties we acquire generally will 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 acquire 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 a material adverse effect on us.
Any of the foregoing could have a material adverse effect on us.
If we sell properties by providing financing to purchasers, defaults by the purchasers could have a material adverse effect on us.
When we provide financing to purchasers, we will bear the risk that the purchaser may default, which could 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 have a material adverse effect on us.
We will be subject to risks associated with the venture partners in our joint venture arrangements that otherwise may not be present in other real estate investments, which could have a material adverse effect on us.
We have entered into, and may continue to enter into, joint ventures or other arrangements with respect to a portion of the properties we acquire. Ownership of joint venture interests involves risks generally not otherwise present with an investment in real estate such as the following:
•the risk that a venture partner 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 we would not be in a position to exercise sole decision-making authority regarding the property, joint venture or structure of ownership or that a venture partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, which has the potential to create impasses on decisions, such as a sale;
•the risk that disputes with venture partners may result in litigation, which may divert the attention and resources of the Company’s management from the ongoing business activities and pursuit of other opportunities that could be beneficial to the Company;
•the possibility that an individual venture partner might become insolvent or bankrupt, or otherwise default under the applicable financing documents, which may constitute an event of default under the applicable financing documents or fail to fund their share of required capital contributions;
•the possibility that a joint venture 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 financing and other 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 both we and our venture partner(s) may each have the right to trigger a buy-sell right or forced sale arrangement, which could cause us to sell our interest, or acquire our venture partners’ interests, or to sell the underlying asset, either on unfavorable terms or at a time when we otherwise would not have initiated such a transaction;
•the risk that a sale or transfer by us to a third party of our interests in the joint venture may be subject to consent rights or rights of first refusal in favor of our venture partner(s), which would in each case restrict our ability to dispose of our interest in the joint venture;
•the risk that a venture partner could take or expects to take actions that could jeopardize our status as a REIT or require us to pay tax, in which case, we may be forced to dispose of our interest in that entity, including by contributing our interest to a subsidiary of ours that is subject to corporate level income tax;
•the risk that a venture partner could breach agreements related to the property, which may cause a default under, or result in personal liability for, the applicable financing documents, violate applicable securities laws and otherwise adversely affect the property and the joint venture arrangement; or
•the risk that a default by any venture partner would constitute a default under the applicable financing documents that could result in a foreclosure and the loss of all or a substantial portion of the investment made by the venture partner.
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, which could have a material adverse effect on us.
In the event that our interests become adverse to those of the other venture partners, we may not have the contractual right to purchase the joint venture interests from the other co-owners. Even if we are given the opportunity to purchase such joint venture interests in the future, we cannot guarantee that we will desire to do so given market conditions or have sufficient funds available at the time to purchase joint venture interests from the venture partner.
If approved by our Board, including by a majority of our independent directors, we may 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 GCEAR OP Units or to sell their interest to us in its entirety. In the event that a 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. Furthermore, entering into joint ventures with our affiliates or with holders of GCEAR OP Units may result in certain conflicts of interest.
We might want to sell our joint venture interests in a given property at a time when the venture partners 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.
Any of the foregoing could have a material adverse effect on us.
Risks Associated with Debt Financing
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 could have a material adverse effect on us.
On April 30, 2019 we entered into a Second Amended and Restated Credit Agreement with KeyBank, National Association (“KeyBank”) and other syndication partners (as amended, the “Second Amended and Restated Credit Agreement”) under which the Company, through the GCEAR Operating Partnership, as the borrower, obtained our Revolving Credit Facility (defined below) in an initial commitment amount of up to $750 million, a five-year term loan in an original principal amount of $200 million, a five-year term loan in an original principal amount of $400 million and a seven-year term loan in an original principal amount of $150 million. On December 18, 2020, we entered into the Second Amendment to the Second Amended and Restated Credit Agreement under which the Company, through the GCEAR Operating Partnership, as the borrower, was provided with commitments to fund a new five-year term loan in a principal amount of up to $400 million which can be drawn in up to three installments at any time within 180 days of December 18, 2020. The commitments in respect of the Revolving Credit Facility and the existing term loan facilities may be increased, and/or one or more new term loan tranches may be incurred, subject to obtaining additional commitments from lenders and certain other customary conditions, up to a maximum total commitment of $2.5 billion. In addition to customary representations, warranties, covenants, and indemnities, the Second Amended and Restated Credit Agreement contains a number of financial covenants as described in Note 5, Debt, to our consolidated financial statements included in this Annual Report on Form 10-K.
If we were to default under the Second Amended and Restated 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. Any of the foregoing could have a material adverse effect on us.
We have broad authority to incur debt, and our indebtedness could have a material adverse effect on us.
Subject to certain limitations in our charter that may be eliminated in the future, we have broad authority to 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.
Our indebtedness could have 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 use of an increased portion of our 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;
•limiting our flexibility in planning for, or reacting to, changes in our business 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 increase our credit facility or other similar financing arrangement in order to acquire properties. We may also decide to later further leverage our properties. We may borrow additional funds if we need funds to pay a desired distribution rate 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. A shortfall between the cash flow from our properties and the cash flow needed to service debt could have a material adverse effect on us.
Any of the foregoing could have a material adverse effect on us.
We have incurred, and intend to continue to incur, indebtedness secured by our properties. 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 have a material adverse effect on us.
Some of our borrowings to acquire properties will be secured by mortgages on our properties. In addition, some of our properties contain mortgage financing. 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 have a material adverse effect on us. To the extent lenders require us to cross-collateralize our properties, or provisions 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 properties 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 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, 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. These or other limitations may adversely affect our flexibility and limit our ability to make distributions to stockholders at our current 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 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 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. Any of the foregoing risks could have a material adverse effect on us.
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 method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate, may adversely affect interest rates on our current or future indebtedness and could have a material adverse effect on us.
In July 2017, the Financial Conduct Authority, the authority that regulates the London Interbank Offered Rate (“LIBOR”), announced that it intended to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee (“ARRC”), in the U.S. has proposed that the Secured Overnight Financing Rate (“SOFR”), is the rate that represents best practice as the alternative to US Dollar LIBOR (“USD-LIBOR”) for use in derivatives and other financial contracts that are currently indexed to USD LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD LIBOR and organizations are currently working on industry-wide and company-specific transition plans as relating to derivatives and cash markets exposed to USD LIBOR. We have certain financial contracts, including our KeyBank Loans (as defined below) and our interest rate swaps, that are indexed to USD LIBOR. Changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate, may adversely affect interest rates on our current or future indebtedness. Any transition process may involve, among other things, increased volatility or illiquidity in markets for instruments that rely on LIBOR, reductions in the value of certain instruments or the effectiveness of related transactions such as hedges, increased borrowing costs, uncertainty under applicable documentation, or difficult and costly consent processes. We are monitoring this activity and evaluating the related risks, and any such effects of the transition away from LIBOR may result in increased expenses, may impair our ability to refinance our indebtedness or hedge our exposure to floating rate instruments, or may result in difficulties, complications or delays in connection with future financing efforts, any of which could have a material adverse effect on us.
Federal Income Tax Risks
Failure to continue to qualify as a REIT would adversely affect our operations and our ability to make distributions because we would incur additional tax 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 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, the various tests imposed by the Code.
If we fail to qualify as a REIT for any taxable year, we will be subject to federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of 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 dividends 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 federal income tax consequences of being a REIT. Our failure to continue to qualify as a REIT could have a material adverse effect on us.
To qualify as a REIT, and to avoid the payment of federal income and excise taxes and maintain our REIT status, we may be forced to borrow funds, use proceeds from the issuance of securities, or sell assets to pay distributions, which may result in our distributing amounts that may otherwise be used for our operations, which could have a material adverse effect on us.
To obtain the favorable tax treatment accorded to REITs, we 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 dividends paid and by excluding net capital gains. We will be subject to federal income tax on our undistributed taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which dividends we pay with respect to any calendar 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, or sell assets in order to distribute enough of our taxable income to maintain our REIT status and to avoid the payment of 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.
If the GCEAR Operating Partnership fails to maintain its status as a partnership for federal income tax purposes, its income would be subject to taxation and our REIT status could be terminated.
We intend to maintain the status of the GCEAR Operating Partnership as a partnership for federal income tax purposes. However, if the IRS were to successfully challenge the status of the GCEAR Operating Partnership as a partnership, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that the GCEAR Operating Partnership could make. This would also result in our losing REIT status and becoming subject to a corporate level tax on our income. This would substantially reduce our cash available to pay distributions and the return on our stockholders’ investment, which could have a material adverse effect on us. In addition, if any of the entities through which the GCEAR Operating Partnership 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 the GCEAR Operating Partnership and jeopardizing our ability to maintain REIT status.
Our stockholders may have tax liability on distributions they elect to reinvest in our common stock.
