Peakstone Realty Trust - Quarter Report: 2018 September (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________________________________________________

FORM 10-Q

____________________________________________________



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-55605

_______________________________________________

Griffin Capital Essential Asset REIT II, Inc.

(Exact name of Registrant as specified in its charter)

________________________________________________



Maryland		46-4654479
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

Griffin Capital Plaza

1520 E. Grand Ave

El Segundo, California 90245

(Address of principal executive offices)

(310) 469-6100

(Registrant’s telephone number)

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of November 7, 2018, there were 226,811; 278; 19,214; 804,562; 25,845,044; 49,961,835; and 991,562 shares of Class T, Class S, Class D, Class I, Class A, Class AA, and Class AAA common stock, respectively, of Griffin Capital Essential Asset REIT II, Inc. outstanding.

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FORM 10-Q

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

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		Page No.
PART I. FINANCIAL INFORMATION
	Cautionary Note Regarding Forward-Looking Statements	4
Item 1.	Financial Statements:
	Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017 (unaudited)	5
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)	6
	Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)	7
	Consolidated Statements of Equity for the Year Ended December 31, 2017 and Nine Months Ended September 30, 2018 (unaudited)	8
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 (unaudited)	9
	Notes to Consolidated Financial Statements (unaudited)	10
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4.	Controls and Procedures	50
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults Upon Senior Securities	52
Item 4.	Mine Safety Disclosures	52
Item 5.	Other Information	52
Item 6.	Exhibits	53
SIGNATURES		54

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PART I. FINANCIAL INFORMATION

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Form 10-Q of Griffin Capital Essential Asset REIT II, Inc., other than historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward-looking statements may discuss, among other things, our future capital expenditures, distributions and acquisitions (including the amount and nature thereof), business strategies, the expansion and growth of our operations, our net sales, gross margin, operating expenses, operating income, net income, cash flow, financial condition, impairments, expenditures, capital structure, organizational structure, and other developments and trends of the real estate industry. Such statements are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations and provide distributions to stockholders, our ability to find suitable investment properties, and our ability to be in compliance with certain debt covenants, may be significantly hindered. Therefore, such statements are not intended to be a guarantee of our performance in future periods. 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. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the Securities and Exchange Commission (the "SEC"). We cannot guarantee the accuracy of any such forward-looking statements contained in this Form 10-Q, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable securities laws and regulations.

See the risk factors identified in Part II, Item 1A of this Form 10-Q and in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2017, as updated by our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2018 and June 30, 2018, each as filed with the SEC for a discussion of some, although not all, of the risks and uncertainties that could cause actual results to differ materially from those presented in our forward-looking statements.

Available Information

Our company website address is www.griffincapital.com/griffin-capital-essential-asset-reit-ii. We use our website as a channel of distribution for important company information. Important information, including press releases and financial information regarding our company, is routinely posted on and accessible on the “Latest News” subpage of our website, which is accessible by clicking on the tab labeled “Latest News” on our website home page. In addition, we make available on the “SEC Filings” subpage of our website free of charge our annual reports 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. 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.

Additionally, the public may read and copy any of the materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at (800) SEC-0330. Our electronically filed reports can also be obtained on the SEC’s internet site at http://www.sec.gov.

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited; in thousands, except share amounts)



	September 30, 2018			December 31, 2017
ASSETS
Cash and cash equivalents	$	33,786		$	33,164
Restricted cash	14,642			12,886
Real estate:
Land	122,482			122,482
Building and improvements	819,079			815,721
Tenant origination and absorption cost	240,364			240,364
Construction in progress	132			299
Total real estate	1,182,057			1,178,866
Less: accumulated depreciation and amortization	(117,288		)	(83,905		)
Total real estate, net	1,064,769			1,094,961
Intangible assets, net	3,016			3,294
Due from affiliates	1,128			686
Deferred rent	29,851			22,733
Other assets, net	6,862			12,224
Total assets	$	1,154,054		$	1,179,948
LIABILITIES AND EQUITY
Total debt	$	481,573		$	481,848
Restricted reserves	13,310			13,368
Distributions payable	1,772			1,689
Due to affiliates	18,988			16,896
Below market leases, net	47,506			51,295
Accrued expenses and other liabilities	21,765			19,903
Total liabilities	584,914			584,999
Commitments and contingencies (Note 11)
Common stock subject to redemption	37,401			32,405
Stockholders' equity:
Common Stock, $0.001 par value - Authorized:800,000,000; 77,760,266 and 77,175,283 shares outstanding in the aggregate, as of September 30, 2018 and December 31, 2017, respectively ⁽¹⁾	77			76
Additional paid-in capital	657,756			656,705
Cumulative distributions	(114,510		)	(82,590		)
Accumulated deficit	(13,102		)	(12,672		)
Accumulated other comprehensive income	310			949
Total stockholders' equity	530,531			562,468
Noncontrolling interests	1,208			76
Total equity	531,739			562,544
Total liabilities and equity	$	1,154,054		$	1,179,948


(1)	See Note 8, Equity, for the number of shares outstanding of each class of common stock as of September 30, 2018 and December 31, 2017.

See accompanying notes.

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Revenue:
Rental income	$	21,928		$	22,926		$	65,854		$	67,211
Property expense recovery	4,785			4,423			13,945			12,671
Total revenue	26,713			27,349			79,799			79,882
Expenses:
Property operating	1,866			1,787			5,598			4,886
Property tax	2,449			2,511			7,521			7,244
Property management fees to affiliates	456			452			1,365			1,347
Asset management fees to affiliates	—			2,485			—			8,026
Advisory fees to affiliates	2,346			273			6,970			273
Performance distribution allocation to affiliates	2,084			213			6,200			213
General and administrative	775			831			2,446			2,736
Corporate operating expenses to affiliates	806			566			2,168			1,679
Depreciation and amortization	11,252			11,236			33,383			32,710
Total expenses	22,034			20,354			65,651			59,114
Income before other income (expenses)	4,679			6,995			14,148			20,768
Other income (expense):
Interest expense	(5,464		)	(3,997		)	(14,775		)	(11,445		)
Other income, net	28			101			196			265
Net (loss) income	(757		)	3,099			(431		)	9,588
Net loss (income) attributable to noncontrolling interests	1			(1		)	1			(3		)
Net (loss) income attributable to common stockholders	$	(756	)	$	3,098		$	(430	)	$	9,585
Net (loss) income attributable to common stockholders per share, basic and diluted	$	(0.01	)	$	0.04		$	(0.01	)	$	0.13
Weighted average number of common shares outstanding, basic and diluted	78,034,852			76,157,963			77,594,234			75,441,620
Distributions declared per common share	$	0.14		$	0.14		$	0.42		$	0.42

See accompanying notes.

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited; in thousands)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Net (loss) income	$	(757	)	$	3,099		$	(431	)	$	9,588
Other comprehensive (loss) income:
Change in fair value of swap agreement	(348		)	(87		)	(641		)	(17		)
Total comprehensive (loss) income	(1,105		)	3,012			(1,072		)	9,571
Comprehensive loss (income) attributable to noncontrolling interests	2			(1		)	3			(3		)
Comprehensive (loss) income attributable to common stockholders	$	(1,103	)	$	3,011		$	(1,069	)	$	9,568

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited; in thousands, except share amounts)



	Common Stock					Additional Paid-In Capital			Cumulative Distributions			Accumulated Deficit			Accumulated Other Comprehensive Income			Total Stockholders’ Equity			Non- controlling Interests			Total Equity
	Shares		Amount			Additional Paid-In Capital			Cumulative Distributions			Accumulated Deficit			Accumulated Other Comprehensive Income			Total Stockholders’ Equity			Non- controlling Interests			Total Equity
Balance December 31, 2016	70,939,647		$	71		$	615,653		$	(38,406	)	$	(23,788	)	$	841		$	554,371		$	84		$	554,455
Gross proceeds from issuance of common stock	4,205,673		4			41,822			—			—			—			41,826			—			41,826
Discount on issuance of common stock	—		—			(16		)	—			—			—			(16		)	—			(16		)
Stock-based compensation	25,500		—			292			—			—			—			292			—			292
Offering costs including dealer manager fees and stockholder servicing fees to affiliates	—		—			(3,593		)	—			—			—			(3,593		)	—			(3,593		)
Distributions to common stockholders	—		—			—			(19,427		)	—			—			(19,427		)	—			(19,427		)
Issuance of shares for distribution reinvestment plan	2,358,188		2			22,206			(22,208		)	—			—			—			—			—
Repurchase of common stock	(623,499	)	(1		)	(5,741		)	—			—			—			(5,742		)	—			(5,742		)
Additions to common stock subject to redemption	—		—			(16,467		)	—			—			—			(16,467		)	—			(16,467		)
Issuance of stock dividends	269,774		—			2,549			(2,549		)	—			—			—			—			—
Distributions to noncontrolling interest	—		—			—			—			—			—			—			(11		)	(11		)
Net income	—		—			—			—			11,116			—			11,116			3			11,119
Other comprehensive income	—		—			—			—			—			108			108			—			108
Balance December 31, 2017	77,175,283		$	76		$	656,705		$	(82,590	)	$	(12,672	)	$	949		$	562,468		$	76		$	562,544
Gross proceeds from issuance of common stock	762,537		1			7,429			—			—			—			7,430			—			7,430
Changes in redeemable common stock	—		—			(5,292		)	—			—			—			(5,292		)	—			(5,292		)
Discount on issuance of common stock	—		—			(1		)	—			—			—			(1		)	—			(1		)
Stock-based compensation	10,500		—			44			—			—			—			44			—			44
Offering costs including dealer manager fees and stockholder servicing fees to affiliates	—		—			(1,129		)	—			—			—			(1,129		)	—			(1,129		)
Distributions to common stockholders	—		—			—			(15,498		)	—			—			(15,498		)	—			(15,498		)
Issuance of shares for distribution reinvestment plan	1,712,265		2			16,420			(16,422		)	—			—			—			—			—
Repurchase of common stock	(2,000,321	)	(2		)	(18,898		)	—			—			—			(18,900		)	—			(18,900		)
Additions to common stock subject to redemption	—		—			2,478			—			—			—			2,478			—			2,478
Issuance of stock dividends	2		—			—			—			—			—			—			—			—
Issuance of limited partnership units	—		—			—			—			—			—			—			1,185			1,185
Distributions to noncontrolling interest	—		—			—			—			—			—			—			(50		)	(50		)
Net (loss)	—		—			—			—			(430		)	—			(430		)	(1		)	(431		)
Other comprehensive loss	—		—			—			—			—			(639		)	(639		)	(2		)	(641		)
Balance September 30, 2018	77,660,266		$	77		$	657,756		$	(114,510	)	$	(13,102	)	$	310		$	530,531		$	1,208		$	531,739

See accompanying notes.

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)



	Nine Months Ended September 30,
	2018			2017
Operating Activities:
Net (loss) income	$	(431	)	$	9,588
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation of building and improvements	15,284			15,053
Amortization of tenant origination and absorption costs	18,099			17,657
Amortization of above and below market leases	(3,511		)	(3,389		)
Amortization of deferred financing costs	981			826
Deferred rent	(7,118		)	(13,227		)
Stock based compensation	44			267
Unrealized loss on interest rate swap	77			60
Performance distribution allocation (non-cash)	3,607			—
Change in operating assets and liabilities:
Other assets, net	1,714			3,730
Accrued expenses and other liabilities, net	4,197			(629		)
Due to affiliates, net	1,749			1,345
Net cash provided by operating activities	34,692			31,281
Investing Activities:
Acquisition of properties, net	—			(44,234		)
Restricted reserves	(58		)	(20,251		)
Payments for construction in progress	(440		)	(407		)
Real estate acquisition deposits	—			250
Net cash used in investing activities	(498		)	(64,642		)
Financing Activities:
Proceeds from borrowings - Credit Facility	—			14,300
Proceeds from borrowings - BofA/KeyBank Loan	250,000			—
Proceeds from borrowings - Term Loan	113,000			—
Principal payoff of indebtedness - Credit Facility	(357,673		)	—
Deferred financing costs	(6,583		)	(30		)
Issuance of common stock	7,465			38,923
Offering costs	(3,660		)	(6,695		)
Repurchase of common stock	(18,900		)	(3,798		)
Distributions paid to common stockholders	(15,420		)	(14,318		)
Distributions paid to noncontrolling interests	(45		)	(8		)
Net cash (used in) provided by financing activities	(31,816		)	28,374
Net increase (decrease) in cash, cash equivalents and restricted cash	2,378			(4,987		)
Cash, cash equivalents and restricted cash at the beginning of the period	46,050			63,561
Cash, cash equivalents and restricted cash at the end of the period	$	48,428		$	58,574
Supplemental Disclosures of Significant Non-Cash Transactions:
Reclassification from escrow account receivables to building and improvements	$	2,905		$	—
Decrease in fair value swap agreement	$	(641	)	$	(17	)
Increase in Stockholder Servicing Fee Payable	$	174		$	564
Increase in distribution payable to common stockholders	$	77		$	118
Common stock issued pursuant to the distribution reinvestment plan	$	16,422		$	16,546

See accompanying notes.

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited; dollars in thousands unless otherwise noted and excluding per share amounts)

1. Organization

Griffin Capital Essential Asset REIT II, Inc., a Maryland corporation (the “Company”), was formed on November 20, 2013 under the Maryland General Corporation Law and qualified as a real estate investment trust (“REIT”) commencing with the year ended December 31, 2015. The Company was organized primarily with the purpose of acquiring single tenant net lease properties that are considered essential to the occupying tenant, and has used a substantial amount of the net proceeds from its initial public offering ("IPO") to invest in such properties. The Company’s year end is December 31.

Griffin Capital Company, LLC, a Delaware limited liability company (the “Sponsor”), is the sponsor of the Company. The Sponsor, which was formerly known as Griffin Capital Corporation, began operations in 1995 to engage principally in acquiring and developing office and industrial properties. Kevin A. Shields, the Company's Chief Executive Officer and Chairman of the Company's board of directors, controls the Sponsor.

