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Griffin Capital Essential Asset REIT II Reports 2018 Second Quarter Results

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Griffin Capital Essential Asset REIT II, Inc. (the "REIT") announced its
operating results for the quarter ended June 30, 2018.

"We continue to execute our investment strategy which provides investors
with current income generated from a well diversified real estate
portfolio. Our portfolio of business-essential assets remains fully
leased with a rent roll comprised of over 75% investment grade rated
cash flow," said Michael Escalante, the REIT's director and president.

As of June 30, 2018, our portfolio consisted of 27 properties (35
buildings) encompassing approximately 7.3 million square feet of space
in 17 states.

Highlights and Accomplishments in Second
Quarter 2018 and Results as of June 30, 2018:

Portfolio Overview

  • The total capitalization(1) of our portfolio was
    approximately $1.3 billion.
  • Our weighted average remaining lease term was approximately 9.8 years
    with average annual rent increases of approximately 2.4%.
  • Our portfolio is 100% leased and occupied(2).
  • Approximately 75.6% of our portfolio's net rental revenue(3)
    was generated by properties leased to tenants and/or guarantors with
    investment grade credit ratings or whose non-guarantor parent
    companies have investment grade credit ratings(4).

Financial Results

  • Total revenue for the quarter ended June 30, 2018 was approximately
    $26.3 million, compared to $26.5 million for the quarter ended June
    30, 2017.
  • Net loss attributable to common stockholders was approximately $(0.5)
    million or $(0.01) per basic and diluted share for the quarter ended
    June 30, 2018, compared to net income attributable to common
    stockholders of $3.4 million or $0.04 per basic and diluted share for
    the same period in 2017.
  • As of June 30, 2018, the ratio of debt to total real estate
    acquisition value was 43.7%.

Financing

  • On April 27, 2018, we entered into a loan agreement with Bank of
    America, N.A. and KeyBank N.A., in which we borrowed $250.0 million.
    The loan is secured by cross-collateralized and cross-defaulted first
    mortgage liens by four properties and has a term of 10 years, maturing
    on May 1, 2028. The loan bears interest at an annual rate of 4.32%.
  • On June 28, 2018, we entered into an amended and restated credit
    agreement related to a revolving credit facility and a term loan with
    a syndicate of lenders, under which KeyBank, National Association
    serves as administrative agent. Pursuant to the amended and restated
    credit agreement, we were provided with a revolving credit facility
    with an initial commitment amount of up to $550 million and a term
    loan in an initial commitment amount of up to $200 million, which
    commitments may be increased under certain circumstances up to a
    maximum total commitment of $1.25 billion. Total outstanding balances
    on the term loan and the revolving credit facility were $113 million
    and $0.1 million, respectively, as of June 30, 2018.

Non-GAAP Measures

  • Adjusted funds from operations, or AFFO, was approximately $10.0
    million and $10.2 million for the quarters ended June 30, 2018 and
    2017, respectively. Funds from operations, or FFO(5), was
    approximately $10.6 million and $14.3 million for the quarters ended
    June 30, 2018 and 2017, respectively. Please see the financial
    reconciliation tables and notes at the end of this release for more
    information regarding AFFO and FFO.
  • Our Adjusted EBITDA, as defined per our amended and restated credit
    agreement, was approximately $16.9 million for the quarter ended
    June 30, 2018 with a fixed charge and interest coverage ratio of 3.73,
    each. Please see the financial reconciliation tables and notes at the
    end of this release for more information regarding Adjusted EBITDA and
    related ratios.

About Griffin Capital Essential Asset REIT II

Griffin Capital Essential Asset REIT II, Inc. is a publicly registered,
non-traded REIT focused on acquiring a portfolio consisting primarily of
single tenant business essential properties throughout the United
States, diversified by corporate credit, physical geography, product
type, and lease duration. As of June 30, 2018, Griffin Capital Essential
Asset REIT II, Inc. has acquired 35 office and industrial buildings
totaling approximately 7.3 million rentable square feet and asset
acquisition value of approximately $1.1 billion. Griffin Capital
Essential Asset REIT II, Inc. is one of several REITs sponsored or
co-sponsored by Griffin Capital Company, LLC ("Griffin Capital").