If our stockholders participate in our DRP, they will be deemed to have received, and for federal 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, it may have to use funds from other sources to pay its tax liability on the value of our common stock received.
In certain circumstances, we may be subject to federal and state income taxes as a REIT, which would reduce our cash available for distribution to 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 federal income taxes or state taxes. For example, net income from a “prohibited transaction” will be subject to a 100% tax. We may not be able to make sufficient distributions to avoid excise taxes applicable to REITs. 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 GCEAR Operating Partnership or at the level of the other companies through which we indirectly own our assets. Any federal or state taxes we pay will reduce our cash available for distribution to our stockholders. If any of the foregoing were to occur, it could have a material adverse effect on us.
We may be required to pay some taxes due to actions of our taxable REIT subsidiaries, which would reduce our cash available for distribution to our stockholders and could have a material adverse effect on us.
Any net taxable income earned directly by our taxable REIT subsidiaries, or through entities that are disregarded for federal income tax purposes as entities separate from our taxable REIT subsidiaries, will be subject to federal and possibly state corporate income tax. We have elected to treat Griffin Capital Essential Asset TRS, 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 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’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 federal, state and local taxes, we will have less cash available for distributions to our stockholders.
Complying with the REIT requirements may cause us to forgo otherwise attractive opportunities, which could have a material adverse effect on us.
To qualify as a REIT for 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, 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.
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’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. 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 (assuming such stock is held as a capital asset for 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.
In certain circumstances, even if we qualify as a REIT, we and our subsidiaries may be subject to certain federal, state, and other taxes, which would reduce our cash available for distribution to our stockholders and could have a material adverse effect on us.
Even if we have qualified and continues to qualify as a REIT, we may be subject to some federal, state and local taxes on our income or property and, in certain cases, a 100% penalty tax, in the event we sell property as a dealer. Any federal, state or other taxes we pay will reduce our cash available for distribution to stockholders and could have a material adverse effect on us.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
As of December 31, 2020, we owned a fee simple interest and a leasehold interest in 95 and 3 properties, respectively, encompassing approximately 26.8 million rentable square feet and an 80% interest in an unconsolidated joint venture. 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 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 contractual net rent for the 12-month period subsequent to December 31, 2020, pursuant to the respective in-place leases, was greater than 4.1% as of December 31, 2020.
The percentage of contractual net rent for the 12-month period subsequent to December 31, 2020, by state, based on the respective in-place leases, is as follows (dollars in thousands):
State Contractual Net Rent
(unaudited)
Number of
Properties Percentage of Contractual
Net Rent
Texas $ 34,091 11 11.8 %
Ohio 27,492 11 9.5
California 26,596 5 9.2
Georgia 25,882 5 8.9
Arizona 25,411 8 8.8
Illinois 22,762 9 7.9
New Jersey 18,540 5 6.4
Colorado 14,179 5 4.9
North Carolina 13,298 6 4.6
Florida 10,716 4 3.7
All Others (1)
70,375 29 24.3
Total $ 289,342 98 100.0 %
(1)All others account for less than 3.1% of total contractual net rent on an individual state basis.
The percentage of contractual net rent for the 12-month period subsequent to December 31, 2020, by industry, based on the respective in-place leases, is as follows (dollars in thousands):
Industry (1)
Contractual Net Rent
(unaudited)
Number of
Lessees Percentage of Contractual
Net Rent
Capital Goods $ 40,746 19 14.1 %
Retailing 31,085 8 10.7
Health Care Equipment & Services 27,409 10 9.5
Insurance 26,122 10 9.0
Consumer Services 22,523 9 7.8
Telecommunication Services 19,281 5 6.7
Diversified Financials 18,702 5 6.5
Technology Hardware & Equipment 16,458 6 5.7
Energy 14,619 4 5.1
Consumer Durables & Apparel 14,551 6 5.0
All others (2)
57,846 31 19.9
Total $ 289,342 113 100.0 %
(1) Industry classification based on the Global Industry Classification Standard.
(2) All others account for less than 4.2% of total contractual net rent on an individual industry basis.
The percentage of contractual net rent for the 12-month period subsequent to December 31, 2020, for the top 10 tenants, based on the respective in-place leases, is as follows (dollars in thousands):
Tenant Contractual Net Rent
(unaudited)
Percentage of Contractual
Net Rent
General Electric Company $ 11,772 4.1 %
Wood Group Mustang, Inc. $ 9,808 3.4 %
Southern Company Services, Inc. $ 8,866 3.1 %
McKesson Corporation $ 8,794 3.0 %
LPL Holdings, Inc. $ 8,284 2.9 %
State Farm $ 7,338 2.5 %
Digital Globe, Inc. $ 7,261 2.5 %
Restoration Hardware $ 7,109 2.5 %
Wyndham Hotel Group, LLC $ 7,059 2.4 %
SB U.S. LLC $ 6,663 2.3 %
The tenant lease expirations by year based on contractual net rent for the 12-month period subsequent to December 31, 2020 are as follows (dollars in thousands):
Year of Lease Expiration (1)
Contractual Net Rent
(unaudited)
Number of
Lessees Approx. Square Feet Percentage of Contractual
Net Rent
2021 $ 2,855 4 759,200 1.0 %
2022 12,628 8 978,900 4.4
2023 22,935 9 1,233,000 7.9
2024 46,967 16 3,950,800 16.2
2025 35,795 19 2,644,700 12.4
2026 24,112 8 2,102,000 8.3
>2027 144,050 49 12,072,054 49.8
Vacant - - 3,093,059 -
Total $ 289,342 113 26,833,713 100.0 %
(1)Expirations that occur on the last day of the month are shown as expiring in the subsequent month.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
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.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
As of February 24, 2021, we had approximately 559,728 Class T shares, 1,801 Class S shares, 41,302 Class D shares, 1,900,456 Class I shares, 24,396,690 Class A shares, 47,442,476 Class AA shares, 923,087 Class AAA shares and 155,608,273 Class E shares of common stock outstanding, including common stock issued pursuant to our DRP and stock distributions held by a total of approximately 47,000 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.
Pursuant to the terms of our charter, certain restrictions are imposed on the ownership and transfer of shares.
As described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we expect to 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.
NAV and NAV per Share Calculation
Our Board, including a majority of our independent directors, has adopted valuation procedures, as amended from time to time, that contain a comprehensive set of methodologies to be used in connection with the calculation of our NAV. 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, as explained below, 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 and liabilities are calculated for the purposes of determining our NAV per share, the calculation is generally in accordance with GAAP principles set forth in ASC 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 practices, there is no established guidance 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.
On February 26, 2020, our Board approved the temporary suspension of (i) the primary portion of our Follow-On Offering, (as defined below) effective February 27, 2020; (ii) our SRP, effective March 28, 2020; and (iii) our DRP, effective March 8, 2020. Redemptions sought upon a stockholder's death, qualifying disability, or determination of incompetence or incapacitation were honored in the first quarter of 2020 in accordance with the terms of the SRP. The Follow-On Offering terminated with the expiration of the registration statement on September 20, 2020. On July 16, 2020, our Board approved the (i) reinstatement of the DRP, effective July 27, 2020; (ii) 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; and (iii) partial reinstatement of the SRP, effective August 17, 2020. After March 31, 2020, we (i) ceased publishing a daily updated estimate of our NAV per share; (ii) are continuing our internal procedures for calculating NAV per share; and (iii) will continue to publish updated estimates of our NAV per share on a quarterly basis. We published our updated December 31, 2020 NAV per share on January 19, 2021.
Prior to the suspension (and subsequent expiration) of our Follow-On Offering, we were offering to the public four 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 had different selling commissions, dealer manager fees and ongoing distribution fees. Our NAV is calculated for each of these classes and our Class A shares, Class AA shares, Class AAA shares and Class E shares after the end of each business day that the New York Stock Exchange is open for unrestricted trading, by our NAV accountant, ALPS Fund Services, Inc., a third-party firm approved by our Board, including a majority of our independent directors. Our Board, including a majority of our independent directors, may replace our NAV accountant with another party, if it is deemed appropriate to do so. 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 our NAV.
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 fair value of our real property portfolio and our management company, any applicable organization and offering costs and any expense reimbursements, real estate-related assets and liabilities, daily accruals for income and expenses, amortization of transaction costs, 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. On an ongoing basis, we will adjust the accruals to reflect actual operating results and the outstanding receivable, payable and other account balances resulting from the accumulation of daily accruals when such financial information is available.
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 organization 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.
We will include the fair value of our liabilities as part of our NAV calculation. Our liabilities include, without limitation, property-level mortgages, interest rate swaps, accrued distributions, the fees payable to the dealer manager, accounts payable, accrued company-level operating expenses, any company or portfolio-level financing arrangements and other liabilities. Liabilities will be valued using widely accepted methodologies specific to each type of liability. Our mortgage debt and related derivatives, if any, will typically be valued at fair value in accordance with GAAP.