Griffin Capital Essential Asset Advisor II, LLC, a Delaware limited liability company (the “Advisor”), was formed on November 19, 2013. Griffin Capital Real Estate Company, LLC, a Delaware limited liability company ("GRECO"), is the sole member of the Advisor and Griffin Capital, LLC, a Delaware limited liability company ("GC"), is the sole member of GRECO. The Sponsor is the sole member of GC. The Advisor is responsible for managing the Company’s affairs on a day-to-day basis and identifying and making acquisitions and investments on behalf of the Company under the terms of the Advisory Agreement (as defined below). The Company's officers are also officers of the Advisor and officers of the Sponsor.

Griffin Capital Securities, LLC (the “Dealer Manager”) is a Delaware limited liability company and is a wholly-owned subsidiary of GC. The Dealer Manager is responsible for marketing the Company’s shares offered pursuant to the Company's public offerings.

The Company’s property manager is Griffin Capital Essential Asset Property Management II, LLC, a Delaware limited liability company (the “Property Manager”), which was formed on November 19, 2013 to manage the Company’s properties, or provide oversight of other property managers engaged by the Company or an affiliate of the Company. The Property Manager derives substantially all of its income from the property management services it performs for the Company.

Griffin Capital Essential Asset Operating Partnership II, L.P., a Delaware limited partnership (the “Operating Partnership”), was formed on November 21, 2013. On February 11, 2014, the Advisor purchased a 99% limited partnership interest and special limited partnership interest in the Operating Partnership for $0.2 million and on February 11, 2014, the Company contributed the initial one thousand dollars capital contribution it received to the Operating Partnership in exchange for a 1% general partner interest.

The Operating Partnership owns, and will own, directly or indirectly, all of the properties acquired by the Company. The Operating Partnership will conduct certain activities through the Company’s taxable REIT subsidiary, Griffin Capital Essential Asset TRS II, Inc., a Delaware corporation (the “TRS”), formed on November 22, 2013, which is a wholly-owned subsidiary of the Operating Partnership. The TRS had no activity as of September 30, 2018.

In 2014, the Company registered $2.2 billion in common shares in its IPO, consisting of $2.0 billion in common shares to be offered to the public in the primary portion of the IPO and $200.0 million in common shares for sale pursuant to the Company's distribution reinvestment plan (“DRP”). (See Note 8, Equity, for additional details.) In September 2016, the Company's board of directors approved the close of the primary portion of the IPO effective January 20, 2017; however, the Company continued to offer shares pursuant to the DRP under the Company's IPO registration statement through May 2017.

On April 6, 2017, the Company filed a Registration Statement on Form S-3 with the Securities and Exchange Commission ("SEC") for the registration of 3.0 million shares for sale pursuant to the DRP. The DRP may be terminated at any time upon 10 days’ prior written notice to stockholders, which may be provided through the Company's filings with the SEC.

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited; dollars in thousands unless otherwise noted and excluding per share amounts)

On September 20, 2017, the Company commenced a follow-on offering of up to $2.2 billion of shares (the "Follow-On Offering"), consisting of up to $2.0 billion of shares in the Company's primary offering and $0.2 billion of shares pursuant to the DRP.

Pursuant to the Follow-On Offering, the Company offered to the public four new classes of shares of common stock: Class T shares, Class S shares, Class D shares and Class I shares (the “New Shares”) with net asset value (“NAV”) based pricing. The share classes have different selling commissions, dealer manager fees and ongoing distribution fees. In connection with the Follow-On Offering, the Company reclassified all Class T and Class I shares sold in the IPO as "Class AA" and "Class AAA" shares, respectively.

On September 20, 2017, the Company entered into an amended and restated advisory agreement (the "Advisory Agreement") with the Advisor and the Operating Partnership, which replaced the original advisory agreement and modified various provisions including the fees and expense reimbursements payable to the Advisor. See Note 10, Related Party Transactions, for additional details.

On September 20, 2017, the Company, as general partner of the Operating Partnership, entered into a Third Amended and Restated Limited Partnership Agreement of the Operating Partnership (the "Third Amended and Restated Operating Partnership Agreement") on behalf of itself and the limited partners. The Third Amended and Restated Operating Partnership Agreement is substantially similar to the Company's prior limited partnership agreement, except that it has been updated to reflect changes to the distributions and fees to which the Advisor is entitled, include additional classes of Operating Partnership units, and make other conforming changes. See Note 10, Related Party Transactions, for additional details.

In connection with the Follow-On Offering, the Company's board of directors adopted an amended and restated DRP effective as of September 30, 2017 to include the New Shares under the DRP.

In connection with the Follow-On Offering, the Company’s board of directors adopted a share redemption program for the New Shares (the “New Share Redemption Program”). Under this program, stockholders of the New Shares are allowed to redeem their shares after a one-year holding period at a redemption price equal to the NAV per share for the applicable class generally on the 13th of the month prior to quarter end.

On March 30, 2018, the board of directors of the Company amended the IPO Share Redemption Program (as defined in Note 8, Equity). The key change to the IPO Share Redemption Program is that after one year from the purchase date, a stockholder will be able to redeem at 100% of the NAV of the applicable share class. The amendment took effect on May 2, 2018. See Note 8, Equity, for additional details.

On June 4, 2018, the board of directors of the Company approved the termination of the IPO Share Redemption Program, effective as of July 5, 2018. In addition, effective as of such date, the board of directors amended and restated the New Share Redemption Program in order to allow stockholders of the IPO shares to utilize the New Share Redemption Program. Accordingly, beginning in July 2018, stockholders of IPO shares will be able to continue to redeem at 100% of the NAV of the applicable share class, subject to the other limitations and conditions of the amended and restated New Share Redemption Program.

On August 16, 2018, in connection with a potential strategic alternative the Company’s board of directors is contemplating, the board approved the temporary suspension of the primary portion of the Company's Follow-On Offering, effective August 17, 2018, to allow the special committee of the board to evaluate a potential strategic alternative. The board of directors intends to recommence the Follow-On Offering in the retail marketplace, if appropriate and at the appropriate time.

2. Basis of Presentation and Summary of Significant Accounting Policies

There have been no significant changes to the Company’s accounting policies since the Company filed its audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2017. For further information about the Company’s accounting policies, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed with the SEC.

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited; dollars in thousands unless otherwise noted and excluding per share amounts)

The accompanying unaudited consolidated financial statements of the Company are prepared by management on the accrual basis of accounting and in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), and in conjunction with rules and regulations of the SEC. Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The unaudited consolidated financial statements include accounts and related adjustments, which are, in the opinion of management, of a normal recurring nature and necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim period. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

The consolidated financial statements of the Company include all accounts of the Company, the Operating Partnership, and its subsidiaries. Intercompany transactions are not shown on the consolidated statements. However, each property owning entity is a wholly owned subsidiary which is a special purpose entity ("SPE"), which assets and credit are not available to satisfy the debts or obligations of any other entity, except to the extent required with respect to any co-borrower or guarantor under the same credit facility.

Use of Estimates

The preparation of the unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.

Change in Consolidated Financial Statements Presentation

During the year ended December 31, 2017, the Company elected to early adopt Accounting Standards Update ("ASU") No. 2016-18, Restricted Cash ("ASU No. 2016-18"). As a result, the Company no longer presents transfers between cash and restricted cash in the consolidated statements of cash flows. Instead, restricted cash is included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the consolidated statements of cash flows.

Per Share Data

The Company reports earnings per share for the period as (1) basic earnings per share computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the period, and (2) diluted earnings per share computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding, including common stock equivalents. As of September 30, 2018 and December 31, 2017, there were no material common stock equivalents that would have a dilutive effect on earnings (loss) per share for common stockholders.

Segment Information

ASC Topic 280, Segment Reporting, establishes standards for reporting financial and descriptive information about a public entity’s reportable segments. The Company internally evaluates all of the properties and interests therein as one reportable segment.

Recently Issued Accounting Pronouncements

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging ("ASU No. 2017-12") . The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. For cash flow hedges that are highly effective, the new standard requires all changes (effective and ineffective components) in the fair value of the hedging instrument to be recorded in other comprehensive income and to be reclassified into earnings only when the hedged item impacts earnings. Current guidance requires a periodic recognition of hedge ineffectiveness in earnings.

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited; dollars in thousands unless otherwise noted and excluding per share amounts)

Under existing standards, a quantitative assessment is made on an ongoing basis to determine if a hedge is highly effective in offsetting changes in cash flows associated with the hedged item. Under the new standard, entities will still be required to perform an initial quantitative test. However, the new standard allows entities to elect to subsequently perform only a qualitative assessment unless facts and circumstances change.

This ASU is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The Company elected to early adopt ASU No. 2017-12 for the reporting period ending March 31, 2018. The adoption of ASU No. 2017-12 did not have a material effect on the Company's financial position or statement of operations.

In February 2016, the FASB issued ASU No. 2016-02, Leases ("ASU No. 2016-02"). ASU No. 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU No. 2016-02 will direct how the Company accounts for payments from the elements of leases that are generally fixed and determinable at the inception of the lease (“Fixed Lease Payments”) while ASU No. 2014-09 (defined below) will direct how the Company accounts for the non-lease components of lease contracts, primarily expense reimbursements (“Non-Lease Payments”) and the accounting for the disposition of real estate facilities. ASU No. 2016-02 will be effective beginning in the first quarter of 2019. Early adoption of ASU No. 2016-02 as of its issuance is permitted.

ASU No. 2016-02 requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. Based on the required adoption date of January 1, 2019, the modified retrospective method for ASU No. 2016-02 requires application of the standard to all leases that exist at, or commence after, January 1, 2017 (beginning of the earliest comparative period presented in the 2019 financial statements), with a cumulative adjustment to the opening balance of accumulated earnings (deficit) on January 1, 2017, for the effect of applying the standard at the date of initial application, and restatement of the amounts presented prior to January 1, 2019.

The FASB has also issued an amendment to the standard that would provide an entity an optional transition method to initially account for the impact of the adoption of the standard with a cumulative adjustment to accumulated earnings (deficit) on January 1, 2019 (the effective date of ASU No. 2016-02), rather than January 1, 2017, which would eliminate the need to restate amounts presented prior to January 1, 2019. Under ASU No. 2016-02, an entity may elect a practical expedient package, which states that: (a) an entity need not reassess whether any expired or existing contracts are leases or contain leases; (b) an entity need not reassess the lease classification for any expired or existing leases; and (c) an entity need not reassess initial direct costs for any existing leases. These three practical expedients are available as a single election that must be elected as a package and must be consistently applied to all existing leases at the date of adoption. The FASB has also tentatively noted in May 2017 board meeting minutes that lessors that adopt this package of practical expedients are not expected to reassess expired or existing leases at the date of initial application, which is January 1, 2017 under ASU No. 2016-02, or January 1, 2019, if the Company elects the optional transition method. The FASB noted that the transition provisions generally enable entities to “run off” their existing leases for the remainder of the lease term, which would effectively eliminate the need to calculate adjustment to the opening balance of accumulated earnings (deficit).

In March 2018, the FASB approved a proposal to the drafting of an amendment to the ASU to allow lessors to elect, as a practical expedient, not to allocate the total consideration to lease and non-lease components based on their relative standalone selling prices. If adopted, this single-lease component practical expedient will allow lessors to elect a combined single-lease component presentation if (i) the timing and pattern of transfer of the lease component and the non-lease component(s) associated with it are the same, and (ii) the lease component would be classified as an operating lease if it were accounted for separately. Non-lease components that do not meet the criteria of this practical expedient and combined components in which the non-lease component is the predominant component will be accounted for under the new revenue recognition ASU.

The Company does not expect that ASU No. 2016-02 will impact the Company's accounting for Fixed Lease Payments because the Company's accounting policy is currently consistent with the provisions of the standard. The Company is currently evaluating the impact of the standard as it relates to Non-Lease Payments. If the practical expedient mentioned above is adopted and the Company elects it, the Company expects payments for expense reimbursements that qualify as Non-Lease Payments will be presented under a single lease component presentation. However, without the proposed practical expedient, the Company expects these reimbursements would be separated into Fixed Lease Payments and Non-Lease Payments. Under ASU No. 2016-02, reimbursements relating to property taxes and insurances are Fixed Lease Payments as the payments relates to the right to use the leased assets, while reimbursements relating to maintenance activities and common area expense are Non-

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited; dollars in thousands unless otherwise noted and excluding per share amounts)

Lease Payments and would be accounted under ASU No. 2014-09 upon the adoption of the ASU No. 2016-02 as these payments for goods or services are transferred separately from the right to use the underlying assets.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”). ASU No. 2014-09 replaces substantially all industry-specific revenue recognition requirements and converges areas under this topic with International Financial Reporting Standards. ASU No. 2014-09 implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. ASU No. 2014-09 also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers. Other major provisions in ASU No. 2014-09 include capitalizing and amortizing certain contract costs, ensuring the time value of money is considered in the applicable transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. ASU No. 2014-09 was originally effective for reporting periods beginning after December 31, 2016 (for public entities). On April 1, 2015, the FASB voted to defer the effective date of ASU No. 2014-09 by one year to annual reporting periods beginning after December 15, 2017. On July 9, 2015, the FASB affirmed its proposal to defer the effective date to annual reporting periods beginning after December 15, 2017, although entities may elect to adopt the standard as of the original effective date. The Company adopted the guidance using the modified retrospective approach for the fiscal year beginning January 1, 2018. The impact was minimal upon adoption of the new accounting guidance on its consolidated financial statements relating to the recognition of gains and losses on the sale of real estate assets as the Company’s current accounting for such transactions is consistent with the new guidance’s core principle. Rental income from leasing arrangements is a substantial portion of the Company’s revenue, is specifically excluded from ASU No. 2014-09 and will be governed by the applicable lease codification ("ASU No. 2016-02").

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) ("ASU No. 2016-08"). The amendments clarify how an entity should identify the unit of accounting (i.e., the specified good or service) for the principal versus agent evaluation, and how it should apply the control principle to certain types of arrangements, such as service transactions, by explaining what a principal controls before the specified good or service is transferred to the customer. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements of ASU No. 2014-09 described above. The Company adopted the guidance using the modified retrospective approach for the fiscal year beginning January 1, 2018. The impact was minimal upon adoption of the new accounting guidance on its consolidated financial statements relating to the recognition of reporting revenue gross versus net on its consolidated financial statements as the Company’s current accounting for such transactions is consistent with the new guidance’s core principle.