About Griffin Capital Company, LLC

Griffin Capital is a leading alternative investment asset manager with
$10.75 billion* in assets under management. Founded in 1995, the
privately held firm is led by a seasoned team of senior executives with
more than two decades of investment and real estate experience and who
collectively have executed more than 650 transactions valued at over
$22.0 billion.

The firm manages, sponsors or co-sponsors a suite of carefully curated,
institutional quality investment solutions distributed by Griffin
Capital Securities, LLC to retail investors through a community of
partners, including independent and insurance broker-dealers,
wirehouses, registered investment advisory firms and the financial
advisors who work with these enterprises. Additional information is
available at www.griffincapital.com.

*Includes the property information related to interests held in certain
joint ventures. As of June 30, 2018.

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

______________________________

1 Total capitalization includes the outstanding debt balance,
plus total equity raised in our public offerings, net of redemptions.
2
There is no guarantee that our properties will remain 100% leased
and occupied.
3 Net rent is based on (a) the contractual
base rental payments assuming the lease requires the tenant to reimburse
us for certain operating expenses or the property is self-managed by the
tenant and the tenant is responsible for all, or substantially all, of
the operating expenses; or (b) contractual rent payments less certain
operating expenses that are our responsibility for the 12-month period
subsequent to June 30, 2018, and includes assumptions that may not be
indicative of the actual future performance of a property, including the
assumption that the tenant will perform its obligations under its lease
agreement during the next 12 months.
4 Approximately
75.6% of our portfolio's net rental revenue was generated by properties
leased to tenants and/or guarantors with investment grade credit ratings
or whose non-guarantor parent companies have investment grade ratings or
what management believes are generally equivalent ratings. Of the 75.6%
investment grade tenant ratings, 64.0% is from Nationally Recognized
Statistical Rating Organization (NRSRO) credit rating, with the
remaining 11.6% being from a non-NRSRO, but having a rating that we
believe is generally equivalent to an NRSRO investment grade rating.
Bloomberg's default risk rating is one example of a non-NRSRO rating.
5
FFO, as described by NAREIT, is adjusted for non-controlling interest
distributions.

 

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited; in thousands, except share amounts)

   
June 30, 2018 December 31, 2017
ASSETS
Cash and cash equivalents $ 30,605 $ 33,164
Restricted cash 14,758 12,886
Real estate:
Land 122,482 122,482
Building and improvements 816,079 815,721
Tenant origination and absorption cost 240,364 240,364
Construction in progress 101   299  
Total real estate 1,179,026 1,178,866
Less: accumulated depreciation and amortization (106,036 ) (83,905 )
Total real estate, net 1,072,990 1,094,961
Intangible assets, net 3,110 3,294
Due from affiliates 1,126 686
Deferred rent 27,946 22,733
Other assets, net 9,665   12,224  
Total assets $ 1,160,200   $ 1,179,948  
LIABILITIES AND EQUITY
Debt:
Mortgages payable $ 375,312 $ 126,287
Unsecured credit facility 105,849   355,561  
Total debt 481,161 481,848
Restricted reserves 13,372 13,368
Distributions payable 1,713 1,689
Due to affiliates 17,191 16,896
Below market leases, net 48,783 51,295
Accrued expenses and other liabilities 20,200   19,903  
Total liabilities 582,420 584,999
Commitments and contingencies (Note 11)
Common stock subject to redemption 33,387 32,405
Stockholders' equity:
Common Stock, $0.001 par value - Authorized:800,000,000; 77,835,406
and 77,175,283 shares outstanding in the aggregate, as of June 30,
2018 and December 31, 2017, respectively (1)
76 76
Additional paid-in capital 658,471 656,705
Cumulative distributions (103,695 ) (82,590 )
Accumulated deficit (12,346 ) (12,672 )
Accumulated other comprehensive income 657   949  
Total stockholders' equity 543,163 562,468
Noncontrolling interests 1,230   76  
Total equity 544,393   562,544  
Total liabilities and equity $ 1,160,200   $ 1,179,948  
 