Following the calculation and allocation of changes in the aggregate company NAV as described above, NAV for each class is adjusted for accrued distributions and the accrued distribution fee, to determine the current day’s NAV. The purchase price of Class T and Class S shares is equal to the applicable NAV per share plus the applicable selling commission and/or dealer manager fee. Selling commissions and dealer manager fees 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 accrued the full cost of the distribution fee as an offering cost for Class T, Class S, and Class D shares up to the 9.0% limit at the time such shares were 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 our daily NAV as of December 31, 2020 and September 30, 2020, calculated in accordance with our valuation procedures (in thousands, except share and per share amounts):
December 31, 2020 September 30, 2020
Real Estate Asset Fair Value $ 4,277,879 $ 4,299,301
Investments in Unconsolidated Entities
4,100 4,100
Goodwill (Management Company Value) 230,000 230,000
Interest Rate Swap (Unrealized Loss) (56,776) (62,478)
Perpetual Convertible Preferred Stock (125,000) (125,000)
Other Assets, net 157,182 158,843
Total Debt at Fair Value (2,140,065) (2,172,130)
NAV
$ 2,347,320 $ 2,332,636
Total Shares Outstanding 262,196,714 262,064,167
NAV per share
$ 8.95 $ 8.90
Our independent valuation firm utilized the discounted cash flow approach for 96 properties and the direct capitalization approach for two properties in our portfolio with a weighted average of approximately 6.8 years remaining on their existing leases. The sales comparison approach was utilized for the Lynwood land parcel. The overall capitalization rate for the two properties utilizing the direct capitalization approach during the quarter was 5.59%. The following summarizes the range of cash flow discount rates and terminal capitalization rates for the 96 properties using the discounted cash flow approach:
Range Weighted Average
Cash Flow Discount Rate (discounted cash flow approach) 6.00% 14.00% 7.57%
Terminal Capitalization Rate (discounted cash flow approach) 5.25% 10.00% 6.81%
The following table sets forth the changes to the components of NAV for the Company and the reconciliation of NAV changes for each class of shares (in thousands, except share and per share amounts):
Share Classes
Class T Class S Class D Class I Class E IPO (1)
OP Units Total
NAV as of September 30, 2020 $ 5,012 $ 16 $ 368 $ 17,056 $ 1,384,969 $ 641,005 $ 284,210 $ 2,332,636
Fund level changes to NAV
Unrealized gain on net assets 67 - 5 228 18,511 8,576 3,801 31,188
Unrealized gain (loss) on interest rate swaps 13 - 1 42 3,384 1,568 695 5,703
Dividend accrual (36) - (3) (167) (13,645) (6,382) (2,801) (23,034)
Class specific changes to NAV
Stockholder servicing fees/distribution fees (13) - - - - (347) (3) (363)
NAV as of December 31, 2020 before share/unit sale/redemption activity $ 5,043 $ 16 $ 371 $ 17,159 $ 1,393,219 $ 644,420 $ 285,902 $ 2,346,130
Unit sale/redemption activity- Dollars
Amount sold $ 21 $ - $ 3 $ 245 $ 4,485 $ 3,080 $ - $ 7,834
Amount redeemed and to be paid - - - (197) (4,767) (1,680) - (6,644)
NAV as of December 31, 2020 $ 5,064 $ 16 $ 374 $ 17,207 $ 1,392,937 $ 645,820 $ 285,902 $ 2,347,320
Shares/units outstanding as of
September 30, 2020 555,732 1,802 40,789 1,894,647 155,245,967 72,486,331 31,838,899 262,064,167
Shares/units sold 2,374 - 306 27,250 503,143 348,782 - 881,855
Shares/units redeemed - - - (21,855) (536,824) (190,629) - (749,308)
Shares/units outstanding as of December 31, 2020 558,106 1,802 41,095 1,900,042 155,212,286 72,644,484 31,838,899 262,196,714
NAV per share as of September 30, 2020 $ 9.02 $ 9.01 $ 9.00 $ 9.00 $ 8.92 $ 8.84
Change in NAV per share/unit 0.05 0.06 0.06 0.06 0.05 0.05
NAV per share as of December 31, 2020 $ 9.07 $ 9.07 $ 9.06 $ 9.06 $ 8.97 $ 8.89
(1) IPO shares include Class A, Class AA, and Class AAA shares.
Recent Sales of Unregistered Securities
During the year ended December 31, 2020, there were no sales of unregistered securities.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Share Redemption Program (SRP)
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.
During the quarter ended December 31, 2020, we redeemed shares under the SRP as follows:
For the Month Ended Total Number of Shares repurchased Average Price Paid per Share Total Number of Shares Purchased 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, 2020 - $ - - -
November 30, 2020 - $ - - -
December 31, 2020 600,075 $ 8.91 - (1)
(1)For a description of the maximum number of shares that may be purchased under our SRP, see Note 9, Equity,to our consolidated financial statements included in this Annual Report on Form 10-K.
Performance Graph
The information below shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, other than as provided in Item 201 of Regulation S-K, or to the liabilities of Section 18 of the Exchange Act, except to the extent we specifically request that such information be treated as soliciting material or specifically incorporate it by reference into a filing under the Securities Act or the Exchange Act.
The performance graph below is a comparison of the five-year cumulative return of our shares of Class A common stock, the Standard and Poor’s 500 Index (“S&P 500”), and the FTSE NAREIT Equity REITs Index. Performance is shown both with and without “Sales Load” and net of all other fees and expenses. Sales Load is defined as upfront selling commissions, dealer manager fees, and estimated issuer and organizational offering expenses, in conformity with the definition of “Net Investment” amount set forth in FINRA Rule 2231. We disclosed our initial estimate of our net asset value per share on February 13, 2017, which estimate was as of December 31, 2016. Therefore, performance for periods prior to this date is based off our Net Investment amount. Performance reflects the sum of cumulative distributions paid during the measurement period, assuming distribution reinvestment. We currently have Class T, Class S, Class D, Class I, Class A, Class AA, Class AAA, and Class E common stock outstanding, with varying performance results between each class due to differences in class-specific fees and expenses. There can be no assurance that the performance of our Class A shares will continue in line with the same or similar trends depicted in the performance graph.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA
Omitted at the option of the Registrant.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the Company’s consolidated financial statements and the notes thereto contained in this Annual Report on Form 10-K.
In connection with the EA Merger on April 30, 2019, EA-2 was the legal acquirer and EA-1 was the accounting acquirer for financial reporting purposes. The financial information for GCEAR as set forth in this Annual Report on Form 10-K represents a continuation of the financial information of EA-1 as the accounting acquirer. Thus, the financial information set forth herein for any period prior to April 30, 2019 reflects results of pre-EA Merger EA-1. The results of operations of EA-2 are incorporated into GCEAR effective May 1, 2019. Following the EA Merger, the surviving company was renamed Griffin Capital Essential Asset, REIT, Inc.
As used throughout this Annual Report on Form 10-K, references to “GCEAR,” the “Company,” “we,” “our,” and “us” herein refer to EA-1 and one or more of EA-1’s subsidiaries for periods prior to the EA Merger, and GCEAR and one or more of GCEAR’s subsidiaries for periods following the EA Merger. Accordingly, comparisons of the period to period financial information of GCEAR may not be meaningful.
Overview
We are an internally managed, publicly-registered non-traded REIT. We own and operate a geographically diversified portfolio of strategically-located, high-quality corporate office and industrial properties that are primarily net-leased to single tenants that we have determined to be creditworthy.
The GCEAR 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 net leases 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.
As of December 31, 2020, we owned 98 properties (including one land parcel held for future development) in 25 states. Our contractual net rent for the 12-month period subsequent to December 31, 2020 is expected to be approximately $289.3 million with approximately 64.3% expected to be generated by properties leased and/or guaranteed, directly or indirectly, by companies we have determined to be creditworthy. As of December 31, 2020, our portfolio was approximately 88.5% leased (based on square footage), with a weighted average remaining lease term of 6.83 years, weighted average annual rent increases of approximately 2.1%.
On October 29, 2020, we entered into the CCIT II Merger Agreement pursuant to which we will acquire CCIT II for approximately $1.2 billion in a stock-for-stock transaction. This transaction is a continuation of our strategy since inception to strategically grow the portfolio with assets consistent with our investment strategy, improve our portfolio statistics, strengthen the balance sheet, and maximize stockholder value. 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 will be converted into the right to receive 1.392 shares of our Class E common stock. The CCIT II Merger is expected to close in March 2021. After the closing of the CCIT II Merger, we expect to have a combined portfolio consisting of 123 properties
(including one land parcel held for future development) in 26 states.