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited; dollars in thousands unless otherwise noted and excluding per share amounts)

3. Real Estate

As of September 30, 2018, the Company's real estate portfolio consisted of 27 properties (35 buildings) in 17 states consisting of office, industrial, distribution, and data center facilities with a combined acquisition value of $1.1 billion including the allocation of the purchase price to above and below-market lease valuation, encompassing approximately 7.3 million square feet.

Depreciation expense for buildings and improvements for the nine months ended September 30, 2018 was $15.3 million. Amortization expense for intangibles, including, but not limited to, tenant origination and absorption costs, for the nine months ended September 30, 2018 was $18.1 million.

Future Minimum Contractual Rent Payments

The future minimum contractual rent payments pursuant to the current lease terms are shown in the table below. The Company's current leases have expirations ranging from 2021 to 2044.



	As of September 30, 2018
Remaining 2018	$	19,311
2019	78,887
2020	80,492
2021	72,677
2022	73,538
Thereafter	528,803
Total	$	853,708

Intangibles

The Company allocated a portion of the acquired real estate asset value to in-place lease valuation and tenant origination and absorption cost. The in-place lease was measured against comparable leasing information and the present value of the difference between the contractual, in-place rent and the fair market rent was calculated using, as the discount rate, the capitalization rate utilized to compute the value of the real estate at acquisition.



	September 30, 2018			December 31, 2017
In-place lease valuation (above market)	$	4,046		$	4,046
In-place lease valuation (above market), accumulated amortization	(1,030		)	(752		)
Intangible assets, net	$	3,016		$	3,294
In-place lease valuation (below market)	$	(62,070	)	$	(62,070	)
In-place lease valuation (below market) - accumulated amortization	14,564			10,775
In-place lease valuation (below market), net	$	(47,506	)	$	(51,295	)
Tenant origination and absorption cost	$	240,364		$	240,364
Tenant origination and absorption cost - accumulated amortization	(65,264		)	(47,165		)
Tenant origination and absorption cost, net	$	175,100		$	193,199

The following table sets forth the estimated annual amortization (income) expense for in-place lease valuation, and tenant origination and absorption costs as of September 30, 2018 for the next five years:



Year	In-Place Lease Valuation			Tenant Origination and Absorption Costs
Remaining 2018	$	(1,170	)	$	6,033
2019	$	(4,695	)	$	24,198
2020	$	(4,695	)	$	24,198
2021	$	(3,799	)	$	19,715
2022	$	(3,799	)	$	19,597

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited; dollars in thousands unless otherwise noted and excluding per share amounts)

4. Debt

As of September 30, 2018 and December 31, 2017, the Company's debt and related deferred financing costs consisted of the following:



	September 30, 2018			December 31, 2017			Contractual Interest Rate⁽¹⁾	Payment Type	Loan Maturity	Effective Interest Rate ⁽²⁾
BofA/KeyBank Loan	$	250,000		$	—		4.32%	Interest Only	May 2028	4.36%
AIG Loan	126,970			126,970			4.15%	Interest Only ⁽³⁾	November 2025	4.22%
Total Mortgage Debt	376,970			126,970
Term Loan	113,000			—			LIBOR + 1.25% ⁽⁴⁾	Interest Only	June 2023	3.58%
Revolving Credit Facility	85			357,758			LIBOR + 1.30%⁽⁴⁾⁽⁵⁾	Interest Only	June 2023 ⁽⁶⁾	3.65%
Total Debt	490,055			484,728
Unamortized deferred financing costs	(8,482		)	(2,880		)
Total Debt, net	$	481,573		$	481,848


(1)	Including the effect of one interest rate swap agreement with a total notional amount of $100.0 million, the weighted average interest rate as of September 30, 2018 was approximately 3.81% for the Company's fixed-rate and variable-rate debt combined.


(2)	Includes the effect of amortization of deferred financing costs.


(3)	The AIG Loan (as defined below) requires monthly payments of interest only, at a fixed rate, for the first five years and fixed monthly payments of principal and interest thereafter.


(4)	The LIBOR as of September 30, 2018 was 2.11%.


(5)	As discussed below, the Company entered into an amended and restated credit agreement in June 2018. The contractual interest rate on the original revolving credit facility was LIBOR + 1.50% as of March 31, 2018.


(6)	The Revolving Credit Facility (as defined below) has an initial term of four years, maturing on June 28, 2022, and may be extended for a one-year period if certain conditions are met and upon payment of an extension fee. See discussion below.

Amended and Restated Credit Agreement

On June 28, 2018, the Company, through the Operating Partnership, entered into an amended and restated credit agreement (the "Amended and Restated Credit Agreement") related to a revolving credit facility and a term loan (collectively, the "Unsecured Credit Facility") with a syndicate of lenders, under which KeyBank, National Association ("KeyBank") serves as administrative agent, and various notes related thereto. In addition, the Company entered into a guaranty agreement.

Pursuant to the Amended and Restated Credit Agreement, the Company was provided with a revolving credit facility (the "Revolving Credit Facility") in an initial commitment amount of up to $550 million and a term loan (the "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. Any increase in the total commitment will be allocated to the Revolving Credit Facility and/or the Term Loan in such amounts as the Operating Partnership and KeyBank may determine.The Revolving Credit Facility may be prepaid and terminated, in whole or in part, at any time without fees or penalty.

The Revolving Credit Facility has an initial term of four years, maturing on June 28, 2022. The Revolving Credit Facility may be extended for a one-year period if certain conditions are met and the Operating Partnership pays an extension fee. Payments under the Revolving Credit Facility are interest only and are due on the first day of each quarter. Amounts borrowed under the Revolving Credit Facility may be repaid and reborrowed, subject to the terms of the Amended and Restated Credit Agreement.

The Term Loan has an initial term of five years, maturing on June 28, 2023. Payments under the Term Loan are interest only and are due on the first day of each quarter. Amounts borrowed under the Term Loan may not be repaid and reborrowed.

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited; dollars in thousands unless otherwise noted and excluding per share amounts)

Operating Partnership, the Company, and the Company's subsidiaries, as disclosed in the periodic compliance certificate provided to the administrative agent each quarter. If the Operating Partnership obtains an investment grade rating of its senior unsecured long term debt from Standard & Poor's Rating Services or Moody's Investors Service, Inc., the applicable LIBOR margin and base rate margin will be dependent on such rating.

The Amended and Restated Credit Agreement relating to the Revolving Credit Facility provides that the Operating Partnership must maintain a pool of real properties (each a "Pool Property" and collectively the "Pool Properties") that meet certain requirements contained in the Amended and Restated Credit Agreement. The agreement sets forth certain covenants relating to the Pool Properties, including, without limitation, the following:

• there must be no less than 15 Pool Properties;

• no greater than 15% of the aggregate pool value may be contributed by a single Pool Property or tenant;

• no greater than 15% of the aggregate pool value may be contributed by Pool Properties subject to ground leases;

• no greater than 20% of the aggregate pool value may be contributed by Pool Properties which are under development;

• the minimum aggregate leasing percentage of all Pool Properties must be no less than 90%; and

• other limitations as determined by KeyBank upon further due diligence of the Pool Properties.

Borrowing availability under the Amended and Restated Credit Agreement is limited to the lesser of (i) an asset pool leverage ratio of no greater than 60%, or (ii) an asset pool debt service coverage ratio of no less than 1.35:1.00.

As of September 30, 2018, the remaining capacity pursuant to the Unsecured Credit Facility was $214.7 million.

Bank of America and KeyBank Loan

On April 27, 2018, the Company, through four SPEs that own the respective four properties noted below and are owned by the Company's Operating Partnership, entered into a loan agreement (the "Loan Agreement”) with Bank of America, N.A. and KeyBank (together with their successors and assigns, collectively, the "Lender") in which the Company borrowed $250.0 million (the "BofA/KeyBank Loan").

The Company utilized approximately $249.8 million of the proceeds provided by the BofA/KeyBank Loan to pay down a portion of the Company's Revolving Credit Facility. In connection with this pay down of the Company's Revolving Credit Facility, KeyBank released four of the special purpose entities owned by the Company's Operating Partnership from their obligations as guarantors under the Revolving Credit Facility. The BofA/KeyBank Loan is secured by cross-collateralized and cross-defaulted first mortgage liens on the properties with the following tenants: 3M Company, Amazon.com.dedc LLC, Southern Company Services, Inc. and IGT (each, a "Secured Property"). In connection with this transaction, the Company entered into a nonrecourse carve-out guaranty agreement.

In addition to their first mortgage lien, the Lender also has a security interest in all other property relating to the ownership, use, maintenance or operation of the improvements on each Secured Property and all rents, profits and revenues from each Secured Property.

The BofA/KeyBank Loan has a term of 10 years, maturing on May 1, 2028. The BofA/KeyBank Loan bears interest at an annual rate of 4.32%. Commencing on June 1, 2020, the BofA/KeyBank Loan may be prepaid but only if such prepayment is made in full (with certain exceptions), subject to certain conditions set forth in the Loan Agreement, including 30 days' prior notice to the Lender and payment of a prepayment premium in addition to all unpaid principal and accrued interest to the date of such prepayment. Commencing on November 1, 2027, the BofA/KeyBank Loan may be prepaid in whole or in part, subject to satisfaction of certain conditions, including 30 days' prior notice to the Lender, without payment of any prepayment premium.

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited; dollars in thousands unless otherwise noted and excluding per share amounts)

AIG Loan

On October 22, 2015, six SPEs that are wholly-owned by the Operating Partnership entered into promissory notes with The Variable Annuity Life Insurance Company, American General Life Insurance Company, and the United States Life Insurance Company (collectively, the "Lenders"), pursuant to which the Lenders provided such SPEs with a loan in the aggregate amount of approximately $127.0 million (the "AIG Loan").

The AIG Loan has a term of 10 years, maturing on November 1, 2025. The AIG Loan bears interest at a rate of 4.15%. The AIG Loan requires monthly payments of interest only for the first five years and fixed monthly payments of principal and interest thereafter. The AIG Loan is secured by cross-collateralized and cross-defaulted first lien deeds of trust and second lien deeds of trust on certain properties. Commencing October 31, 2017, each of the individual promissory notes comprising the AIG Loan may be prepaid but only if such prepayment is made in full, subject to 30 days' prior notice to the holder and payment of a prepayment premium in addition to all unpaid principal and accrued interest to the date of such prepayment.

Debt Covenant Compliance

Pursuant to the terms of the Unsecured Credit Facility, BofA/KeyBank Loan and AIG Loan, the Company is subject to certain loan compliance covenants. The Company was in compliance with all applicable covenants as of September 30, 2018.

5. Interest Rate Contracts

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both business operations and economic conditions. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of debt funding and the use of derivative financial instruments. Specifically, the Company entered into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by expected cash payments principally related to borrowings and interest rates. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company does not use derivatives for trading or speculative purposes.

Derivative Instruments

The Company entered into an interest rate swap agreement to hedge the variable cash flows associated with the LIBO Rate-based variable-rate debt on the Company's Revolving Credit Facility. The interest rate swap is effective for the period from April 1, 2016 to December 12, 2018 with a notional amount of $100.0 million.

Effective as of November 1, 2017, Griffin Capital Essential Asset Operating Partnership, L.P., an affiliated party of the Sponsor, novated one of its $100.0 million swaps to the Operating Partnership, as a result of the repayment of debt. The terms of the cash flow swap are listed in the table below.

On April 30, 2018, the Company settled the $100.0 million cash flow hedge contract purchased from Griffin Capital Essential Asset Operating Partnership, L.P., which resulted in the Company receiving a net settlement of approximately $0.1 million.

The change in the fair value of derivatives designated and qualifying as cash flow hedges is initially recorded in AOCI and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in accumulated other comprehensive income ("AOCI") related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt.

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited; dollars in thousands unless otherwise noted and excluding per share amounts)

The following table sets forth a summary of the interest rate swaps at September 30, 2018 and December 31, 2017:



				Fair Value ⁽¹⁾
Derivative Instruments	Effective Date	Maturity Date/ Termination	Interest Strike Rate	September 30, 2018		December 31, 2017
Assets
Interest Rate Swap	4/1/2016	12/12/2018	0.74%	$	310	$	967
Interest Rate Swap (terminated on April 30, 2018)	11/1/2017	4/30/2018	1.50%	—		65
				$	310	$	1,032


(1)	The Company records all derivative instruments on a gross basis on the consolidated balance sheets, and accordingly, there are no offsetting amounts that net assets against liabilities. As of September 30, 2018, the Company's derivative was in an asset position, and as such, the fair value is included in the line item "Other Assets, net" on the consolidated balance sheet.

The following table sets forth the impact of the interest rate swaps on the consolidated financial statements for the nine months ended September 30, 2018 and 2017:



	Nine Months Ended September 30,
	2018			2017
Interest Rate Swaps in Cash Flow Hedging Relationship:
Amount of (gain) recognized in AOCI on derivatives	$	(281	)	$	(190	)
Amount of gain reclassified from AOCI into earnings under “Interest expense”	$	922		$	207
Total interest expense presented in the consolidated statement of operations in which the effects of cash flow hedges are recorded	$	14,775		$	11,445

During the twelve months subsequent to September 30, 2018, the Company estimates that an additional $0.3 million of income will be recognized from AOCI into earnings.

The Company's agreements with the derivative counterparties contain a provision where if the Company defaults on any of the Company's indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender within a specified time period, then the Company could also be declared in default on its derivative obligations.

As of September 30, 2018, the fair value of the interest rate swap was in an asset position excluding any adjustment for nonperformance risk related to the Company's derivative counterparty agreement, which was approximately $0.3 million. As of September 30, 2018, the Company had not posted any collateral related to the Company's derivative counterparty agreements.

6. Fair Value Measurements

The Company is required to disclose fair value information about all financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practicable to estimate fair value. The Company measures and discloses the estimated fair value of financial assets and liabilities utilizing a fair value hierarchy that distinguishes between data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. This hierarchy consists of three broad levels, as follows: (i) quoted prices in active markets for identical assets or liabilities, (ii) "significant other observable inputs," and (iii) "significant unobservable inputs." "Significant other observable inputs" can include quoted prices for similar assets or liabilities in active markets, as well as inputs that are observable for the asset or liability, such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. "Significant unobservable inputs" are typically based on an entity’s own assumptions, since there is little, if any, related market activity. In instances in which the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level of input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. There were no transfers between the levels in the fair value hierarchy during the nine months ended September 30, 2018 and the year ended December 31, 2017.