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; in thousands, except share and per share amounts)

   
Three Months Ended June 30, Six Months Ended June 30,
2018   2017 2018   2017
Revenue:
Rental income $ 21,916 $ 22,677 $ 43,926 $ 44,285
Property expense recovery 4,381   3,869   9,160   8,233  
Total revenue 26,297   26,546   53,086   52,518  
Expenses:
Property operating 1,679 1,411 3,732 3,084
Property tax 2,613 2,321 5,072 4,733
Property management fees to affiliates 450 469 909 895
Asset management fees to affiliates 2,795 5,541
Advisory fees to affiliates 2,323 4,624
Performance distribution allocation to affiliates 2,055 4,116
General and administrative 911 983 1,671 1,905
Corporate operating expenses to affiliates 684 522 1,362 1,113
Depreciation and amortization 11,133   10,951   22,131   21,474  
Total expenses 21,848   19,452   43,617   38,745  
Income before other income (expenses) 4,449 7,094 9,469 13,773
Other income (expense):
Interest expense (5,040 ) (3,869 ) (9,311 ) (7,448 )
Other income, net 113   140   168   164  
Net (loss) income (478 ) 3,365 326 6,489
Net loss (income) attributable to noncontrolling interests 1   (1 )   (2 )
Net (loss) income attributable to common stockholders $ (477 ) $ 3,364   $ 326   $ 6,487  
Net (loss) income attributable to common stockholders per share,
basic and diluted
$ (0.01 ) $ 0.04   $   $ 0.09  
Weighted average number of common shares outstanding, basic and
diluted
77,480,406   75,658,033   77,370,273   75,109,702  
Distributions declared per common share $ 0.14   $ 0.14   $ 0.28   $ 0.28  
 

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

(Unaudited)

Funds from Operations and Adjusted Funds from Operations

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

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

In order to provide a more complete understanding of the operating
performance of a REIT, the National Association of Real Estate
Investment Trusts ("NAREIT") promulgated a measure known as 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.

Beginning with the three months ended March 31, 2018, we are now using
Adjusted Funds from Operations ("AFFO") as a non-GAAP financial measure
to evaluate our operating performance. We previously used Modified Funds
from Operations as a non-GAAP measure of operating
performance. Management elected to replace the Modified Funds from
Operations measure with AFFO as management believes AFFO provides
investors with an operating performance measure that is consistent with
the performance models and analysis used by management, including the
addition of non-cash performance distributions not defined in the
calculation of MFFO. In addition, AFFO is a measure used among our peer
group, which includes daily NAV REITs. We also believe that AFFO is a
recognized measure of sustainable operating performance by the REIT
industry. Further, we believe AFFO is useful in comparing the
sustainability of our operating performance with the sustainability of
the operating performance of other real estate companies.