COVID-19 and Outlook
We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business and geographies, including how it will impact our tenants and business partners. The COVID-19 pandemic in many countries, including the United States, has significantly adversely impacted global economic activity and has contributed to volatility and negative pressure in financial markets. The global impact of the pandemic has been rapidly evolving and, as cases of COVID-19 have continued to be identified, many countries, including the United States, have reacted by instituting various levels of quarantines, business and school closures and travel restrictions. Certain states and cities, including those where we own properties and where our principal place of business is located, have instituted similar measures, including various levels of “shelter in place” rules, and restrictions on the types of business that may continue to operate at full capacity. We cannot predict when restrictions
currently in place will be lifted to some extent or entirely. As a result, the COVID-19 pandemic is negatively impacting almost every industry, directly or indirectly, including industries in which the Company 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 which 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 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 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 three months ended December 31, 2020, 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 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 properties, and our financial condition, including our NAV per share, results of 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 24, 2021, we received October-February 2020 rent payments from 100% of our portfolio. In addition, we have received a number of short-term rent relief inquiries from our tenants, most often in the form of rent deferral inquiries, or requests for further discussion from tenants. We believe some of these inquiries were opportunistic in nature and may not have been as a result of a direct financial need due to the outbreak. As of February 24, 2021, we granted two of these deferral requests that deferred three months of rent to be collected during 2021 without interest and represented less than 1.0% of total revenue for the year ended December 31, 2020. While there are no current active short-term rent relief inquiries, we are unable to predict the amount of future rent relief inquiries and the October-February collections and rent relief requests to-date may not be indicative of collections or requests in any future period. Additionally, not all tenant inquiries will ultimately result in lease concessions.
While the long-term impact of the COVID-19 pandemic on our business is not yet known, our management believes we are well-positioned from a liquidity perspective with $390.9 million of immediate liquidity as of December 31, 2020, consisting of $221.9 million undrawn on our Revolving Credit Facility and $169.0 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 increased our credit facility availability from $1.5 billion to $1.9 billion. See Part I "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 well-being of our employees and 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 certain “essential” business functions, (2) capital investment in technology solutions and hardware, as necessary, to 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 of 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 employees to the office, which plans will be finalized in accordance with applicable local guidelines, when such guidelines are established.
Critical Accounting Policies and Estimates
We have established accounting policies which conform to GAAP in the United States as contained in the 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 policies discussion reflects what we believe are the most significant estimates, assumptions, and judgments used in the preparation of our consolidated financial statements. This discussion of our critical accounting policies 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 on our significant accounting policies, see Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to our consolidated financial statements included in this 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 of an asset acquisition, acquisition costs are expensed 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, 2020, in connection with the preparation and review of the Company's financial statements, we recorded an impairment provision related to the building and land on three properties. See Note 3, Real Estate to our 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. Monthly, we reconcile the amount of additional rent paid by the tenant during the year to the actual amount of 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 our consolidated financial 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 1.0% of our contractual net rent for the 12-month period subsequent to December 31, 2020 are scheduled to expire during the period from January 1, 2021 to December 31, 2021. 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, 2021 to December 31, 2021, thereby resulting in revenue that may differ from the current in-place rents.
We are not aware of any other material trends or uncertainties, other than as discussed under "COVID-19 and Outlook" and other than national economic conditions affecting real estate in general, that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition, management and operations of properties other than those listed in Part I, Item 1A. Risk Factors, of this Annual Report on Form 10-K.
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 2020:
•Executed definitive documents with CCIT II pursuant to which we will acquire CCIT II for approximately $1.2 billion in a stock-for-stock transaction, which is expected to close in March 2021 (see “Overview”);
•Amended the terms of our Revolving Credit Facility to provide for a new $400 million delayed draw term loan and to provide us 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;
•Drew $125.0 million from our Revolving Credit Facility in April 2020 for potential upcoming capital expenditure requirements and to provide us with a flexible conservative cash management position, in light of the COVID-19 pandemic and concerns about potential pressure on cash flow and the potential for insufficient access to bank finance;
•Entered into three interest rate swap agreements to hedge variable cash flows in March with a term of approximately five years with a total notional amount of $325.0 million;
•Concluded our Follow-On Offering after the expiration of its registration statement in September, following its temporary suspension in February;
•Reinstated our DRP in July and amended it to permit the use of the most recently published NAV per share of the applicable share class available, following the temporary suspension of the DRP in March;
•Partially reinstated our SRP in August with certain limitations after its temporary suspension in March;
•Elected to change from a quarterly to a monthly declaration of distributions commencing in April 2020 in order to give the Board maximum flexibility due to the review of a prior potential strategic transaction and to monitor and evaluate the situation related to the financial impact of COVID-19 pandemic and limited our annualized distribution rate to $0.35/share, all-cash, subject to adjustments for class-specific expenses, commencing with distributions accrued during the month of April 2020, and paid in early May 2020 and then declared daily cash distributions during the fourth quarter; and
•Disposed of two properties, Bank of America I and Bank of America II, each in Simi Valley, California for gross proceeds of $30.0 million in December and $24.5 million in June, respectively.
Same Store Analysis
For the year ended December 31, 2020, our "Same Store" portfolio consisted of 72 properties, encompassing approximately 19.5 million square feet, with an acquisition value of $2.9 billion and contractual net rent for the 12-month period subsequent to December 31, 2020 of $210.9 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 the 72 properties for the years ended December 31, 2020 and 2019 (dollars in thousands):
Year Ended December 31, Increase/(Decrease) Percentage
Change
2020 2019
Rental income $ 294,251 $ 300,374 $ (6,123) (2) %
Property operating expense 49,705 49,470 235 -
Property management fees to non-affiliates 3,018 2,840 178 6 %
Property tax expense 31,581 31,528 53 -
Depreciation and amortization 104,931 106,435 (1,504) (1) %
Rental Income
Rental income decreased by approximately $6.1 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 primarily as a result of (1) approximately $25.0 million in expiring and early terminated leases; and (2) an approximately $1.9 million decrease in common area maintenance recoveries; offset by (3) an approximately $18.2 million increase in lease commencements and amendments to existing tenant leases during the year ended December 31, 2020; and (4) an approximately $2.8 million increase in termination income for the year ended December 31, 2020.
Portfolio Analysis
Comparison of the Years Ended December 31, 2020 and 2019
The following table provides summary information about our results of operations for the years ended December 31, 2020 and 2019 (dollars in thousands):
Year Ended December 31, Increase/(Decrease) Percentage
Change
2020 2019
Rental income $ 397,452 $ 387,108 $ 10,344 3 %
Property operating expense 57,461 55,301 2,160 4 %
Property tax expense 37,590 37,035 555 1 %
Property management fees to non-affiliates 3,656 3,528 128 4 %
General and administrative expenses 38,633 26,078 12,555 48 %
Corporate operating expenses to affiliates 2,500 2,745 (245) (9) %
Depreciation and amortization 161,056 153,425 7,631 5 %
Impairment provision 23,472 30,734 (7,262) (24) %
Interest expense 79,646 73,557 6,089 8 %
(Loss) from investment in unconsolidated entities (6,523) (5,307) (1,216) 23 %
Gain from disposition of assets 4,083 29,938 (25,855) (86) %
Rental Income
The increase in rental income of approximately $10.3 million during the year ended December 31, 2020 compared to the year ended December 31, 2019 is primarily due to (1) an increase of approximately $36.7 million as a result of the EA Merger and two properties acquired in 2019 and 2020; (2) new and amended leases of $18.2 million for the year ended December 31, 2020; offset by (3) approximately $25.0 million related to expiring and early termination leases for the year ended December 31, 2020; (4) approximately $8.5 million decrease in termination income for the year ended December 31, 2020; and (5) approximately $9.2 million related to four properties sold during 2019 and 2020.
Property Operating Expense
The increase in property operating expense of approximately $2.2 million during the year ended December 31, 2020 compared to the year ended December 31, 2019 is primarily the result of (1) approximately $2.0 million related to two properties vacated during the year ended December 31, 2020 that were tenant-managed; (2) approximately $1.0 million primarily related to one property acquired subsequent to June 30, 2019; offset by (3) approximately $0.8 million related to one property sold during the year ended December 31, 2019.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2020 increased by approximately $12.6 million compared to the year ended December 31, 2019 primarily due to (1) an increase of approximately $5.0 million in professional fees, mainly due to the write-off of transaction costs and audit fees; (2) an approximately $3.7 million increase in payroll primarily due to employee severance payment, the EA Merger (see Note 1, Organization, to our consolidated financial statements included in this Annual Report on Form 10-K for details), and an increase in number of employees.; (3) approximately $1.5 million in restricted stock unit expense as a result of RSUs issued during the year ended December 31, 2020; (4) approximately $1.4 million in accelerated RSU amortization expense related to a resignation of an officer of the Company; and (5) an approximately $0.6 million increase in transfer agent fees as a result of additional shareholder accounts activity during the year ended December 31, 2020 compared to the year ended December 31, 2019.