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited; dollars in thousands unless otherwise noted and excluding per share amounts)

The following tables set forth the assets that the Company measures at fair value on a recurring basis by level within the fair value hierarchy as of September 30, 2018:



	Total Fair Value		Quoted Prices in Active Markets for Identical Assets and Liabilities		Significant Other Observable Inputs		Significant Unobservable Inputs
Interest Rate Swaps at:
September 30, 2018	$	310	$	—	$	310	$	—
December 31, 2017	$	1,032	$	—	$	1,032	$	—

Financial instruments as of September 30, 2018 and December 31, 2017 consisted of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, other accrued expenses, and borrowings. With the exception of the mortgage loan in the table below, the amounts of the financial instruments presented in the consolidated financial statements substantially approximate their fair value as of September 30, 2018 and December 31, 2017. The fair value of the mortgage loan is estimated by discounting the loan’s principal balance over the remaining term of the mortgage using current borrowing rates available to the Company for debt instruments with similar terms and maturities. The Company determined that the mortgage loan valuation in its entirety is classified in Level 2 of the fair value hierarchy, as the fair value is based on current pricing for debt with similar terms as the in-place debt, and there were no transfers into and out of fair value measurement levels during the nine months ended September 30, 2018 and for the year ended December 31, 2017.



	September 30, 2018				December 31, 2017
	Fair Value		Carrying Value ⁽¹⁾		Fair Value		Carrying Value ⁽¹⁾
AIG Loan	$	119,338	$	126,970	$	122,928	$	126,970


(1)	The carrying value of the AIG Loan does not include deferred financing costs as of September 30, 2018 and December 31, 2017. See Note 4, Debt, for details.

7. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consisted of the following as of September 30, 2018 and December 31, 2017:



	September 30, 2018		December 31, 2017
Prepaid rent	$	4,866	$	4,304
Leasing commission payable	1,900		3,783
Accrued property taxes	3,633		3,490
Interest expense payable	2,661		3,013
Redemptions payable	6,671		2,181
Other liabilities	2,034		3,132
Total	$	21,765	$	19,903

8. Equity

Status of Offerings

On January 20, 2017, the Company closed the primary portion of the IPO; however, the Company continued to offer shares pursuant to the DRP under the IPO registration statement through May 2017. The Company is currently offering shares pursuant to the DRP. The DRP may be terminated at any time upon 10 days’ prior written notice to stockholders, which may be provided through the Company's filings with the SEC.

On September 20, 2017, the Company commenced the Follow-On Offering of up to $2.2 billion of shares, consisting of up to $2.0 billion of shares in the Company's primary offering and $0.2 billion of shares (including Class A, Class AA and Class AAA shares) pursuant to the DRP. The Company reclassified all Class T and Class I shares sold in the IPO as "Class AA" and "Class AAA" shares, respectively. The Company offered Class T shares, Class S shares, Class D shares and Class I shares in its Follow-On Offering.

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited; dollars in thousands unless otherwise noted and excluding per share amounts)

Share Classes

Class T shares, Class S shares, Class D shares, Class I shares, Class A shares, Class AA shares and Class AAA shares vote together as a single class, and each share is entitled to one vote on each matter submitted to a vote at a meeting of the Company's stockholders; provided that with respect to any matter that would only have a material adverse effect on the rights of a particular class of common stock, only the holders of such affected class are entitled to vote.

The following table summarizes shares issued and gross proceeds received for each share class as of September 30, 2018 and outstanding shares as of September 30, 2018 and December 31, 2017:



	Class T		Class S		Class D		Class I		Class A			Class AA			Class AAA			Total
Gross proceeds from primary portion of offerings	$	2,245	$	3	$	182	$	7,538	$	240,780		$	474,858		$	8,381		$	733,987
Gross proceeds from DRP	$	16	$	—	$	2	$	158	$	25,328		$	32,369		$	503		$	58,376
Shares issued in primary portion of offerings	224,647		264		18,921		786,573		24,199,764			47,562,870			901,225			73,694,264
DRP shares issued	1,650		13		236		16,496		2,669,097			3,412,273			53,014			6,152,779
Stock distribution shares issued	—		—		—		—		263,642			300,166			4,677			568,485
Restricted stock issued	—		—		—		—		—			—			36,000			36,000
Total redemptions	—		—		—		—		(1,351,178		)	(1,434,491		)	(5,593		)	(2,791,262		)
Total shares outstanding as of September 30, 2018	226,297		277		19,157		803,069		25,781,325			49,840,818			989,323			77,660,266
Total shares outstanding as of December 31, 2017	4,148		268		268		267,476		25,995,943			49,942,471			964,709			77,175,283

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited; dollars in thousands unless otherwise noted and excluding per share amounts)

Organizational and Offering Costs

Pursuant to the Advisory Agreement, in no event will the Company be obligated to reimburse the Advisor for organizational and offering costs incurred in connection with the Follow-On Offering totaling in excess of 15% (including selling commissions, dealer manager fees, distribution fees and non-accountable due diligence expense allowance, but excluding acquisition expenses or any fees, if ever applicable) of the gross proceeds raised in the Follow-On Offering (excluding gross proceeds from the DRP). If the organizational and offering costs exceed such limits discussed above, within 60 days after the end of the month in which the Follow-On Offering terminates or is completed, the Advisor is obligated to reimburse the Company for any excess amounts. As long as the Company is subject to the Statement of Policy Regarding Real Estate Investment Trusts published by the North American Securities Administrators Association (“NASAA REIT Guidelines”), such limitation discussed above will also apply to any future public offerings. As of September 30, 2018, organizational and offering costs relating to the Follow-On Offering were 33.3% (approximately $3.3 million) of gross offering proceeds ($10.0 million), including selling commissions, dealer manager fees and distribution fees. Therefore, if the Follow-On Offering had been terminated on September 30, 2018, the Company would owe the Advisor $1.5 million and the Advisor would be liable for organizational and offering costs incurred by the Company of approximately $1.8 million. Approximately $0.7 million of organizational and offering costs the Advisor is liable for as of September 30, 2018 is deducted from "Due to Affiliates" and the remaining $1.1 million is included in "Other Assets, net" on the consolidated balance sheet.

Organizational and offering costs incurred as of September 30, 2018, including those incurred by the Company and due to the Advisor, for the Follow-On Offering are as follows:



	September 30, 2018
Cumulative offering costs	$	2,806
Cumulative organizational costs	$	510
Organizational and offering costs advanced by the Advisor	$	1,998
Organizational and offering costs paid by the Company	1,318
Adjustment to organizational and offering costs pursuant to the limitation:
Costs in excess of limit	(1,820		)
Organizational and offering costs incurred	$	1,496

Distribution Reinvestment Plan (DRP)

The Company has adopted the DRP, which allows stockholders to have dividends and other distributions otherwise distributable to them invested in additional shares of common stock. No sales commissions or dealer manager fees are paid on shares sold through the DRP. The Company may amend or terminate the DRP for any reason at any time upon 10 days' prior written notice to stockholders, which may be provided through the Company's filings with the SEC.

IPO Share Redemption Program

The Company had a share redemption program for holders of Class A, Class AA, and Class AAA shares ("IPO Shares") who held their shares for less than four years, which enabled IPO stockholders to sell their shares back to the Company in limited circumstances ("IPO Share Redemption Program"). On June 4, 2018, the board of directors of the Company approved the termination of the IPO Share Redemption Program effective as of July 5, 2018. In addition, effective as of such date, the board of directors amended and restated the New Share Redemption Program in order to allow stockholders of the IPO Shares to utilize the New Share Redemption Program. Accordingly, beginning in July 2018, stockholders of IPO Shares are able to continue to redeem at 100% of the NAV of the applicable share class, subject to the other limitations and conditions of the amended and restated New Share Redemption Program, as noted below. Redemption requests must be received by 4:00 p.m. (Eastern time) on the second to last business day of the applicable quarter.

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited; dollars in thousands unless otherwise noted and excluding per share amounts)

During the three and nine months ended September 30, 2018 and 2017, the Company redeemed shares of its outstanding common stock under the IPO Share Redemption Program as follows:



	Three Months Ended September 30,					Nine Months Ended September 30,
Period	2018			2017		2018		2017
Shares of common stock redeemed	585,525		⁽¹⁾	146,083		1,306,834		413,842
Weighted average price per share	$	9.65		$	9.06	$	9.36	$	9.18


(1)	Second quarter requests redeemed in the third quarter.

During the nine months ended September 30, 2018, the Company redeemed 1,306,834 shares of common stock under the IPO Share Redemption Program for approximately $12.2 million at a weighted average price per share of 9.36. Since inception, the Company has honored all redemption requests related to the IPO Share Redemption Program and has redeemed a total of 2,097,775 shares of common stock for approximately $19.6 million at a weighted average price per share of $9.34. The Company has funded all redemptions using proceeds from the sale of IPO Shares pursuant to the DRP. For more information regarding the IPO Share Redemption Program, see our Annual Report on Form 10-K for the year ended December 31, 2017.

New Share Redemption Program

In connection with the Follow-On Offering, the Company’s board of directors adopted the New Share Redemption Program for the New Shares (and IPO Shares that have been held for four years or longer). As noted above, subsequently, on June 4, 2018, the board of directors amended and restated the program to allow stockholders of the IPO Shares to utilize the New Share Redemption Program, effective as of July 5, 2018. Under the New Share Redemption Program, the Company will redeem shares as of the last business day of each quarter. The redemption price will be equal to the NAV per share for the applicable class generally on the 13th of the month prior to quarter end. Redemption requests must be received by 4:00 p.m. (Eastern time) on the second to last business day of the applicable quarter. Redemption requests exceeding the quarterly cap will be filled on a pro rata basis.With respect to any pro rata treatment, redemption requests following the death or qualifying disability of a stockholder will be considered first, as a group, followed by requests where pro rata redemption would result in a stockholder owning less than the minimum balance of $2,500 of shares of the Company's common stock, which will be redeemed in full to the extent there are available funds, with any remaining available funds allocated pro rata among all other redemption requests. All unsatisfied redemption requests must be resubmitted after the start of the next quarter, or upon the recommencement of the New Share Redemption Program, as applicable.

There are several restrictions under the New Share Redemption Program. Stockholders generally have to hold their shares for one year before submitting their shares for redemption under the program; however, the Company will waive the one-year holding period in the event of the death or qualifying disability of a stockholder. Shares issued pursuant to the DRP are not subject to the one-year holding period. In addition, the New Share Redemption Program generally imposes a quarterly cap on aggregate redemptions of the Company's shares equal to a value of up to 5% of the aggregate NAV of the outstanding shares as of the last business day of the previous quarter. As the value on the aggregate redemptions of the Company's shares is outside the Company's control, the 5% quarterly cap is considered to be temporary equity and is presented as the common stock subject to redemption on the accompanying consolidated balance sheets. As of September 30, 2018, the quarterly cap was approximately $37.4 million and $6.7 million of common stock was reclassified from common stock to accrued expenses and other liabilities in the consolidated balance sheet as of September 30, 2018.

During the three and nine months ended September 30, 2018 and 2017, the Company redeemed shares of its outstanding common stock under the New Share Redemption Program as follows:



	Three Months Ended September 30,			Nine Months Ended September 30,
Period	2018		2017	2018		2017
Shares of common stock redeemed	693,487		—	693,487		—
Weighted average price per share	$	9.62	—	$	9.62	—

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited; dollars in thousands unless otherwise noted and excluding per share amounts)

Since inception, the Company has honored all redemption requests related to the New Share Redemption Program and has redeemed a total of 693,487 shares of common stock for approximately $6.7 million at a weighted average price per share of $9.62.

The Company’s board of directors has the right to modify or suspend the New Share Redemption Program upon 30 days' notice at any time if it deems such action to be in the Company’s best interest. Any such modification or suspension will be communicated to stockholders through the Company’s filings with the SEC.

9. Noncontrolling Interests

Noncontrolling interests represent limited partnership interests in the Operating Partnership in which the Company is the general partner. The Operating Partnership issued 20,000 Class A limited partnership units for $10.00 per unit on February 11, 2014 to the Advisor in exchange for the initial capitalization of the Operating Partnership. On February 16, 2018, as elected by the Advisor, the Company issued 123,779 Operating Partnership units for $9.57 per unit to the Advisor for the 50% of the 2017 performance distribution allocation that the Advisor elected to receive in Class I limited partnership units. The remaining balance was paid in cash.

As of September 30, 2018, noncontrolling interests were approximately 0.18% of total shares outstanding and 0.16% of weighted average shares outstanding (both measures assuming limited partnership units were converted to common stock).

The Company evaluates individual noncontrolling interests for the ability to recognize the noncontrolling interest as permanent equity on the consolidated balance sheets at the time such interests are issued and on a continual basis. Any noncontrolling interest that fails to qualify as permanent equity will be reclassified as temporary equity and adjusted to the greater of (a) the carrying amount, or (b) its redemption value as of the end of the period in which the determination is made.

The limited partners of the Operating Partnership will have the right to cause the Operating Partnership to redeem their limited partnership units for cash equal to the value of an equivalent number of shares, or, at the Company’s option, the Company may purchase such limited partners' limited partnership units by issuing one share of common stock for each limited partnership unit redeemed. These rights may not be exercised under certain circumstances which could cause the Company to lose its REIT election. Furthermore, limited partners may generally exercise their redemption rights only after their limited partnership units have been outstanding for one year. The limited partnership units are reported on the consolidated balance sheets as noncontrolling interests.