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

  • Revenues in excess of cash received, net. Most of our leases provide
    for periodic minimum rent payment increases throughout the term of the
    lease. In accordance with GAAP, these contractual periodic minimum
    rent payment increases during the term of a lease are recorded to
    rental revenue on a straight-line basis in order to reconcile the
    difference between accrual and cash basis accounting. As straight-line
    rent is a GAAP non-cash adjustment and is included in historical
    earnings, FFO is adjusted for the effect of straight-line rent to
    arrive at AFFO as a means of determining operating results of our
    portfolio. In addition, when applicable, in conjunction with certain
    acquisitions, we may enter into a master escrow or lease agreement
    with a seller, whereby the seller is obligated to pay us rent
    pertaining to certain spaces impacted by existing rental abatements.
    In accordance with GAAP, these proceeds are recorded as an adjustment
    to the allocation of real estate assets at the time of acquisition,
    and, accordingly, are not included in revenues, net income, or FFO.
    This application results in income recognition that can differ
    significantly from current contract terms. By adjusting for this item,
    we believe AFFO is reflective of the realized economic impact of our
    leases (including master agreements) that is useful in assessing the
    sustainability of our operating performance.
  • Amortization of in-place lease valuation. Acquired in-place leases are
    valued as above-market or below-market as of the date of acquisition
    based on the present value of the difference between (a) the
    contractual amounts to be paid pursuant to the in-place leases and (b)
    management's estimate of fair market lease rates for the corresponding
    in-place leases over a period equal to the remaining non-cancelable
    term of the lease for above-market leases. The above-market and
    below-market lease values are capitalized as intangible lease assets
    or liabilities and amortized as an adjustment to rental income over
    the remaining terms of the respective leases. As amortization of
    in-place lease valuation is a non-cash adjustment and is included in
    historical earnings, FFO is adjusted for the effect of the
    amortization to arrive at AFFO as a means of determining operating
    results of our portfolio.
  • Acquisition-related costs. We were organized primarily with the
    purpose of acquiring or investing in income-producing real property in
    order to generate operational income and cash flow that will allow us
    to provide regular cash distributions to our stockholders. In the
    process, we incur non-reimbursable affiliated and non-affiliated
    acquisition-related costs, which in accordance with GAAP are
    capitalized and included as part of the relative fair value when the
    property acquisition meets the definition of an asset acquisition or
    are expensed as incurred and are included in the determination of
    income (loss) from operations and net income (loss), for property
    acquisitions accounted for as a business combination. By excluding
    acquisition-related costs, AFFO may not provide an accurate indicator
    of our operating performance during periods in which acquisitions are
    made. However, it can provide an indication of our on-going ability to
    generate cash flow from operations and continue as a going concern
    after we cease to acquire properties on a frequent and regular basis,
    which can be compared to the AFFO of other non-listed REITs that have
    completed their acquisition activity and have similar operating
    characteristics to ours. Management believes that excluding these
    costs from AFFO provides investors with supplemental performance
    information that is consistent with the performance models and
    analyses used by management.
  • Gain or loss from the extinguishment of debt. We use debt as a partial
    source of capital to acquire properties in our portfolio. As a term of
    obtaining this debt, we will pay financing costs to the respective
    lender. Financing costs are presented on the balance sheet as a direct
    deduction from the carrying amount of that debt liability, consistent
    with debt discounts and amortized into interest expense on a
    straight-line basis over the term of the debt. We consider the
    amortization expense to be a component of operations if the debt was
    used to acquire properties. From time to time, we may cancel certain
    debt obligations and replace these canceled debt obligations with new
    debt at more favorable terms to us. In doing so, we are required to
    write off the remaining capitalized financing costs associated with
    the canceled debt, which we consider to be a cost, or loss, on
    extinguishing such debt. Management believes that this loss is
    considered an event not associated with our operations, and therefore,
    deems this write off to be an exclusion from AFFO.
  • Unrealized gains (losses) on derivative instruments. These adjustments
    include unrealized gains (losses) from mark-to-market adjustments on
    interest rate swaps and losses due to hedge ineffectiveness. The
    change in the fair value of interest rate swaps not designated as a
    hedge and the change in the fair value of the ineffective portion of
    interest rate swaps are non-cash adjustments recognized directly in
    earnings and are included in interest expense. We have excluded these
    adjustments in our calculation of AFFO to more appropriately reflect
    the economic impact of our interest rate swap agreements.
  • Performance distribution allocation. Our Advisor holds a special
    limited partner interest in our Operating Partnership that entitles it
    to receive a special distribution from our Operating Partnership equal
    to 12.5% of the total return, subject to a 5.5% hurdle amount and a
    high water mark, with a catch-up. At the election of the advisor, the
    performance distribution allocation may be paid in cash or Class I
    units in our Operating Partnership. We believe that the distribution,
    to the extent it is paid in cash, is appropriately included as a
    component of corporate operating expenses to affiliates and therefore
    included in FFO and AFFO. If, however, the special distribution is
    paid in Class I units, management believes the distribution would be
    excluded from AFFO to more appropriately reflect the on-going
    portfolio performance and our ability to sustain the current
    distribution level.