Corporate Operating Expenses to Affiliates
Corporate operating expenses to affiliates for the year ended December 31, 2020 decreased by approximately $0.2 million compared to the year ended December 31, 2019 primarily due to revised amounts owed per the Administrative Services
Agreement. See Note 11, Related Party Transactions, to our consolidated financial statements included in this Annual Report
on Form 10-K for details.
Depreciation and Amortization
Depreciation and amortization for the year ended December 31, 2020 increased by approximately $7.6 million compared to the year ended December 31, 2019 as a result of (1) approximately $18.4 million related to the EA Merger and properties acquired during 2019 and 2020; and (2) an approximately $4.5 million increase as a result of fixed asset additions during the year ended December 31, 2020; offset by (3) approximately $11.6 million related to fully depreciated assets and four properties sold subsequent to 2019; and (4) approximately $4.2 million in amortization of the management contract intangible during the year ended December 31, 2019.
Impairment Provision
The decrease in impairment provision of approximately $7.3 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 is primarily the result of larger impairments in the previous year at two properties (2200 Channahon Road and Houston Westway I).
Interest Expense
The increase of approximately $6.1 million in interest expense for the year ended December 31, 2020 as compared to the year ended December 31, 2019 is primarily the result of (1) approximately $3.1 million related to an increase in borrowing on our Revolving Credit Facility (defined below), the balance of which was $373.5 million as of December 31, 2020 compared to $211.5 million as of the year ended December 31, 2019; and (2) approximately $2.5 million as a result of a loan with The Variable Annuity Life Insurance Company, American General Life Insurance Company, and the United States Life Insurance Company as lenders (the “AIG Loan II”) and a loan with Bank of America, N.A. and KeyBank and write offs of deferred financing costs related to the EA Merger.
Loss from Investment in Unconsolidated Entities
The increase of approximately $1.2 million in loss from investment in unconsolidated entities for the year ended December 31, 2020 as compared to the year ended December 31, 2019 is primarily the result of an other-than-temporary impairment loss and the anticipated liquidation of our unconsolidated investment, as discussed in Note 4, Investments in Unconsolidated Entities.
Gain from Disposition of Assets
The decrease in gain from disposition of assets of approximately $25.9 million compared to the same period a year ago is primarily the result of the sale of Bank of America II for a total gain of $4.3 million in 2020 compared to two properties sold in 2019 (7601 Technology Way & 2160 East Grand Avenue), for total gain of approximately $29.6 million.
For additional information related to a comparison of the Company’s results for the years ended December 31, 2019 and
2018, please see the information under the caption “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” contained in the Company’s, Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 4, 2020, which information under that section is incorporated herein by reference.
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 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 Adjusted Funds from Operations (“AFFO”) as a non-GAAP financial measure to evaluate our operating performance. AFFO 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 the extinguishment 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 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 our 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.
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, 2020, 2019 and 2018 (in thousands, except per share amounts):
Year Ended December 31,
2020 2019 2018
Net (loss) income $ (5,774) $ 37,044 $ 22,038
Adjustments:
Depreciation of building and improvements 93,979 80,393 60,120
Amortization of leasing costs and intangibles 67,366 73,084 59,020
Impairment provision 23,472 30,734 -
Equity interest of depreciation of building and improvements - unconsolidated entities 1,438 2,800 2,594
Equity interest of amortization of intangible assets - unconsolidated entities 1,751 4,632 4,644
Loss (Gain) from disposition of assets (4,083) (29,938) (1,231)
Equity interest of gain on sale - unconsolidated entities - (4,128) -
Impairment on unconsolidated entities 1,906 6,927 -
FFO $ 180,055 $ 201,548 $ 147,185
Distributions to redeemable preferred shareholders (8,708) (8,188) (3,275)
FFO attributable to common stockholders and limited partners $ 171,347 $ 193,360 $ 143,910
Reconciliation of FFO to AFFO:
FFO attributable to common stockholders and limited partners $ 171,347 $ 193,360 $ 143,910
Adjustments:
Acquisition fees and expenses to non-affiliates - - 1,331
Non-cash earn-out adjustment (2,581) (1,461) -
Revenues in excess of cash received, net (25,686) (19,519) (8,571)
Amortization of share-based compensation 4,108 2,614 -
Deferred rent - ground lease 2,065 1,353 841
Amortization of above/(below) market rent, net (2,292) (3,201) (685)
Amortization of debt premium/(discount), net 412 300 32
Amortization of ground leasehold interests (290) (52) 28
Non-cash lease termination income - (10,150) (12,532)
Financed termination fee payments received 7,557 6,065 15,866
Company's share of revenues in excess of cash received (straight-line rents) -
unconsolidated entity 505 528 116
Unrealized loss (gain) on investments 31 307 -
Company's share of amortization of above market rent - unconsolidated entity 1,419 3,696 2,956
Performance fee adjustment - (2,604) -
Unconsolidated joint venture valuation adjustment 4,452 - -
Employee separation expense 2,666 - -
Write-off of transaction costs 4,427 252 -
AFFO available to common stockholders and limited partners $ 168,140 $ 171,488 $ 143,292
FFO per share, basic and diluted $ 0.65 $ 0.76 $ 0.81
AFFO per share, basic and diluted $ 0.64 $ 0.68 $ 0.80
Weighted-average common shares outstanding - basic EPS 230,042,543 222,531,173 169,907,020
Weighted-average OP Units 31,919,525 30,947,370 8,120,706
Weighted-average common shares and OP Units outstanding - basic FFO/AFFO 261,962,068 253,478,543 178,027,726
Liquidity and Capital Resources
Property rental income is our primary source of operating cash flow and is dependent on a number of factors including occupancy levels and rental rates, as well as our tenants’ ability to pay rent. Our assets provide a relatively consistent level of cash flow that enables us to pay operating expenses, distributions, including preferred equity distribution, redemptions, and for the payment of debt service on our outstanding indebtedness, including repayment of our Second Amended and 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 from financings, together with existing cash balances, will be adequate to fund our business operations, debt amortization, capital expenditures, and distributions over the next 12 months.
Financing Activities
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 and the Second Amendment to Second Amended and Restated Credit Agreement dated as of December 18, 2020, the “Second Amended and Restated Credit Agreement”), with KeyBank, as administrative agent, and a syndicate of lenders, we, through the GCEAR Operating Partnership, 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 $150 million senior unsecured term loan maturing in April 2026 (the “$150M 7-Year Term Loan”), a $400 million senior unsecured term loan maturing in April 2024 (the “$400M 5-Year Term Loan”) and a delayed draw $400 million senior unsecured term loan maturing in December 2025 (the “Delayed Draw $400M 5-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, 2020, the remaining capacity under the Revolving Credit Facility was $221.9 million and the entire amount of the Delayed Draw $400M 5-Year Term Loan was undrawn. We refer to the Revolving Credit Facility, the $200M 5-Year Term Loan, the $400M 5-Year Term Loan and the Delayed Draw $400M 5-Year Term Loan collectively as the “KeyBank Loans.”
Based on the terms of the Second Amended and Restated Credit Agreement as of December 31, 2020, the interest rate for the Credit Facility varies based on our consolidated leverage ratio 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 and the Delayed Draw $400M 5-Year Term Loan, from LIBOR plus 1.25% to LIBOR plus 2.15% and (c) in the case of the $150M 7-Year Term Loan, from LIBOR plus 1.65% to LIBOR plus 2.50%. If the GCEAR Operating Partnership 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 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 provides procedures for determining a replacement reference rate in the event 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 replacement of LIBOR with an alternative reference rate may adversely affect interest rates on our current or future indebtedness and may otherwise adversely affect our financial condition and results of operations.
In the event that any of the Delayed Draw $400M 5-Year Term Loan is not advanced as of the date that is 120 days after December 18, 2020, such unadvanced amount will incur an unused fee equal to 0.20% annually multiplied by the average daily amount of the unadvanced portion of the Delayed Draw $400M 5-Year Term Loan. Such unused fee will be payable quarterly in arrears and will start accruing on the date that is 120 days after December 18, 2020 and will stop accruing on the first to occur of (a) the date the Delayed Draw $400M 5-Year Term Loan is fully advanced, (b) the date that is 180 days after December 18, 2020, or (c) the date the GCEAR Operating Partnership, as borrower, terminates any remaining portion of the Delayed Draw $400M 5-Year Term Loan.
Derivative Instruments
As discussed in Note 6, Interest Rate Contracts, to the consolidated financial statements, we entered into interest rate swap agreements to hedge the variable cash flows associated with certain existing or forecasted, LIBOR-based variable-rate debt, including our Second Amended and Restated Credit Agreement. The effective portion of changes in the fair value of
derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income ("AOCI") and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Derivatives were used to hedge the variable cash flows associated with existing variable-rate debt and forecasted issuances of debt. The ineffective portion of the change in the fair value of the derivatives is recognized directly in earnings.