The following summarizes the activity for noncontrolling interests for the nine months ended September 30, 2018 and the year ended December 31, 2017:



	Nine Months Ended September 30, 2018			Year Ended December 31, 2017
Beginning balance	$	76		$	84
Issuance of limited partnership units	1,185			—
Distributions to noncontrolling interests	(50		)	(11		)
Net (loss) income allocation	(1		)	3
Other comprehensive loss	(2		)	—
Ending balance	$	1,208		$	76

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited; dollars in thousands unless otherwise noted and excluding per share amounts)

10. Related Party Transactions

Summarized below are the related party costs incurred by the Company for the nine months ended September 30, 2018, and 2017, respectively, and amounts payable as of September 30, 2018 and December 31, 2017:



	Incurred for the Nine Months Ended September 30,				Payable as of September 30,			Payable as of December 31,
	2018		2017		2018			2017
Expensed
Corporate operating expenses	$	2,168	$	1,677	$	806		$	658
Asset management fees ⁽¹⁾	—		8,027		—			—
Property management fees	1,365		1,347		153			158
Performance distribution allocation	6,200		213		6,224			2,394
Advisory fees	6,970		273		784			762
Capitalized/Offering
Acquisition fees and expenses ⁽²⁾	—		1,099		—			—
Organization and offering expense	1,113		250		1,305		⁽⁶⁾	192
Other costs advanced by the Advisor	938		604		319			285
Selling commissions ⁽³⁾	66		1,127		—			—
Dealer Manager fees	11		393		—			—
Stockholder servicing fee ⁽⁴⁾	175		565		9,353			12,377
Advisor advances: ⁽⁵⁾
Organization and offering expenses	45		136		44			8
Dealer Manager fees	—		791		—			62
Total	$	19,051	$	16,502	$	18,988		$	16,896


(1)	As part of the Follow-On Offering, the Company's new management compensation structure no longer includes asset management fees.

(2)

Effective September 20, 2017, the Advisor is not entitled to acquisition fees, disposition fees or financing fees; provided, however, that the Advisor will receive the compensation set forth in the original advisory agreement for the Company’s investment in an approximately 1,000,000 square foot property located at 39000 Amrheim Road, Livonia, Michigan 48150 with a total transaction price of approximately $80.0 million.


(3)	On September 18, 2017, the Company and the Dealer Manager entered into a dealer manager agreement for the Follow-On Offering. See the "Dealer Manager Agreement" section below for details regarding selling commissions and dealer manager fees.

(4)

The Dealer Manager continues to receive a stockholder servicing fee with respect to Class AA shares as detailed in the Company's IPO prospectus. The stockholder servicing fee is paid quarterly and accrues daily in an amount equal to 1/365th of 1.0% of the NAV per share of the Class AA shares, up to an aggregate of 4% of the gross proceeds of Class AA shares sold. The Company will cease paying the stockholder servicing fee with respect to the Class AA shares at the earlier of (i) the date at which the aggregate underwriting compensation from all sources equals 10% of the gross proceeds from the sale of shares in Company's IPO (excluding proceeds from sales pursuant to the related DRP); (ii) the fourth anniversary of the last day of the fiscal quarter in which the Company's IPO terminated; (iii) the date that such Class AA share is redeemed or is no longer outstanding; and (iv) the occurrence of a merger, listing on a national securities exchange, or an extraordinary transaction.


(5)	Pursuant to the original advisory agreement, commencing November 2, 2015, the Company remained obligated to reimburse the Advisor for organizational and offering costs incurred after such date. Terms of the organizational and offering costs are included in the Company's 2016 Annual Report on Form 10-K filed on March 15, 2017.


(6)	Excludes amounts in excess of the 15% organization and offering costs limitation. See Note 8, Equity, for additional details.

On September 20, 2017, an affiliated entity of the Sponsor purchased 263,992 New Shares for $2.5 million. As of September 30, 2018, the total outstanding shares owned by affiliates (including DRP) was 563,440.

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited; dollars in thousands unless otherwise noted and excluding per share amounts)

Advisory Agreement

In connection with the Follow-On Offering, on September 20, 2017, the Company entered into the Advisory Agreement with the Advisor and the Operating Partnership. The Advisory Agreement is substantially similar to the Original Advisory Agreement, except that the Company will not pay the Advisor any acquisition, financing or other similar fees from proceeds raised in the Follow-On Offering in connection with making investments and will instead pay the Advisor an advisory fee that will be payable in arrears on a monthly basis and accrues daily in an amount equal to 1/365th of 1.25% of the NAV for each class of common stock for each day.

Performance Distribution Allocation

So long as the Advisory Agreement has not been terminated (including by means of non-renewal), the Advisor will hold a special limited partner interest in the Operating Partnership that entitles it to receive a distribution from the Operating Partnership equal to 12.5% of the total return, subject to a 5.5% hurdle amount and a high water mark, with a catch-up (terms of the performance distribution allocation are included in the Company's 2017 Annual Report on Form 10-K filed on March 9, 2018). Such distribution will be made annually and accrue daily. On February 16, 2018, the Company paid in cash approximately $1.2 million and issued approximately $1.2 million in Class I limited partnership units to the Advisor. The Advisor elected to receive 50% in cash and the remaining in Class I limited partnership units.

Operating Expenses

The Advisor and its affiliates are entitled to reimbursement for certain expenses incurred on behalf of the Company in connection with providing administrative services, including related personnel costs; provided, however, the Advisor must reimburse the Company for the amount, if any, by which total operating expenses (as defined), including advisory fees, paid during the previous 12 months then ended exceeded the greater of: (i) 2% of the Company’s average invested assets for that 12 months then ended; or (ii) 25% of the Company’s net income, before any additions to reserves for depreciation, bad debts or other expenses connected with the acquisition and disposition of real estate interests and before any gain from the sale of the Company’s assets, for that fiscal year, unless the Company’s board of directors has determined that such excess expenses were justified based on unusual and non-recurring factors. The Advisor may waive or defer all or a portion of these reimbursements or elect to receive Class I shares or Class I units of the Operating Partnership in lieu of these reimbursements at any time and from time to time, in its sole discretion. For the nine months ended September 30, 2018 and 2017, the Company’s total operating expenses did not exceed the 2%/25% guideline.

The Company reimbursed the Advisor and its affiliates a portion of the compensation paid by the Advisor and its affiliates for the Company's principal financial officer, Javier F. Bitar, executive vice president, David C. Rupert, and vice president and secretary, Howard S. Hirsch of approximately $0.6 million and $0.5 million, which is partially included in offering costs with the remaining amount included in corporate operating expenses to affiliates for the nine months ended September 30, 2018 and 2017, respectively, for services provided to the Company, for which the Company does not pay the Advisor a fee.

In addition, the Company incurred approximately $0.07 million and $0.1 million in reimbursable expenses to the Advisor for services provided to the Company by certain of its other executive officers for each of the nine months ended September 30, 2018 and 2017, respectively. The reimbursable expenses include components of salaries, bonuses, benefits and other overhead charges and are based on the percentage of time each executive officer spends on the Company's affairs.

Dealer Manager Agreement

The Company entered into a dealer manager agreement (the "Dealer Manager Agreement") and associated form of participating dealer agreement with the Dealer Manager. The terms of the Dealer Manager Agreement are substantially similar to the terms of the dealer manager agreement from the Company's IPO, except as it relates to the share classes offered and the fees to be received by the Dealer Manager (terms of the Dealer Manager Agreement are included in the Company's 2017 Annual Report on Form 10-K filed on March 9, 2018).

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited; dollars in thousands unless otherwise noted and excluding per share amounts)

Distribution Fees

Subject to Financial Industry Regulatory Authority, Inc.'s limitations on underwriting compensation, under the Dealer Manager Agreement the Company will pay the Dealer Manager a distribution fee for ongoing services rendered to stockholders by participating broker-dealers or broker-dealers servicing investors’ accounts, referred to as servicing broker-dealers. The fee accrues daily and is paid monthly in arrears and is calculated based on the average daily NAV for the applicable month (the “Average NAV”). The distribution fees for the different share classes are as follows: (i) with respect to the outstanding Class T shares equal to 1/365th of 1.0% of the Average NAV of the outstanding Class T shares for each day, consisting of an advisor distribution fee of 1/365th of 0.75% and a dealer distribution fee of 1/365th of 0.25% of the Average NAV of the Class T shares for each day; (ii) with respect to the outstanding Class S shares equal to 1/365th of 1.0% of the Average NAV of the outstanding Class S shares for each day; and (iii) with respect to the outstanding Class D shares equal to 1/365th of 0.25% of the Average NAV of the outstanding Class D shares for each day. The Company will not pay a distribution fee with respect to the outstanding Class I shares.

The distribution fees will accrue daily and be paid monthly in arrears. The Dealer Manager will reallow the distribution fees to participating broker-dealers and servicing broker-dealers for ongoing services performed by such broker-dealers, and will retain any such distribution fees to the extent a broker-dealer is not eligible to receive them for failure to provide such services. The Dealer Manager will waive the distribution fees for any purchases by affiliates of the Company.

The Company will cease paying the distribution fee with respect to any Class T share, Class S share or Class D share held in a stockholder's account at the end of the month in which the Dealer Manager in conjunction with the transfer agent determines that total selling commissions, dealer manager fees and distribution fees paid with respect to all shares from the Follow-On Offering held by such stockholder within such account would exceed, in the aggregate, 9.0% (or a lower limit as set forth in any applicable agreement between the Dealer Manager and a participating broker-dealer) of the gross proceeds from the sale of such shares (including the gross proceeds of any shares issued under the DRP with respect thereto). At the end of such month, such Class T share, Class S share or Class D share (and any shares issued under the DRP with respect thereto) will convert into a number of Class I shares (including any fractional shares) with an equivalent NAV as such share.

In addition, the Company will cease paying the distribution fee on the Class T shares, Class S shares and Class D shares on the earlier to occur of the following: (i) a listing of the Company's shares, (ii) a merger or consolidation with or into another entity, or the sale or other disposition of all or substantially all of the Company's assets, including any liquidation of the Company or (iii) the date following the completion of the primary portion of the Follow-On Offering on which, in the aggregate, underwriting compensation from all sources in connection with the Follow-On Offering, including selling commissions, dealer manager fees, the distribution fee and other underwriting compensation, is equal to 9% of the gross proceeds from the Company's primary offering.

Conflicts of Interest

The Sponsor, Advisor, Property Manager and their officers and certain of their key personnel and their respective affiliates currently serve as key personnel, advisors, managers and sponsors or co-sponsors to some or all of 12 other programs affiliated with the Sponsor, including Griffin Capital Essential Asset REIT, Inc. ("GCEAR"), Griffin-American Healthcare REIT III, Inc. ("GAHR III"), Griffin-American Healthcare REIT IV, Inc. ("GAHR IV") and Phillips Edison Grocery Center REIT III, Inc. ("PECO III"), all of which are publicly-registered, non-traded real estate investment trusts, and Griffin Institutional Access Real Estate Fund ("GIA Real Estate Fund") and Griffin Institutional Access Credit Fund ("GIA Credit Fund"), both of which are non-diversified, closed-end management investment companies that are operated as interval funds under the Investment Company Act of 1940, as amended (the "1940 Act"). Because these persons have competing demands on their time and resources, they may have conflicts of interest in allocating their time between the Company’s business and these other activities.

Some of the material conflicts that the Advisor, the Dealer Manager or its affiliates will face are (1) competing demand for time of the Advisor’s executive officers and other key personnel from the Sponsor and other affiliated entities; (2) determining if certain investment opportunities should be recommended to the Company or another program sponsored or co-sponsored by the Sponsor; and (3) influence of the fee structure under the Advisory Agreement and distribution structure of the operating partnership agreement that could result in actions not necessarily in the long-term best interest of the Company's stockholders. The board of directors has adopted the Sponsor’s acquisition allocation policy as to the allocation of acquisition opportunities among the Company and GCEAR, which is as follows:

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited; dollars in thousands unless otherwise noted and excluding per share amounts)

The Sponsor will allocate potential investment opportunities to the Company and GCEAR based on the following factors:


•	the investment objectives of each program;


•	the amount of funds available to each program;


•	the financial impact of the acquisition on each program, including each program’s earnings and distribution ratios;


•	various strategic considerations that may impact the value of the investment to each program;


•	the effect of the acquisition on concentration/diversification of each program’s investments; and


•	the income tax effects of the purchase to each program.

In the event all acquisition allocation factors have been exhausted and an investment opportunity remains equally suitable for the Company and GCEAR, the Sponsor will offer the investment opportunity to the REIT that has had the longest period of time elapse since it was offered an investment opportunity.

If the Sponsor no longer sponsors GCEAR, then, in the event that an investment opportunity becomes available that is suitable, under all of the factors considered by the Advisor, for both the Company and one or more other entities affiliated with the Sponsor, the Sponsor has agreed to present such investment opportunities to the Company first, prior to presenting such opportunities to any other programs sponsored by or affiliated with the Sponsor. In determining whether or not an investment opportunity is suitable for more than one program, the Advisor, subject to approval by the board of directors, shall examine, among others, the following factors:


•	anticipated cash flow of the property to be acquired and the cash requirements of each program;


•	effect of the acquisition on diversification of each program’s investments;


•	policy of each program relating to leverage of properties;


•	income tax effects of the purchase to each program;


•	size of the investment;


•	no significant increase in the cost of financing; and


•	amount of funds available to each program and the length of time such funds have been available for investment.

Economic Dependency

The Company will be dependent on the Advisor and the Dealer Manager for certain services that are essential to the Company, including the sale of the Company's shares of common stock available for issue, the identification, evaluation, negotiation, purchase and disposition of properties and other investments, management of the daily operations of the Company’s real estate portfolio, and other general and administrative responsibilities. In the event that these companies are unable to provide the respective services, the Company will be required to obtain such services from other resources.

11. Commitments and Contingencies

Litigation

From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. The Company is not a party to any material legal proceedings, nor is the Company aware of any pending or threatened litigation that would have a material adverse effect on the Company’s business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.

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GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited; dollars in thousands unless otherwise noted and excluding per share amounts)

12. Declaration of Distributions

During the quarter ended September 30, 2018, the Company paid cash distributions in the amount of $0.0015068493 per day, before adjustments of class-specific expenses, per Class T share, Class S share, Class D share, Class I share, Class A share, Class AA share and Class AAA share on the outstanding shares of common stock payable to stockholders of record at the close of business on each day during the period from July 1, 2018 through September 30, 2018. Such distributions payable to each stockholder of record were paid on such date after the end of each month during the period as determined by the Company's Chief Executive Officer.