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 three and six months ended June 30, 2018 and 2017 (dollars in
thousands):

  Three Months Ended June 30,   Six Months Ended June 30,
2018   2017   2018   2017
Net (loss) income $ (478 ) $ 3,365 $ 326 $ 6,489
Adjustments:
Depreciation of building and improvements 5,100 5,024 10,131 9,916
Amortization of leasing costs and intangibles 6,033   5,927   12,000   11,558  
FFO $ 10,655 $ 14,316 $ 22,457 $ 27,963
Distributions to noncontrolling interests (20 ) (2 ) (31 ) (5 )
FFO, net of noncontrolling interest distributions $ 10,635   $ 14,314   $ 22,426   $ 27,958  
Reconciliation of FFO to AFFO
FFO, net of noncontrolling interest distributions $ 10,635 $ 14,314 $ 22,426 $ 27,958
Adjustments:
Revenues in excess of cash received, net (1,490 ) (2,930 ) (3,132 ) (5,149 )
Amortization of below market rent, net (1,170 ) (1,173 ) (2,328 ) (2,206 )
Unrealized loss (gain) on derivatives 18 77 41
Performance distribution adjustment 2,056     3,086    
AFFO $ 10,031   $ 10,229   $ 20,129   $ 20,644  
 

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

Adjusted EBITDA

(Unaudited)

(dollars in thousands)

   
Three Months Ended June 30, Six Months Ended June 30,
2018   2017 2018   2017
ADJUSTED EBITDA(1):
Net income/(loss) $ (478 ) $ 3,365 $ 326 $ 6,489
Depreciation and amortization 11,133 10,951 22,131 21,474
Interest expense 4,522 3,497 8,447 6,701
Unused commitment fee 222 79 294 160
Unrealized loss (gain) on swap 18 77 41
Amortization - Deferred financing costs 296 275 570 546
Amortization - In-place lease (1,170 ) (1,173 ) (2,328 ) (2,206 )
Income taxes 112 94 226 176
Asset management fees 2,323 2,795 4,624 5,541
Performance distribution 2,055 4,116
Property management fees 458 478 924 914
Deferred rent (2,279 ) (4,556 ) (5,214 ) (8,729 )
17,194 15,823 34,193 31,107
Less: Capital reserves (334 ) (334 ) (668 ) (655 )
Adjusted EBITDA (per credit facility) $ 16,860   $ 15,489   $ 33,525   $ 30,452  
       
Interest expense (excluding unused commitment fee) $ 4,522   $ 3,497   $ 8,447   $ 6,701  
 
Interest Coverage Ratio(2) 3.73   4.43   3.97   4.54  
Fixed Charge Coverage Ratio(3) 3.73   4.43   3.97   4.54  
(1)   Adjusted EBITDA, as defined in our amended and restated credit
agreement, is calculated as net income before interest, taxes,
depreciation and amortization (EBITDA), plus acquisition fees and
expenses, asset and property management fees, straight-line rents
and in-place lease amortization for the period, further adjusted for
acquisitions that have closed during the quarter and certain
reserves for capital expenditures.
(2) Interest coverage is the ratio of interest expense as if the
corresponding debt was in place at the beginning of the period to
adjusted EBITDA.
(3)

Fixed charge coverage is the ratio of principal amortization for
the period plus interest expense as if the corresponding debt were
in place at the beginning of the period plus preferred unit
distributions as if in place at the beginning of the period over
adjusted EBITDA.

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