The following table sets forth a summary of the interest rate swaps at December 31, 2020 and December 31, 2019 (dollars in thousands):
Fair Value (1)
Current Notional Amount
December 31, December 31,
Derivative Instrument Effective Date Maturity Date Interest Strike Rate 2020 2019 2020 2019
(Liabilities)
Interest Rate Swap 3/10/2020 7/1/2025 0.83% $ (2,963) $ - $ 150,000 $ -
Interest Rate Swap 3/10/2020 7/1/2025 0.84% (2,023) - 100,000 -
Interest Rate Swap 3/10/2020 7/1/2025 0.86% (1,580) - 75,000 -
Interest Rate Swap 7/1/2020 7/1/2025 2.82% (13,896) (7,038) 125,000 125,000
Interest Rate Swap 7/1/2020 7/1/2025 2.82% (11,140) (5,651) 100,000 100,000
Interest Rate Swap 7/1/2020 7/1/2025 2.83% (11,148) (5,665) 100,000 100,000
Interest Rate Swap 7/1/2020 7/1/2025 2.84% (11,225) (5,749) 100,000 100,000
Interest Rate Swap 7/9/2015 7/1/2020 1.69% - (43) - 425,000
Total $ (53,975) $ (24,146) $ 750,000 $ 850,000
(1) We record 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, 2020, derivatives where in a liability position are included in the line item "Interest rate swap liability," 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.
On February 26, 2020, our Board approved the temporary suspension of the primary portion of our Follow-On Offering, effective February 27, 2020. 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 February 26, 2020, our Board approved the temporary suspension of our DRP, effective March 8, 2020.
On July 16, 2020, the Board approved the (i) reinstatement of the DRP, effective July 27, 2020; and (ii) 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, 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, 2020, we had sold 32,978,545 shares for approximately $318.2 million in our DRP Offering.
Share Class Amount
(dollars in thousands) Shares
Class A $ 6,923 743,349
Class AA 13,695 1,470,340
Class AAA 207 22,190
Class D 12 1,312
Class E 296,930 30,697,419
Class I 300 31,992
Class S - 12
Class T 112 11,931
Total $ 318,179 32,978,545
Share Redemption Program
On February 26, 2020, our Board approved the temporary suspension of our SRP, effective March 28, 2020. Redemptions sought upon a stockholder's death, qualifying disability, or determination of incompetence or incapacitation were honored in the first quarter of 2020 in accordance with the terms of the SRP, and the SRP was officially 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.
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. During year ended December 31, 2020, we redeemed 1,841,887 shares.
Distribution Rate
On March 30, 2020, our Board limited the annualized distribution rate to $0.35/share, all-cash, subject to adjustments for class-specific expenses. This change commenced with distributions accrued during the month of April 2020, and paid in early May 2020.
Perpetual Convertible Preferred Shares
Upon consummation of the 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.
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 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, 2020, our annual distribution rate was 7.55% 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, 2020.
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).
Other Potential Future Sources of Capital
Other potential future sources of capital include proceeds from potential private or public offerings of our stock or GCEAR OP Units, proceeds from secured or unsecured financings from banks or other lenders, including debt assumed in a real estate acquisition transaction, proceeds from the sale of properties and undistributed funds from operations, and entering into joint venture arrangements to 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 or other third party source of liquidity, we will be heavily dependent upon our current financing and income from operations.
Liquidity Requirements
Our principal liquidity needs for the next 12 months and beyond 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 GCEAR OP Units; and
•possible acquisitions of properties.
Contractual Commitments and Contingencies
The following is a summary of our contractual obligations as of December 31, 2020 (in thousands):
Payments Due During the Years Ending December 31,
Total 2021 2022-2023 2024-2025 Thereafter
Outstanding debt obligations (1)
$ 2,152,593 $ 9,587 $ 347,603 $ 554,032 $ 1,241,371
Interest on outstanding debt obligations (2)
330,273 62,986 118,435 80,366 68,486
Interest rate swaps (3)
63,093 13,770 27,540 21,783 -
Ground lease obligations 295,001 1,510 3,452 3,881 286,158
Total $ 2,840,960 $ 87,853 $ 497,030 $ 660,062 $ 1,596,015
(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, 2020. Projected interest payments on the Credit Facility and Term Loan are based on the contractual interest rates in effect at December 31, 2020.
(3)The interest rate swaps contractual commitment was calculated based on the swap rate less the LIBOR as of December 31, 2020.
Summary of Cash Flows
We expect to meet our short-term operating liquidity requirements with operating cash flows generated from our properties and draws from our KeyBank loans.
Our cash, cash equivalents and restricted cash balances increased by approximately $41.1 million during the year ended December 31, 2020 compared to the same period a year ago and were primarily used in or provided by the following (in thousands):
Year Ended December 31,
2020 2019 Change
Net cash provided by operating activities $ 164,538 $ 160,849 $ 3,689
Net cash (used in) provided by investing activities $ (24,971) $ 85,818 $ (110,789)
Net cash provided by (used in) financing activities $ (49,521) $ (197,692) $ 148,171
Operating Activities. Cash flows provided by operating activities are primarily dependent on the occupancy level, the rental rates of our leases, the collectability of rent and recovery of operating expenses from our tenants, and the timing of acquisitions. During the year ended December 31, 2020, we generated $164.5 million in cash from operating activities compared to $160.8 million for the year ended December 31, 2019. Net cash provided by operating activities before changes in operating assets and liabilities for the year ended December 31, 2020 decreased by approximately $14.5 million to approximately $159.5 million compared to approximately $174.0 million for the year ended December 31, 2019.
Investing Activities. Cash provided by investing activities for the years ended December 31, 2020 and 2019 consisted of the following (in thousands):
Year Ended December 31,
2020 2019 Increase (decrease)
Net cash (used in) provided by investing activities:
Distributions of capital from investment in unconsolidated entities $ 8,531 $ 14,603 $ (6,072)
Proceeds from disposition of properties 51,692 139,446 (87,754)
Real estate acquisition deposits 1,047 (1,047) 2,094
Cash acquired in connection with the EA Merger, net of acquisition costs - 25,320 (25,320)
Total sources of cash provided by investing activities $ 61,270 $ 178,322 $ (117,052)
Uses of cash for investing activities:
Acquisition of properties, net $ (16,584) $ (38,775) $ 22,191
Payments for construction in progress (58,938) (46,346) (12,592)
Contributions of capital for investment in unconsolidated entities (8,160) - (8,160)
Restricted reserves (1,530) 1,039 (2,569)
Purchase of investments (1,029) (8,422) 7,393
Total uses of cash (used in) provided by investing activities $ (86,241) $ (92,504) $ 6,263
Net cash (used in) provided by investing activities $ (24,971) $ 85,818 $ (110,789)
Financing Activities. Cash used in financing activities for the years ended December 31, 2020 and 2019 consisted of the following (in thousands):
Year Ended December 31,
2020 2019 Increase (decrease)
Sources of cash (used in) provided by financing activities:
Proceeds from borrowings - Revolver/KeyBank Loans $ 215,000 $ 942,854 $ (727,854)
Issuance of common stock, net of discounts and underwriting costs 4,698 8,826 (4,128)
Total sources of cash provided by (used in) financing activities $ 219,698 $ 951,680 $ (731,982)
Uses of cash (used in) provided by financing activities:
Principal payoff of secured indebtedness - Unsecured Credit Facility - EA-1 $ - $ (715,000) $ 715,000
Principal payoff of secured indebtedness - Revolver Loan (53,000) (104,439) 51,439
Principal amortization payments on secured indebtedness (7,362) (6,577) (785)
Repurchase of common shares to satisfy employee tax withholding requirements (751) - (751)
Repurchase of common stock (107,821) (200,013) 92,192
Distributions to common stockholders (72,143) (90,116) 17,973
Dividends paid on preferred units subject to redemption (8,396) (8,188) (208)
Distributions to noncontrolling interests (13,290) (16,865) 3,575
Deferred financing costs (4,725) (5,737) 1,012
Offering costs (594) (2,384) 1,790
Repurchase of noncontrolling interest (1,137) (53) (1,084)
Total sources of cash (used in) provided by financing activities $ (269,219) $ (1,149,372) $ 880,153
Net cash (used in) provided by financing activities $ (49,521) $ (197,692) $ 148,171
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. We expect to 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:
•our operating and interest expenses;
•the amount of distributions or dividends received by us from our indirect real estate 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 from our properties, any future public offerings, or a combination thereof. 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 paid, and cash flow provided by operating activities during the year ended December 31, 2020 and December 31, 2019 (dollars in thousands):
Year Ended December 31, 2020 Year Ended December 31, 2019
Distributions paid in cash - noncontrolling interests $ 13,290 $ 16,865
Distributions paid in cash - common stockholders 72,143 90,116
Distributions paid in cash - preferred stockholders 8,396 8,188
Distributions of DRP 24,497 41,060
Total distributions $ 118,326 (1)
$ 156,229
Source of distributions (2)
Paid from cash flows provided by operations $ 93,829 79 % $ 115,169 74 %
Offering proceeds from issuance of common stock pursuant to the DRP 24,497 21 41,060 26
Total sources $ 118,326 (3)
100 % $ 156,229 100 %
Net cash provided by operating activities $ 164,538 $ 160,849
(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, 2020 were $7.8 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, 2020, we paid and declared cash distributions of approximately $92.4 million to common stockholders including shares issued pursuant to the DRP, and approximately $12.7 million to the limited partners of the GCEAR Operating Partnership, as compared to FFO attributable to common stockholders and limited partners and AFFO available to common stockholders and limited partners for the year ended December 31, 2020 of approximately $171.3 million and $168.1 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, 2020, we paid approximately $850.4 million of cumulative distributions (excluding preferred distributions), including approximately $318.3 million reinvested through our DRP, as compared to net cash provided by operating activities of approximately $557.8 million.