On September 12, 2018, the Company’s board of directors declared cash distributions in the amount of $0.0015068493 per day, subject to adjustments for class-specific expenses, per Class T share, Class S share, Class D share, Class I share, Class A share, Class AA share, and Class AAA on the outstanding shares of common stock payable to stockholders of record at the close of business on each day during the period from October 1, 2018 through December 31, 2018. Such distributions payable to each stockholder of record will be paid on such date after the end of each month during the period as determined by the Company's Chief Executive Officer.

13. Subsequent Events

Offering Status

As of November 7, 2018, the Company had issued 7,372,224 shares of the Company’s common stock pursuant to the DRP and Follow-On Offering for approximately $70.2 million.

Redemptions

On October 1, 2018, the Company paid approximately $6.7 million at a weighted average price per share of $9.62 related to redemption payables.

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ITEM 2. 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 unaudited consolidated financial statements and the notes thereto contained in Part I of this Quarterly Report on Form 10-Q.

Overview

Griffin Capital Essential Asset REIT II, Inc., a Maryland corporation (the "Company," "we," "us," "our"), was formed on November 20, 2013 under the Maryland General Corporation Law and qualified as a REIT commencing with the year ended December 31, 2015. We were organized primarily with the purpose of acquiring single tenant net lease properties that are considered essential to the occupying tenant, and expect to use a substantial amount of the net proceeds from our Follow-On Offering to invest in these properties. We have no employees and are externally advised and managed by our Advisor. Our year end is December 31.

In September 2016, our board of directors approved the close of the primary portion of the IPO effective January 20, 2017; however, we continued to offer shares pursuant to our DRP under our IPO registration statement through May 2017. We are currently offering shares pursuant to our DRP as part of our Follow-On Offering. The DRP may be terminated at any time upon 10 days’ prior written notice to stockholders, which may be provided through our filings with the SEC.

On September 20, 2017, we commenced our Follow-On Offering of up to $2.2 billion of shares, consisting of up to $2.0 billion of shares in our primary offering and $0.2 billion of shares pursuant to the DRP. We reclassified all Class T and Class I shares sold in the IPO as "Class AA" and "Class AAA" shares, respectively. See Note 10, Related Party Transactions, for additional details on changes in fees to affiliates.

On August 16, 2018, in connection with a potential strategic alternative our board of directors is contemplating, our board approved the temporary suspension of the primary portion of our Follow-On Offering, effective August 17, 2018, to allow the special committee of the board to evaluate a potential strategic alternative. Our board of directors intends to recommence the Follow-On Offering in the retail marketplace, if appropriate and at the appropriate time.

As of September 30, 2018, our real estate portfolio consisted of 27 properties (35 buildings) consisting substantially of office, industrial, distribution, and data center facilities with a combined acquisition value of $1.1 billion, including the allocation of the purchase price to above and below-market lease valuation, encompassing approximately 7.3 million square feet. Our annualized net rent for the 12-month period subsequent to September 30, 2018 was approximately $78.0 million with approximately 75.8% generated by properties leased to tenants and/or guarantors or whose non-guarantor parent companies have investment grade or what management believes are generally equivalent ratings. Our rentable square feet under lease as of September 30, 2018 was 100%, with a weighted average remaining lease term of 9.6 years with average annual rent increases of approximately 2.4%, and a debt to total real estate acquisition value of 43.7%.

NAV and NAV per Share Calculation

In our Follow-On Offering, we offered the New Shares with NAV-based pricing to the public. The share classes have different selling commissions, dealer manager fees and ongoing distribution fees. Our board of directors, including a majority of the independent directors, has adopted valuation procedures that contain a comprehensive set of methodologies to be used in connection with the calculation of the NAV.

As a public company, we are required to issue financial statements generally based on historical cost in accordance with GAAP as applicable to our financial statements. To calculate our NAV for the purpose of establishing a purchase and redemption price for our shares, we have adopted a model which adjusts the value of certain of our assets from historical cost to fair value. As a result, our NAV may differ from the amount reported as stockholder’s equity on the face of our financial statements prepared in accordance with GAAP. When the fair value of our assets is calculated for the purposes of determining our NAV per share, the calculation is done using the fair value methodologies detailed within the Financial Accounting Standards Board ("FASB") Accounting Standards Codification under Topic 820, Fair Value Measurements and Disclosures. However, our valuation procedures and our NAV are not subject to GAAP and will not be subject to independent audit. Our NAV may differ from equity reflected on our audited financial statements, even if we are required to adopt a fair value basis of accounting for GAAP financial statement purposes in the future. Furthermore, no rule or regulation requires that we calculate NAV in a certain way. Although we believe our NAV calculation methodologies are consistent with standard industry

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principles, there is no established practice among public REITs, whether listed or not, for calculating NAV in order to establish a purchase and redemption price. As a result, other public REITs may use different methodologies or assumptions to determine NAV.

Our NAV is calculated for the New Shares and our IPO Shares by ALPS Fund Services, Inc. (the "NAV Accountant"), a third-party firm approved by our board of directors, including a majority of our independent directors, after the end of each business day that the New York Stock Exchange is open for unrestricted trading. Our board of directors, including a majority of our independent directors, may replace our NAV Accountant with another party, including our Advisor, if it is deemed appropriate to do so.

At the end of each such trading day, before taking into consideration accrued distributions or class-specific expense accruals, any change in the aggregate company NAV (whether an increase or decrease) is allocated among each class of shares based on each class’s relative percentage of the previous aggregate company NAV plus issuances of shares that were effective the previous trading day. Changes in the aggregate company NAV reflect factors, including, but not limited to, unrealized/realized gains (losses) on the value of our real property portfolio, any applicable organization and offering costs and any expense reimbursements, real estate-related liabilities, and daily accruals for income and expenses (including the allocation/accrual of any performance distribution and accruals for advisory fees and distribution fees) and distributions to investors. Changes in our aggregate company NAV also include material non-recurring events, such as capital expenditures and material property acquisitions and dispositions.

Our most significant source of net income is property income. We accrue estimated income and expenses on a daily basis based on annual budgets as adjusted from time to time to reflect changes in the business throughout the year. For the first month following a property acquisition, we calculate and accrue portfolio income with respect to such property based on the performance of the property before the acquisition and the contractual arrangements in place at the time of the acquisition, as identified and reviewed through our due diligence and underwriting process in connection with the acquisition. For the purpose of calculating our NAV, all organizational and offering costs reduce NAV as part of our estimated income and expense accrual. On a periodic basis, our income and expense accruals are adjusted based on information derived from actual operating results.

Our liabilities are included as part of our NAV calculation generally based on GAAP. Our liabilities include, without limitation, property-level mortgages, accrued distributions, the fees payable to the Advisor and the dealer manager, accounts payable, accrued company-level operating expenses, any company or portfolio-level financing arrangements and other liabilities.

Following the calculation and allocation of changes in the aggregate company NAV as described above, NAV for each share class is adjusted for accrued distributions and the accrued distribution fee, to determine the current day’s NAV. Selling commissions and dealer manager fees, which are effectively paid by purchasers of Class T and Class S shares in the Follow-On Offering at the time of purchase, because the purchase price of such shares is equal to the applicable NAV per share plus the applicable selling commission and/or dealer manager fee, will generally have no effect on the NAV of any class.

NAV per share for each class is calculated by dividing such class’s NAV at the end of each trading day by the number of shares outstanding for that class on such day.

Under GAAP, we accrue the full cost of the distribution fee as an offering cost for the New Shares up to the 9.0% limit at the time such shares are sold. For purposes of NAV, we recognize the distribution fee as a reduction of NAV on a daily basis as such fee is accrued. We intend to reduce the net amount of distributions paid to stockholders by the portion of the distribution fee accrued for such class of shares, so that the result is that although the obligation to pay future distribution fees is accrued on a daily basis and included in the NAV calculation, it is not expected to impact the NAV of the shares because of the adjustment to distributions.

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Set forth below are the components of the daily NAV as of September 30, 2018 and June 30, 2018, calculated in accordance with our valuation procedures (in thousands, except share and per share amounts):



	As of September 30, 2018			As of June 30, 2018
Gross Real Estate Asset Value	$	1,225,400		$	1,219,280
Other Assets, net	11,567			18,252
Mortgage Debt	(490,055		)	(490,055		)
NAV	$	746,912		$	747,477

Total Shares Outstanding	77,620,432			77,783,486
NAV per share	$	9.62		$	9.61

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Our independent valuation firm utilized the direct capitalization approach for 3 of the 27 properties in our portfolio and the discounted cash flow approach for the remaining 24 properties in our portfolio with a weighted average of approximately 9.31 years remaining on their existing leases. The following summarizes the range of overall capitalization rates for the 27 properties using the cash flow discount rates:



	Range		Weighted Average
Overall Capitalization Rate (direct capitalization approach)	5.25%	6.75%	5.47%
Terminal Capitalization Rate (discounted cash flow approach)	5.25%	9.25%	6.51%
Cash Flow Discount Rate (discounted cash flow approach)	6.00%	11.50%	7.28%

The following table sets forth the quarterly changes to the components of NAV for the Company and the reconciliation of NAV changes for each class of shares:



	Share Classes
	Class T			Class S			Class D			Class I			IPO				OP Units			Total

NAV as of June 30, 2018	$	728,999		$	2,632		$	157,881		$	3,893,132		$	741,310,668			$	1,383,852		$	747,477,164
Fund level changes to NAV
Realized/unrealized gain on net assets	29,277			46			3,070			117,303			12,738,169				23,786			12,911,651
Dividend accrual	(20,264		)	(31		)	(2,457		)	(98,739		)	(10,689,429		)		(19,932		)	(10,830,852		)
Class specific changes to NAV
Stockholder servicing fees/distribution fees	(4,450		)	(6		)	(113		)	—			(1,070,236		)		(1,999		)	(1,076,804		)
NAV as of September 30, 2018 before share/unit sale/redemption activity	$	733,562		$	2,641		$	158,381		$	3,911,696		$	742,289,172			$	1,385,707		$	748,481,159
Unit sale/redemption activity- Dollars
Amount sold	1,452,764			31			26,284			3,838,714			5,471,271				—			10,789,064
Amount redeemed and to be paid	—			—			—			—			(12,358,277		)	⁽²⁾	—			(12,358,277		)
NAV as of September 30, 2018	$	2,186,326		$	2,672		$	184,665		$	7,750,410		$	735,402,166			$	1,385,707		$	746,911,946
Shares/units outstanding as of June 30, 2018	75,490			273			16,379			403,702			77,143,863				143,779			77,783,486
Shares/units sold	150,311			3			2,724			397,928			569,034				—			1,120,000
Shares/units redeemed	—			—			—			—			(1,283,055		)		—			(1,283,055		)
Shares/units outstanding as of September 30, 2018⁽¹⁾	225,801			276			19,103			801,630			76,429,842				143,779			77,620,431
NAV per share/unit as of June 30, 2018	$	9.66		$	9.65		$	9.64		$	9.64		$	9.61
Change in NAV per share/unit	0.02			0.03			0.03			0.03			0.01
NAV per share as of September 30, 2018	$	9.68		$	9.68		$	9.67		$	9.67		$	9.62


(1)	Excludes DRP shares issued on October 1, 2018.


(2)	Amount includes second quarter redemptions paid of $5,686,980 and third quarter 2018 redemptions paid on October 1, 2018 of $6,671,297.

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Revenue Concentration

The percentage of net rent for the 12-month period subsequent to September 30, 2018, by state, based on the respective in-place leases, is as follows (dollars in thousands):



State	Net Rent (unaudited)		Number of Properties	Percentage of Net Rent
Ohio	$	9,986	4	12.8	%
Illinois	8,810		2	11.3
California	8,714		3	11.2
Alabama ⁽¹⁾	8,477		1	10.9
New Jersey	8,240		2	10.6
Arizona	7,514		2	9.6
Nevada	6,906		2	8.9
Texas	4,150		1	5.3
Oregon	3,291		1	4.2
North Carolina	2,732		2	3.5
All Others ⁽²⁾	9,151		7	11.7
Total	$	77,971	27	100.0	%


(1)	Includes escrow proceeds of approximately $0.1 million to be received during the 12-month period subsequent to September 30, 2018.


(2)	All others represent 3.5% or less of total net rent on an individual basis.

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The percentage of net rent for the 12-month period subsequent to September 30, 2018, by industry, based on the respective in-place leases, is as follows (dollars in thousands):



Industry ⁽¹⁾	Net Rent (unaudited)		Number of Lessees	Percentage of Net Rent
Consumer Services	$	12,967	4	16.6	%
Utilities ⁽²⁾	10,413		2	13.4
Capital Goods	10,385		6	13.3
Technology Hardware & Equipment	9,752		3	12.5
Diversified Financials	5,863		1	7.5
Retailing	5,731		1	7.4
Banks	5,603		2	7.2
Energy	4,150		1	5.3
Consumer Durables and Apparel	3,291		1	4.2
Transportation	3,161		2	4.1
Pharmaceuticals, Biotechnology & Life Sciences	2,867		1	3.7
All Others⁽³⁾	3,788		3	4.8
Total	$	77,971	27	100.0	%


(1)	Industry classification based on the Global Industry Classification Standards.


(2)	Includes escrow proceeds of approximately $0.1 million to be received during the 12-month period subsequent to September 30, 2018.


(3)	All others represent 3.5% or less of total net rent on an individual basis.

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The percentage of net rent for the 12-month period subsequent to September 30, 2018, by tenant, based on the respective in-place leases, is as follows (dollars in thousands):



Tenant	Net Rent (unaudited)		Percentage of Net Rent
Southern Company Services, Inc. ⁽¹⁾	$	8,477	10.9	%
American Express Travel Related Services Company, Inc.	5,863		7.5
Amazon.com.dedc, LLC	5,731		7.4
Bank of America, N.A.	5,604		7.2
Wyndham Worldwide Operations	5,373		6.9
IGT	4,754		6.1
3M Company	4,521		5.8
Zebra Technologies Corporation	4,289		5.5
Wood Group Mustang, Inc.	4,150		5.3
Nike	3,291		4.2
Others ⁽²⁾	25,918		33.2
Total	$	77,971	100.0	%


(1)	Includes escrow proceeds of approximately $0.1 million to be received during the 12-month period subsequent to September 30, 2018.


(2)	All others account for 4% or less of total net rent on an individual basis.

