Griffin Capital Essential Asset REIT II Reports First Quarter 2019 Results

Griffin Capital Essential Asset REIT II, Inc. (the “Company" or "REIT")
announced its operating results for the quarter ended March 31, 2019.

This press release features multimedia. View the full release here:
https://www.businesswire.com/news/home/20190522005740/en/

(Photo: Business Wire)

Michael Escalante, Chief Executive Officer of the REIT stated, “We are
pleased to have garnered such overwhelming support from our shareholders
for the approval of the completion of the merger of Griffin Capital
Essential Asset REIT and Griffin Capital Essential Asset REIT II, which
closed subsequent to first quarter on April 30, 2019. As we have
recently stated, the transaction significantly increased the size,
scale, and diversification of the REIT. Furthermore, the merger brings
additional long-term benefits to our shareholders which we expect will
become more evident in our financial statements as we progress through
2019 and beyond.”

Results as of March 31, 2019 - Financial
Highlights and Accomplishments:

Financial Results

• Total revenue for the three months ended March 31, 2019 was
  approximately $26.4 million, compared to $26.8 million for the three
  months ended March 31, 2018.
• Net loss attributable to common shareholders was approximately $(1.6)
  million or $(0.02) per basic and diluted share for the three months
  ended March 31, 2019, compared to net income attributable to common
  shareholders of $0.8 million or $0.01 per basic and diluted share for
  the same period in 2018 primarily related to higher interest expense
  in the current year.
• As of March 31, 2019, the ratio of debt to total real estate
  acquisition price was 44.6 percent.

Non-GAAP Measures

• Adjusted funds from operations, or AFFO, was approximately $9.3
  million and $10.1 million for the three months ended March 31, 2019
  and 2018, respectively. Funds from operations, or FFO⁽¹⁾,
  was approximately $9.3 million and $11.8 million for the three months
  ended March 31, 2019 and 2018, 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 $17.9 million for the quarter ended
  March 31, 2019 with both a fixed charge and interest coverage ratio of
  3.49. Please see the financial reconciliation tables and notes at the
  end of this release for more information regarding Adjusted EBITDA and
  related ratios.

Merger Transaction and Other Subsequent Events

Merger with Griffin Capital Essential Asset REIT, Inc. (“GCEAR”)

• On April 30, 2019, we announced the completion of the merger with
  GCEAR. The merger creates a $4.7 billion, self-managed REIT, which
  will generate significant benefits for shareholders, including
  substantial cost savings, increased operating efficiencies, and
  immediate accretion to earnings and cash flows.
• As of April 30, 2019, we owned 124 buildings located on 101 properties
  in 25 states, encompassing approximately 27.2 million rentable square
  feet, 96.8 percent leased business essential assets occupied by credit
  worthy-tenants with a weighted average remaining lease term of
  approximately 7.5 years.

New Credit Facility

• As part of the merger, we also entered into a second amended and
  restated credit agreement ("Second Amended and Restated Credit
  Agreement") with a syndicate of lenders, under which KeyBank, National
  Association serves as administrative agent. Pursuant to the Second
  Amended and Restated Credit Agreement, we were provided with an
  upsized revolving credit facility with an initial commitment of $750
  million, an existing $200 million term loan, a new five year $400
  million term loan and a new seven year $150 million term loan, which
  commitments may be increased under certain circumstances up to a
  maximum total commitment of $2.0 billion. In addition, we entered into
  a guaranty agreement.

Self-Tender

• On May 6, 2019, we commenced a self-tender offer for up to $100
  million in shares of common stock. Our offer expires on Monday, June
  10, 2019, unless extended or withdrawn per the terms of our offer.

About Griffin Capital Essential Asset REIT II

Griffin Capital Essential Asset REIT II, Inc., is a self-managed,
publicly registered, non-listed Real Estate Investment Trust (REIT) that
reports its Net Asset Value (NAV) daily. Its portfolio of net-lease
assets consists of single-tenant, business essential properties
throughout the United States, diversified by corporate credit, physical
geography, product type, and lease duration. As of April 30, 2019,
Griffin Capital Essential Asset REIT II owns 101 properties located in
25 states totaling 27.2 million in rentable square feet, representing a
total REIT market capitalization of $4.7 billion⁽²⁾. Griffin
Capital Securities, LLC, Member FINRA/SIPC, is the dealer manager for
Griffin Capital Essential Asset REIT II.

Additional information is available at www.gcear.com.

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

______________________________

¹ FFO, as described by National Association of Real Estate
Investment Trusts ("NAREIT"), is adjusted for non-controlling interest
distributions.

² Total market capitalization includes the outstanding debt
balance (excluding deferred financing costs and premium/discounts), plus
total outstanding shares (including limited partnership units issued and
shares issued pursuant to DRP, net of redemptions) multiplied by the NAV
per share as of March 31, 2019.

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.

Additionally, we use Adjusted Funds from Operations (“AFFO”) as a
non-GAAP financial measure to evaluate our operating performance. 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 distributions.

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 shareholders. 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. Prior to the Mergers, our Advisor
  held a special limited partnership interest in our Operating
  Partnership that entitled 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 highwater mark, with a catch-up. At the
  election of the advisor, the performance distribution allocation was
  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 was paid in Class I units,
  management believed the distribution would be excluded from AFFO to
  more appropriately reflect the on-going portfolio performance and
  our ability to sustain the current distribution level.

• Dead deal costs. As part of investing in income-producing real
  property, we incur non-reimbursable affiliated and non-affiliated
  acquisition-related costs for transactions that fail to close, which
  in accordance with GAAP, are expensed and are included in the
  determination of income (loss) from operations and net income (loss).
  Similar to acquisition-related costs (see above), management believes
  that excluding these costs from AFFO provides investors with
  supplemental performance information that is consistent with the
  performance models and analyses used by management.

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

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

Our calculation of FFO and AFFO is presented in the following table for
the three months ended March 31, 2019 and 2018 (dollars in thousands):

View source version on businesswire.com: https://www.businesswire.com/news/home/20190522005740/en/