Off-Balance Sheet Arrangements
As of December 31, 2020, we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations.
Inflation
The real estate market has not been affected significantly by inflation in the past several years due to the relatively low inflation rate. However, in the event inflation does become a factor, we expect that our leases do not specifically protect us from the impact of inflation. We will attempt to acquire properties 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.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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. We expect that the primary market risk to which we will be exposed is interest rate risk, including the risk of changes in the underlying rates on our variable rate debt. Our current indebtedness consists of the KeyBank loans and 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 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.
On July 9, 2015, we executed one interest rate swap agreement to hedge the variable cash flows associated with LIBOR. The interest rate swap was effective for the period from July 9, 2015 to July 1, 2020 with a notional amount of $425.0 million, which matured during the third quarter of 2020.
On August 31, 2018, we executed four interest rate swap agreements to hedge future variable cash flows associated with LIBOR. The forward-starting interest rate swaps with a total notional amount of $425.0 million became effective on July 1, 2020 and have a term of five years.
On March 10, 2020, we entered into three interest rate swap agreements to hedge variable cash flows associated with LIBOR. The interest rate swaps became effective on March 10, 2020, and have a term of approximately five and half years with notional amounts of $150.0 million, $100.0 million and $75.0 million respectively.
As of December 31, 2020, our debt consisted of approximately $1.8 billion in fixed rate debt (including the 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). As of December 31, 2019, our debt consisted of approximately $1.4 billion in fixed rate debt (including the effect of interest rate swaps) and approximately $536.5 million in variable rate debt (excluding unamortized deferred financing cost and discounts, net, of approximately $10.0 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 effect on interest incurred or cash flows. A change in interest rates on variable rate debt could affect 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-rate debt, including our KeyBank loans, after considering the effect of our interest rate swap agreements, would decrease our future earnings and cash flows by approximately $2.9 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.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data filed as part of this Annual Report on Form 10-K are set forth beginning on page of this Annual Report on Form 10-K.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this 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 Annual 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, 2020, the effectiveness of our internal control over financial reporting using the framework in Internal 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, 2020.
There have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.
PART III
We expect to file a definitive proxy statement for our 2021 Annual Meeting of Stockholders (the “2021 Proxy Statement”) with the SEC, 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 2021 Proxy Statement. Only those sections of the 2021 Proxy Statement that specifically address the items required to be set forth herein are incorporated by reference.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to the 2021 Proxy Statement to be filed within 120 days after the end of the year ended December 31, 2020.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the 2021 Proxy Statement to be filed with the SEC within 120 days after the end of the year ended December 31, 2020.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to the 2021 Proxy Statement to be filed with the SEC within 120 days after the end of the year ended December 31, 2020.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to the 2021 Proxy Statement to be filed with the SEC within 120 days after the end of the year ended December 31, 2020.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference to the 2021 Proxy Statement to be filed with the SEC within 120 days after the end of the year ended December 31, 2020.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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 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, 2020 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit No. Description
2.1
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)
2.2
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
3.1
First Articles of Amendment and Restatement of Griffin Capital Essential Asset REIT II, Inc., incorporated by reference to Exhibit 3.1 to Pre-Effective Amendment No. 4 to the Registrant’s Registration Statement on Form S-11, filed on July 30, 2014, SEC File No. 333-194280
3.2
Bylaws of Griffin Capital Essential Asset REIT II, Inc., incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-11, filed on March 3, 2014, SEC File No. 333-194280
3.3
Amendment No. 1 to Bylaws of the Registrant, incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K, filed on May 1, 2019, SEC File No. 000-55605
3.4
Articles Supplementary to First Articles of Amendment and Restatement of Griffin Capital Essential Asset REIT II, Inc., incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed on April 29, 2016, SEC File No. 000-55605
3.5
Articles of Amendment to First Articles of Amendment and Restatement of Griffin Capital Essential Asset REIT II, Inc., incorporated by reference to Exhibit 3.4 to Pre-Effective Amendment No. 3 to the Registrant’s Registration Statement on Form S-11, filed on September 18, 2017, SEC File No. 333-217223
3.6
Articles Supplementary of Griffin Capital Essential Asset REIT II, Inc., incorporated by reference to Exhibit 3.5 to Pre-Effective Amendment No. 3 to the Registrant’s Registration Statement on Form S-11, filed on September 18, 2017, SEC File No. 333-217223
3.7
Articles Supplementary to First Articles of Amendment and Restatement, incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed on April 19, 2019, SEC File No. 000-55605
3.8
Articles Supplementary to First Articles of Amendment and Restatement, incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed on May 1, 2019, SEC File No. 000-55605
3.9
Second Articles of Amendment to the First Articles of Amendment and Restatement, incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed on June 13, 2019, SEC File No. 000-55605
3.10
Articles Supplementary to First Articles of Amendment and Restatement, as amended, incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K, filed November 10, 2020, SEC File No. 000-55605
4.1
Form of Subscription Agreement and Subscription Agreement Signature Page, incorporated by reference to Appendix A of the Registrant’s final prospectus filed pursuant to Rule 424(b)(3), filed on June 18, 2019, SEC File No. 333-217223
4.2
Form of Additional Investment Subscription Agreement, incorporated by reference to Appendix B of the Registrant’s final prospectus filed pursuant to Rule 424(b)(3), filed on June 18, 2019, SEC File No. 333-217223
4.3
Amended and Restated Distribution Reinvestment Plan of Griffin Capital Essential Asset REIT, Inc., incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed on July 17, 2020, SEC File No. 000-55605
4.4
Account Update Form, incorporated by reference to Appendix A to the prospectus included in the Registrant's Registration Statement on Form S-3D, file on July 17, 2020, SEC File No. 333-239924
4.5
Amended and Restated Share Redemption Program effective as of December 12, 2019, incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed on November 12, 2019, SEC File No. 000-55605
4.6*
Description of Securities
10.1+
Employee and Director Long-Term Incentive Plan, incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q, filed on August 21, 2014, SEC File No. 333-194280
10.2+
Griffin Capital Essential Asset REIT, Inc. Amended and Restated Employee and Director Long-Term Incentive Plan, incorporated by reference to Appendix B included in the Registrant's Definitive Proxy Statement on Schedule 14A filed on April 15, 2020, SEC File No. 000-55605
10.3+
Griffin Capital Essential Asset REIT II, Inc.’s Employee and Director Long-Term Incentive Plan Form of Restricted Stock Agreement for Directors, incorporated by reference to Exhibit 10.3 to the Registrant’s Annual Report on Form 10-K, filed on March 15, 2017, SEC File No. 000-55605
10.4+
Director Compensation Plan, incorporated by reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K, filed on March 15, 2017, SEC File No. 000-55605
10.5
Master Property Management, Leasing, and Construction Management Agreement, dated March 17, 2015, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on March 23, 2015, SEC File No. 333-194280
10.6
Fifth Amended and Restated Limited Partnership Agreement of the Current Operating Partnership dated April 30, 2019, incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K, filed on May 1, 2019, SEC File No. 000-55605
10.7
Promissory Note dated February 27, 2013 issued to Midland National Life Insurance Company, incorporated by reference to Exhibit 10.1 to EA-1’s Current Report on Form 8-K, filed on March 5, 2013, SEC File No. 000-54377
10.8