The tenant lease expirations by year based on net rent for the 12-month period subsequent to September 30, 2018 are as follows (dollars in thousands)



Year of Lease Expiration	Net Rent (unaudited)		Number of Lessees	Approx. Square Feet	Percentage of Net Rent
2021	$	8,895	3	747,000	11.4	%
2022	1,198		1	312,000	1.5
2023	6,908		2	658,600	8.9
2024	8,952		4	571,500	11.5
2025	7,509		5	728,700	9.6
2026 and beyond ⁽¹⁾	44,509		12	4,322,800	57.1
Total	$	77,971	27	7,340,600	100.0	%


(1)	Includes escrow proceeds of approximately $0.1 million to be received during the 12-month period subsequent to September 30, 2018.

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Critical Accounting Policies

We have established accounting policies which conform to GAAP as contained in the FASB ASC. 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.

For further information about our critical accounting policies, refer to our consolidated financial statements and notes thereto for the year ended December 31, 2017 included in our Annual Report on Form 10-K filed with the SEC. There have been no significant changes to our policies during the nine months ended September 30, 2018.

Recently Issued Accounting Pronouncements

See Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to the consolidated financial statements.

Results of Operations

Overview

We are not aware of any material trends or uncertainties, 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 our Annual Report on Form 10-K for the year ended December 31, 2017.

Same Store Analysis

Comparison of the Three Months Ended September 30, 2018 and 2017

For the quarter ended September 30, 2018, our "Same Store" portfolio consisted of 27 properties with an acquisition value of $1.1 billion. Our "Same Store" portfolio includes properties which were held for a full period for all periods presented.

The following table provides a comparative summary of the results of operations for 27 properties for the three months ended September 30, 2018 and 2017 (dollars in thousands):



	Three Months Ended September 30,				Increase/(Decrease)			Percentage Change
	2018		2017		Increase/(Decrease)			Percentage Change
Rental income	$	21,928	$	22,926	$	(998	)	(4	)%
Property expense recoveries	4,785		4,423		362			8	%
Property operating expenses	1,866		1,787		79			4	%
Property tax expense	2,449		2,511		(62		)	(2	)%
Depreciation and amortization	11,252		11,236		16			0	%

Rental Income

The decrease in rental income was primarily related to an expiring rent reimbursement at one property.

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Property Expense Recoveries

The increase in property expense recoveries of approximately $0.4 million compared to the same period a year ago is primarily the result of higher operating expenses and a prior year common area maintenance reconciliation.

Comparison of the Nine Months Ended September 30, 2018 and 2017

For the nine months ended September 30, 2018, our "Same Store" portfolio consisted of 25 properties with an acquisition value of $1.1 billion. Our "Same Store" portfolio includes properties which were held for a full period for all periods presented.

The following table provides a comparative summary of the results of operations for 25 properties for the nine months ended September 30, 2018 and 2017 (dollars in thousands):



	Nine Months Ended September 30,				Increase/(Decrease)			Percentage Change
	2018		2017		Increase/(Decrease)			Percentage Change
Rental income	$	63,433	$	65,628	$	(2,195	)	(3	)%
Property expense recoveries	13,363		12,252		1,111			9	%
Property operating expenses	5,491		4,872		619			13	%
Property tax expense	7,078		6,930		148			2	%
Depreciation and amortization	31,824		31,710		114			0	%

Rental Income

The decrease in rental income was primarily related to an expiring rent reimbursement at one property.

Property Expense Recoveries

The increase in property expense recoveries of approximately $1.1 million compared to the same period a year ago is primarily the result of higher operating expenses and a prior year common area maintenance reconciliations.

Property Operating Expenses

The increase in property operating expense of $0.6 million compared to the same period a year ago is primarily the result of higher property expenses at one property due to adverse weather conditions and timing of repair and maintenance costs incurred during the current year.

Portfolio Analysis

As of both September 30, 2018 and 2017, we owned 27 properties.

Comparison of the Three and Nine Months Ended September 30, 2018 and 2017

We own 27 properties as of September 30, 2018. The variances as it relates to advisory fees, performance distribution allocation expenses and asset management fees from our results of operations for the three and nine months ended September 30, 2018 compared to the same period in the prior year, are primarily a result of our new management compensation structure related to our Follow-On Offering.

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The following tables provide summary information about our results of operations for the three and nine months ended September 30, 2018 and 2017 (dollars in thousands):



	Three Months Ended September 30,				Increase/(Decrease)			Percentage Change
	2018		2017		Increase/(Decrease)			Percentage Change
Rental income	$	21,928	$	22,926	$	(998	)	(4	)%
Property expense recoveries	4,785		4,423		362			8	%
Property operating expense	1,866		1,787		79			4	%
Property tax expense	2,449		2,511		(62		)	(2	)%
Property management fees to affiliates	456		452		4			1	%
Asset management fees to affiliates	—		2,485		(2,485		)	(100	)%
Advisory fees to affiliates	2,346		273		2,073			759	%
Performance distribution allocation to affiliates	2,084		213		1,871			878	%
Corporate operating expenses to affiliates	806		566		240			42	%
General and administrative expenses	775		831		(56		)	(7	)%
Depreciation and amortization	11,252		11,236		16			0	%
Interest expense	5,464		3,997		1,467			37	%
Other income, net	28		101		(73		)	(72	)%

Rental Income

The decrease in rental income was primarily related to an expiring rent reimbursement at one property.

Corporate Operating Expenses to Affiliates

Corporate operating expenses to affiliates for the three months ended September 30, 2018 increased by approximately $0.2 million compared to the same period a year ago primarily as a result of an increase in allocated personnel and rent costs by our Advisor.

Interest Expense

The increase in interest expense for the three months ended September 30, 2018 was primarily related to (1) approximately $2.7 million related to the execution of the BofA/KeyBank loan during the prior quarter; (2) approximately $1.0 million related to the execution of the term loan; offset by a $2.2 million decrease in the principal balance of the Revolving Credit Facility.

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	Nine Months Ended September 30,				Increase/(Decrease)			Percentage Change
	2018		2017		Increase/(Decrease)			Percentage Change
Rental income	$	65,854	$	67,211	$	(1,357	)	(2	)%
Property expense recoveries	13,945		12,671		1,274			10	%
Property operating expense	5,598		4,886		712			15	%
Property tax expense	7,521		7,244		277			4	%
Asset management fees to affiliates	—		8,026		(8,026		)	(100	)%
Property management fees to affiliates	1,365		1,347		18			1	%
Advisory fees to affiliates	6,970		273		6,697			2,453	%
Performance distribution allocation to affiliates	6,200		213		5,987			2,811	%
General and administrative expenses	2,446		2,736		(290		)	(11	)%
Corporate operating expenses to affiliates	2,168		1,679		489			29	%
Depreciation and amortization	33,383		32,710		673			2	%
Interest expense	14,775		11,445		3,330			29	%
Other (expense) income, net	196		265		(69		)	(26	)%

Rental Income

The decrease in rental income was primarily related to an expiring rent reimbursement at one property.

Property Expense Recoveries

The increase in property expense recoveries of $1.3 million compared to the same period a year ago is primarily the result of higher operating expenses and a prior year common area maintenance reconciliation.

Property Operating Expense

The increase in property operating expense of $0.7 million compared to the same period a year ago is primarily the result of higher property expenses at one property due to adverse weather conditions and timing of repair and maintenance costs incurred during the current year.

General and Administrative

Corporate operating expenses to affiliates for the nine months ended September 30, 2018 decreased by approximately $0.3 million compared to the same period a year ago primarily as a result of timing of restricted stock vesting.

Corporate Operating Expenses to Affiliates

Corporate operating expenses to affiliates for the nine months ended September 30, 2018 increased by approximately $0.5 million compared to the same period a year ago primarily as a result of an increase in allocated personnel and rent costs by our Advisor.

Interest Expense

The increase in interest expense for the nine months ended September 30, 2018 was primarily related to approximately (1) $4.7 million related to the execution of the BofA/KeyBank fixed rate loan during the current year; (2) approximately $1.0 million related to the execution of the Revolving Credit Facility Term Loan; offset by a (1) $1.8 million decrease in the principal balance of the Revolving Credit Facility; and (2) interest rate swap expense of approximately $0.7 million.

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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

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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

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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 nine months ended September 30, 2018 and 2017 (dollars in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Net (loss) income	$	(757	)	$	3,099		$	(431	)	$	9,588
Adjustments:
Depreciation of building and improvements	5,153			5,137			15,284			15,053
Amortization of leasing costs and intangibles	6,099			6,099			18,099			17,657
FFO	$	10,495		$	14,335		$	32,952		$	42,298
Distributions to noncontrolling interests	(20		)	(3		)	(51		)	(8		)
FFO, net of noncontrolling interest distributions	$	10,475		$	14,332		$	32,901		$	42,290
Reconciliation of FFO to AFFO
FFO, net of noncontrolling interest distributions	$	10,475		$	14,332		$	32,901		$	42,290
Adjustments:
Revenues in excess of cash received, net	(1,412		)	(2,857		)	(4,544		)	(8,006		)
Amortization of below market rent, net	(1,183		)	(1,183		)	(3,511		)	(3,389		)
Unrealized loss (gain) on derivatives	—			19			77			60
Performance distribution adjustment	521			—			3,607			—
AFFO	$	8,401		$	10,311		$	28,530		$	30,955

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Liquidity and Capital Resources

Long-Term Liquidity and Capital Resources

On a long-term basis, our principal demands for funds will be for property acquisitions, either directly or through entity interests, for the payment of operating expenses and distributions, and for the payment of interest on our outstanding indebtedness and other investments. Generally, cash needs for items, other than property acquisitions, will be met from operations and proceeds received from offerings. However, there may be a delay between the sale of our shares and our purchase of properties that could result in a delay in the benefits to our stockholders, if any, of returns generated from our investment operations. Our Advisor will evaluate potential property acquisitions and engage in negotiations with sellers on our behalf. After a purchase contract is executed that contains specific terms, the property will not be purchased until the successful completion of due diligence, which includes review of the title insurance commitment, an appraisal and an environmental analysis. In some instances, the proposed acquisition will require the negotiation of final binding agreements, which may include financing documents. During this period, we may decide to temporarily invest any unused proceeds from our public offerings in certain investments that could yield lower returns than the properties. These lower returns may affect our ability to make distributions.

Offerings

On January 20, 2017, we closed the primary portion of our IPO; however, we continued to offer shares pursuant to our DRP under our IPO registration statement through May 2017. We are currently offering shares pursuant to our DRP as part of our Follow-On Offering. The DRP may be terminated at any time upon 10 days’ prior written notice to stockholders, which may be provided through our filings with the SEC.

On September 20, 2017, we commenced our Follow-On Offering of up to $2.2 billion of shares, consisting of up to $2.0 billion of shares in the primary portion of our Follow-On Offering and $0.2 billion of shares pursuant to the DRP. On September 20, 2017, we reclassified all Class T shares sold in the IPO as "Class AA" shares and all Class I shares sold in the IPO as "Class AAA" shares.

On August 16, 2018, in connection with a potential strategic alternative our board of directors is contemplating, our board approved the temporary suspension of the primary portion of our Follow-On Offering, effective August 17, 2018, to allow the special committee of the board to evaluate the potential strategic alternative. Our board of directors intends to recommence the Follow-On Offering in the retail marketplace, if appropriate and at the appropriate time.

The following table summarizes shares issued and gross proceeds received for each share class as of September 30, 2018 (dollars in thousands):



	Class
	T		S		D		I		A		AA		AAA		Total
Gross proceeds from primary portion of offerings	$	2,245	$	3	$	182	$	7,538	$	240,780	$	474,858	$	8,381	$	733,987
Gross proceeds from DRP	$	16	$	—	$	2	$	158	$	25,328	$	32,369	$	503	$	58,376
Shares issued in primary portion of offerings	224,647		264		18,921		786,573		24,199,764		47,562,870		901,225		73,694,264
DRP shares issued	1,650		13		236		16,496		2,669,097		3,412,273		53,014		6,152,779
Stock distribution shares issued	—		—		—		—		263,642		300,166		4,677		568,485
Restricted stock issued	—		—		—		—		—		—		36,000		36,000
Total shares issued prior to redemptions	226,297		277		19,157		803,069		27,132,503		51,275,309		994,916		80,451,528

In order to maintain a reasonable level of liquidity for redemptions of our shares, shares are not eligible for redemption for the first year after purchase except upon death or qualifying disability of a stockholder; provided, however, shares issued pursuant to the DRP are not subject to the one-year holding period. In addition, our New Share Redemption Program generally imposes a quarterly cap on aggregate redemptions of our shares equal to a value of up to 5% of the aggregate NAV of the outstanding shares as of the last business day of the previous quarter.

Should redemption requests, in the business judgment of our board of directors, place an undue burden on our liquidity, adversely affect our operations or risk having an adverse impact on us as a whole, or should we otherwise determine that investing our liquid assets in real properties or other illiquid investments rather than redeeming our shares is in the best interests of us as a whole, we may choose to redeem fewer shares in any particular quarter than have been requested to be

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redeemed, or none at all. Further, our board of directors may modify, suspend or terminate our New Share Redemption Program if it deems such action to be in our best interest. Material modifications, including any amendment to the 5% quarterly limitation on redemptions, to and suspensions of the New Share Redemption Program will be promptly disclosed to stockholders in a prospectus supplement (or post-effective amendment if required by the Securities Act) or special or periodic reports filed by us.

Amended and Restated Credit Agreement

On June 28, 2018, we, through our Operating Partnership, entered into an amended and restated credit agreement (the "Amended and Restated Credit Agreement") related to a revolving credit facility and a term loan (collectively, the "Unsecured Credit Facility") with a syndicate of lenders, under which KeyBank, National Association ("KeyBank") serves as administrative agent, and various notes related thereto. In addition, we entered into a guaranty agreement.

Pursuant to the Amended and Restated Credit Agreement, we were provided with a revolving credit facility (the "Revolving Credit Facility") in an initial commitment amount of up to $550 million and a term loan (the "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. Any increase in the total commitment will be allocated to the Revolving Credit Facility and/or the Term Loan in such amounts as the Operating Partnership and KeyBank may determine.The Revolving Credit Facility may be prepaid and terminated, in whole or in part, at any time without fees or penalty.