NUF Note for the Schlumberger Property, incorporated by reference to Exhibit 10.1 to EA-1’s Current Report on Form 8-K, filed on January 30, 2014, SEC File No. 000-54377
10.9
VALIC Note for the Schlumberger Property, incorporated by reference to Exhibit 10.2 to EA-1’s Current Report on Form 8-K, filed on January 30, 2014, SEC File No. 000-54377
10.10
First Deed of Trust for the Schlumberger Property, incorporated by reference to Exhibit 10.3 to EA-1’s Current Report on Form 8-K, filed on January 30, 2014, SEC File No. 000-54377
10.11
Second Deed of Trust for the Schlumberger Property, incorporated by reference to Exhibit 10.4 to EA-1’s Current Report on Form 8-K, filed on January 30, 2014, SEC File No. 000-54377
10.12
First Mortgage for the Verizon Property, incorporated by reference to Exhibit 10.5 to EA-1’s Current Report on Form 8-K, filed on January 30, 2014, SEC File No. 000-54377
10.13
Second Mortgage for the Verizon Property, incorporated by reference to Exhibit 10.6 to EA-1’s Current Report on Form 8-K, filed on January 30, 2014, SEC File No. 000-54377
10.14
Recourse Carve-Out Guaranty Agreement, incorporated by reference to Exhibit 10.7 to EA-1’s Current Report on Form 8-K, filed on January 30, 2014, SEC File No. 000-54377
10.15
VALIC Note for Owens Corning Sales, LLC Property, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on October 28, 2015, SEC File No. 333-194280
10.16
AGL Note for Owens Corning Sales, LLC Property, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed on October 28, 2015, SEC File No. 333-194280
10.17
USL Note for Owens Corning Sales, LLC Property, incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, filed on October 28, 2015, SEC File No. 333-194280
10.18
First Deed of Trust for Owens Corning Sales, LLC Property, incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K, filed on October 28, 2015, SEC File No. 333-194280
10.19
Second Deed of Trust for Owens Corning Sales, LLC Property, incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K, filed on October 28, 2015, SEC File No. 333-194280
10.20
Recourse Carve-Out Guaranty Agreement, incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K, filed on October 28, 2015, SEC File No. 333-194280
10.21
Schedule of Omitted Documents, incorporated by reference to Exhibit 10.7 to the Registrant’s Current Report on Form 8-K, filed on October 28, 2015, SEC File No. 333-194280
10.22
Loan Agreement with Bank of America, N.A. dated September 29, 2017, incorporated by reference to Exhibit 10.1 to EA-1’s Current Report on Form 8-K, filed on October 5, 2017, SEC File No. 000-54377
10.23
Guaranty Agreement, dated September 29, 2017, incorporated by reference to Exhibit 10.2 to EA-1’s Current Report on Form 8-K, filed on October 5, 2017, SEC File No. 000-54377
10.24
Promissory Note A-1-1, incorporated by reference to Exhibit 10.3 to EA-1’s Current Report on Form 8-K, filed on October 5, 2017, SEC File No. 000-54377
10.25
Mortgage, Assignment of Leases and Rents, Security Agreement, and Fixture Filing, incorporated by reference to Exhibit 10.4 to EA-1’s Current Report on Form 8-K, filed on October 5, 2017, SEC File No. 000-54377
10.26
Schedule of Omitted Documents for Bank of America Loan, incorporated by reference to Exhibit 10.5 to EA-1’s Current Report on Form 8-K, filed on October 5, 2017, SEC File No. 000-54377
10.27
Loan Agreement with Bank of America, N.A. and KeyBank N.A. dated April 27, 2018, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on May 3, 2018, SEC File No. 000-55605
10.28
Guaranty Agreement dated April 27, 2018, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed on May 3, 2018, SEC File No. 000-55605
10.29
Promissory Note A-1-1 dated April 27, 2018, incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, filed on May 3, 2018, SEC File No. 000-55605
10.30
Mortgage, Assignment of Leases and Rents, Security Agreement, and Fixture Filing for the Southern Company Services, Inc. Property dated April 27, 2018, incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K, filed on May 3, 2018, SEC File No. 000-55605
10.31
Schedule of Omitted Documents, incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K, filed on May 3, 2018, SEC File No. 000-55605
10.32
Second Amended and Restated Credit Agreement dated April 30, 2019, incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K, filed on May 2019, SEC File No. 000-55605
10.33
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
10.34
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
10.35
Guaranty Agreement with KeyBank dated April 30, 2019, incorporated by reference to Exhibit 10.4 to the Registrant's Current Report on Form 8-K, filed on May 1, 2019, SEC File No. 000-55605
10.36
Amended and Restated 2023 Term Note payable to KeyBank dated April 30, 2019, incorporated by reference to Exhibit 10.5 to the Registrant's Current Report on Form 8-K, filed on May 1, 2019, SEC File No. 000-55605
10.37
2024 Term Note payable to KeyBank dated April 30, 2019, incorporated by reference to Exhibit 10.6 to the Registrant's Current Report on Form 8-K, filed on May 1, 2019, SEC File No. 000-55605
10.38
2026 Term Note payable to KeyBank dated April 30, 2019, incorporated by reference to Exhibit 10.7 to the Registrant's Current Report on Form 8-K, filed on May 1, 2019, SEC File No. 000-55605
10.39
Second Amended and Restated Revolving Note payable to KeyBank dated April 30, 2019, incorporated by reference to Exhibit 10.8 to the Registrant's Current Report on Form 8-K, filed on May 1, 2019, SEC File No. 000-55605
10.40
Swingline Note with KeyBank dated April 30, 2019, incorporated by reference to Exhibit 10.9 to the Registrant's Current Report on Form 8-K, filed on May 1, 2019, SEC File No. 000-55605
10.41
Schedule of Omitted Documents for KeyBank Loan, incorporated by reference to Exhibit 10.10 to the Registrant's Current Report on Form 8-K, filed on May 1, 2019, SEC File No. 000-55605
10.42
2025 Term Note payable to KeyBank, National Association dated December 18, 2020, incorporated by reference to Exhibit 10.2 the Registrant’s Current Report on Form 8-K, filed on December 23, 2020, SEC File No. 000-55605
10.43
Schedule of Omitted Documents for New $400M 5-Year Term Loan, incorporated by reference to Exhibit 10.3 the Registrant’s Current Report on Form 8-K, filed on December 23, 2020, SEC File No. 000-55605
10.44
Registration Rights Agreement dated December 14, 2018, incorporated by reference to Exhibit 10.4 to EA-1's Current Report on Form 8-K, filed on December 20, 2018, SEC File No. 000-54377
10.45
Contribution Agreement dated December 14, 2018, incorporated by reference to Exhibit 2.2 to EA-1's Current Report on Form 8-K, filed on December 20, 2018, SEC File No. 000-54377
10.46
Form of Master Property Management, Leasing and Construction Management Agreement, incorporated by reference to Exhibit 10.6 to EA-1's Quarterly Report on Form 10-Q, filed on December 10, 2009, SEC File No. 333-159167
10.47
Series A Cumulative Perpetual Convertible Preferred Stock Purchase Agreement dated August 8, 2018, incorporated by reference to Exhibit 10.1 to EA-1's Quarterly Report on Form 10-Q, filed on August 13, 2018, SEC File No. 000-54377
10.48
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
10.49
Form of Indemnification Agreement dated December 14, 2018, incorporated by reference to Exhibit 10.5 to EA-1’s Current Report on Form 8-K, filed on December 20, 2018, SEC File No. 000-54377
10.50+
Escalante Employment Agreement dated December 14, 2018, incorporated by reference to Exhibit 10.6 to EA-1’s Current Report on Form 8-K, filed on December 20, 2018, SEC File No. 000-54377
10.51+
Form of Employment Agreement for Other Officers dated December 14, 2018, incorporated by reference to Exhibit 10.7 to EA-1’s Current Report on Form 8-K, filed on December 20, 2018, SEC File No. 000-54377
10.52+
Employment Agreement with Nina Momtazee Sitzer effective June 10, 2019, incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q, filed on August 14, 2019, SEC File No. 000-55605
10.53+
Form of Time-Based Restricted Stock Unit Agreement (NEOs), incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q, files on Mary 12, 2020 SEC File No. 000- 55605
10.54
Form of Time-Based Restricted Stock Unit Agreement (Employees), incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q, filed on May 12, 2020, SEC File No. 000-55605
10.55
Form of Restricted Stock Agreement for Directors, incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q, filed on August 7, 2020, SEC File No. 000- 55605
10.56
Manager Agreement and Participating Dealer Agreement dated September 18, 2017, incorporated by reference to Exhibit 1.1 to Pre-Effective Amendment No. 3 to the Registrant’s Registration Statement on Form S-11, filed on September 18, 2017, SEC File No. 333-217223
10.57
Amendment No. 1 to Dealer Manager Agreement and Participating Dealer Agreement dated June 24, 2019, incorporated by reference to Exhibit 1.1 to the Registrant’s Quarterly Report on Form 10-Q, filed on August 14, 2019, SEC File No. 000-55605
21.1*
Subsidiaries of Griffin Capital Essential Asset REIT, Inc.
23.1*
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
31.1*
Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**
Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002
32.2**
Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002
101* The following Griffin Capital Essential Asset REIT, Inc. financial information for the period ended
December 31, 2020 formatted in XBRL (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.
*
Filed herewith.
**
Furnished herewith.
+
Management contract, compensatory plan or arrangement filed in response to Item 15(a)(3) of Form 10-K.