The Unsecured Credit Facility has an interest rate calculated based on LIBOR plus the applicable LIBOR margin, as provided in the Amended and Restated Credit Agreement, or the Base Rate plus the applicable base rate margin, as provided in the agreement. The applicable LIBOR margin and base rate margin are dependent on the consolidated leverage ratio of the Operating Partnership, us, and our Company's subsidiaries, as disclosed in the periodic compliance certificate provided to the administrative agent each quarter. If the Operating Partnership obtains an investment grade rating of its senior unsecured long term debt from Standard & Poor's Rating Services or Moody's Investors Service, Inc., the applicable LIBOR margin and base rate margin will be dependent on such rating.

• there must be no less than 15 Pool Properties;

• no greater than 15% of the aggregate pool value may be contributed by a single Pool Property or tenant;

• no greater than 15% of the aggregate pool value may be contributed by Pool Properties subject to ground leases;

• no greater than 20% of the aggregate pool value may be contributed by Pool Properties which are under development;

• the minimum aggregate leasing percentage of all Pool Properties must be no less than 90%; and

• other limitations as determined by KeyBank upon further due diligence of the Pool Properties.

As of September 30, 2018, we were in compliance with all applicable covenants. As of September 30, 2018, the remaining capacity pursuant to the Unsecured Credit Facility was $214.7 million.

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BofA/KeyBank Loan

On April 27, 2018, we, through four special purpose entities owned by our Operating Partnership, entered into the Loan Agreement with Bank of America, N.A. and KeyBank, in which we borrowed $250.0 million. The BofA/KeyBank Loan is secured by cross-collateralized and cross-defaulted first mortgage liens on four properties. The BofA/KeyBank Loan has a term of 10 years, maturing on May 1, 2028. The BofA/KeyBank Loan bears interest at a rate of 4.32%. The BofA/KeyBank Loan requires monthly payments of interest only.

As of September 30, 2018, there was approximately $250.0 million outstanding pursuant to the BoA/KeyBank Loan.

As of September 30, 2018, we were in compliance with all applicable covenants.

AIG Loan

On October 22, 2015, six special purpose entities that are wholly-owned by our Operating Partnership entered into promissory notes with The Variable Annuity Life Insurance Company, American General Life Insurance Company, and the United States Life Insurance Company (collectively, the "Lenders"), pursuant to which the Lenders provided such special purpose entities with a loan in the aggregate amount of approximately $127.0 million (the "AIG Loan").

As of September 30, 2018, there was approximately $127.0 million outstanding pursuant to the AIG Loan.

As of September 30, 2018, we were in compliance with all applicable covenants.

Derivative Instruments

As discussed in Note 5, Interest Rate Contracts, to the consolidated financial statements, on February 25, 2016, we entered into an interest rate swap agreement to hedge the variable cash flows associated with the existing LIBO Rate-based variable-rate debt on our Revolving Credit Facility. The interest rate swap is effective for the period from April 1, 2016 to December 12, 2018 with a notional amount of $100.0 million.

Effective as of November 1, 2017, Griffin Capital Essential Asset Operating Partnership, L.P, an affiliated party, novated a $100.0 million interest rate swap agreement with an expiration date of June 1, 2018 to our Operating Partnership. We paid approximately nine thousand dollars, which approximated fair value. See further details of the cash flow swap in the table below.

On April 30, 2018, we settled the $100.0 million cash flow hedge contract purchased from Griffin Capital Essential Asset Operating Partnership, L.P., which resulted in us receiving a net settlement of approximately $0.1 million.

The effective portion of the change in the fair value of derivatives designated and qualifying as cash flow hedges is initially recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments and accruals are made on our variable-rate debt.

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The following table sets forth a summary of the interest rate swaps at September 30, 2018 and December 31, 2017 (dollars in thousands):



				Fair value ⁽¹⁾
Derivative Instrument	Effective Date	Maturity Date/ Termination	Interest Strike Rate	September 30, 2018		December 31, 2017
Assets
Interest Rate Swap	4/1/2016	12/12/2018	0.74%	$	310	$	967
Interest Rate Swap (terminated on April 30, 2018)	11/1/2017	4/30/2018	1.50%	—		65
Total				$	310	$	1,032


(1)	We record all derivative instruments on a gross basis on the consolidated balance sheets, and accordingly, there are no offsetting amounts that net assets against liabilities. As of September 30, 2018, our derivative was in an asset position, and as such, the fair value is included in the line item "Other Assets, net" on the consolidated balance sheet.

Other Potential Future Sources of Capital

Potential future sources of capital include proceeds from our public or private offerings, proceeds from secured or unsecured financings from banks or other lenders, proceeds from the sale of our properties and undistributed funds from operations. 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 the proceeds of our public offerings and income from operations in order to meet our long-term liquidity requirements and to fund our distributions.

Short-Term Liquidity and Capital Resources

We expect to meet our short-term operating liquidity requirements from advances from our Advisor and its affiliates, proceeds received from our offerings, and operating cash flows generated from our properties and other properties we acquire in the future. Any advances from our Advisor will be repaid, without interest, as funds are available after meeting our current liquidity requirements, subject to the limitations on reimbursement set forth in the “Management Compensation” section of our prospectus.

Our cash, cash equivalents and restricted cash balances increased by approximately $2.4 million during the nine months ended September 30, 2018 and were used in or provided by the following:

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. Net cash provided by operating activities for the nine months ended September 30, 2018 increased to $34.7 million compared to cash provided by operating activities of approximately $31.3 million for the nine months ended September 30, 2017. Net cash provided by operating activities before changes in operating assets and liabilities for the nine months ended September 30, 2018 increased by $0.2 million to $27.0 million, compared to approximately $26.8 million for the nine months ended September 30, 2017.

Investing Activities. During the nine months ended September 30, 2018, we used $0.5 million in cash for investing activities compared to $64.6 million used during the same period in 2017. The $64.1 million decrease in cash utilization in investing activities is primarily related to the following:


•	$44.2 million decrease in cash used to acquire properties for the nine months ended September 30, 2018 as a result of no acquisitions in 2018; and


•	$20.2 million decrease in restricted reserves primarily as a result of payments of tenant improvement disbursements; offset by


•	$0.3 million used in real estate acquisition deposits.

Financing Activities. During the nine months ended September 30, 2018, we used $31.8 million in financing activities compared to $28.4 million generated during the same period in 2017, a decrease in cash provided by financing activities of $60.2 million which is comprised primarily of the following:

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•	$357.7 million increase in cash used for principal repayments of the Revolving Credit Facility in the current year provided by the proceeds of the BofA/KeyBank Loan and Term Loan borrowings in the current year;


•	$16.2 million increase in cash used for payment for distributions and repurchases of common stock due to an increase in number of shareholders;


•	$14.3 million decrease in cash provided from borrowings from the Revolving Credit Facility due to the acquisition of MISO on May 15, 2017;


•	$6.6 million increase in cash used in deferred financing costs related to the BofA/KeyBank Loan in the current year; and


•	$28.4 million decrease in cash provided by the issuance of common stock, net of discounts and offering costs due to the closing of the primary portion of our IPO during the first quarter of 2017; offset by


•	$250.0 million increase in proceeds from borrowings on the BofA/KeyBank Loan. $249.8 million of the proceeds provided by the loan was used to pay down a portion of our Revolving Credit Facility; and


•	$113.0 million increase in proceeds from borrowings on the Term Loan. $107.9 million of the proceeds provided by the loan was used to pay down a portion of our Revolving Credit Facility.

Distributions and Our Distribution Policy

Distributions will be paid to our stockholders as of the record date selected by our board of directors. We expect to continue to pay distributions monthly based on daily declaration and record dates so that investors may be entitled to distributions immediately upon purchasing our shares. We expect to regularly pay distributions 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 of directors, which will be directed, in substantial part, by its obligation to cause us to comply with the REIT requirements of the Code. The funds we receive from operations that are available for distribution may be affected by a number of factors, including the following:


•	the amount of time required for us to invest the funds received in our public offerings;


•	our operating and interest expenses;


•	the amount of distributions or dividends received by us from our indirect real estate investments, if applicable;


•	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.

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Distributions may be funded with operating cash flow, offering proceeds, 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 declared, distributions paid, and cash flows provided by operating activities during the nine months ended September 30, 2018 and the year ended December 31, 2017, excluding stock distributions (dollars in thousands):



	Nine Months Ended September 30, 2018					Year Ended December 31, 2017
Distributions paid in cash — noncontrolling interests	$	45				$	11
Distributions paid in cash — common stockholders	15,420					19,232
Distributions of DRP	16,422					22,208
Total distributions	$	31,887	⁽¹⁾			$	41,451
Source of distributions ⁽²⁾
Paid from cash flows provided by operations	$	15,465		48	%	$	19,243	46	%
Offering proceeds from issuance of common stock	—			0	%	—		0	%
Offering proceeds from issuance of common stock pursuant to the DRP	16,422			52	%	22,208		54	%
Total sources	$	31,887	⁽³⁾	100	%	$	41,451	100	%
Net cash provided by operating activities	$	34,692				$	39,712


(1)	Distributions are paid on a monthly basis in arrears. Distributions for all record dates of a given month are paid on or about the first business day of the following month. Total distributions declared but not paid as of September 30, 2018 were approximately $1.7 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 nine months ended September 30, 2018, we paid and declared distributions of approximately $31.9 million to common stockholders including shares issued pursuant to the DRP and approximately $0.05 million to the limited partners of our Operating Partnership, as compared to FFO, net of noncontrolling interest distributions and AFFO for the nine months ended September 30, 2018 of approximately $32.9 million and $28.5 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 September 30, 2018, we paid approximately $107.7 million of cumulative distributions, including approximately $58.4 million reinvested through our DRP, as compared to net cash provided by operating activities of approximately $88.0 million.

Contractual Commitments and Contingencies

The following is a summary of our contractual obligations as of September 30, 2018 (dollars in thousands):



	Payments Due During the Years Ending December 31,
	Total		2018		2019-2020		2021-2022		Thereafter
Outstanding debt obligations ^{(1) (2)}	$	490,055	$	—	$	—	$	4,449	$	485,606
Interest on outstanding debt obligations ⁽³⁾	162,932		5,016		40,494		40,299		77,123
Total	$	652,987	$	5,016	$	40,494	$	44,748	$	562,729


(1)	Amount relates to principal payments for the outstanding balance on the Unsecured Credit Facility, BofA/KeyBank Loan and AIG Loan at September 30, 2018.


(2)	Deferred financing costs are excluded from total contractual obligations above.


(3)	Projected interest payments are based on the outstanding principal amounts under the Unsecured Credit Facility, BofA/KeyBank Loan and AIG Loan at September 30, 2018. Projected interest payments are based on the interest rate in effect at September 30, 2018.

Off-Balance Sheet Arrangements

As of September 30, 2018, we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations.

Subsequent Events

See Note 13, Subsequent Events, to the consolidated financial statements.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

For quantitative and qualitative disclosure about market risk, see Item 7A, “Quantitative and Qualitative Disclosure About Market Risk, of our annual report on Form 10-K for the year ended December 31, 2017. Our exposures to market risk have not changed materially since December 31, 2017.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this report, 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 report 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

There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2018 and June 30, 2018, which could materially affect our business, financial condition or future results. There have been no material changes from the risk factors set forth in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 as filed with the SEC on March 9, 2018 and Part II, Item 1A, “Risk Factors” in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2018 and June 30, 2018 as filed with the SEC on May 14, 2018 and August 10, 2018, respectively. However, the risks and uncertainties that we face are not limited to those set forth in such Annual and Quarterly Reports.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

New Share Redemption Program

In connection with the Follow-On Offering, our board of directors adopted the New Share Redemption Program for the New Shares (and IPO Shares that have been held for four years or longer). On June 4, 2018, our board of directors amended and restated the program to allow stockholders of our IPO Shares to utilize the New Share Redemption Program, effective as of July 5, 2018. Under the New Share Redemption Program, we will redeem shares as of the last business day of each quarter. The redemption price will be equal to the NAV per share for the applicable class generally on the 13th of the month prior to quarter end. Redemption requests must be received by 4:00 p.m. (Eastern time) on the second to last business day of the applicable quarter. Redemption requests exceeding the quarterly cap will be filled on a pro rata basis. With respect to any pro rata treatment, redemption requests following the death or qualifying disability of a stockholder will be considered first, as a group, followed by requests where pro rata redemption would result in a stockholder owning less than the minimum balance of $2,500 of shares of our common stock, which will be redeemed in full to the extent there are available funds, with any remaining available funds allocated pro rata among all other redemption requests. All unsatisfied redemption requests must be resubmitted after the start of the next quarter, or upon the recommencement of the New Share Redemption Program, as applicable.

There are several restrictions under the New Share Redemption Program. Stockholders generally have to hold their shares for one year before submitting their shares for redemption under the program; however, we will waive the one-year holding period in the event of the death or qualifying disability of a stockholder. Shares issued pursuant to the DRP are not subject to the one-year holding period. In addition, the New Share Redemption Program generally imposes a quarterly cap on aggregate redemptions of our shares equal to a value of up to 5% of the aggregate NAV of the outstanding shares as of the last business day of the previous quarter. Our board of directors has the right to modify or suspend the New Share Redemption Program upon 30 days' notice at any time if it deems such action to be in our best interest. Any such modification or suspension will be communicated to stockholders through our filings with the SEC.

As of September 30, 2018, $37.4 million of common stock was available for redemption and $6.7 million of common stock was reclassified from redeemable common stock to accrued expenses and other liabilities in the consolidated balance sheet as of September 30, 2018.

IPO Share Redemption Program

We had a share redemption program for holders of IPO Shares who had held their shares for less than four years, which enabled IPO stockholders to sell their shares back to us in limited circumstances. For additional details regarding our IPO Share Redemption Program, please see Note 8, Equity, to the consolidated financial statements contained in this report.

On June 4, 2018, our board of directors approved the termination of the IPO Share Redemption Program effective as of July 5, 2018. In addition, effective as of such date, as described above, our board of directors amended and restated the New Share Redemption Program in order to allow stockholders of the IPO Shares to utilize the New Share Redemption Program. Accordingly, beginning in July 2018, stockholders of IPO Shares will be able to continue to redeem at 100% of the NAV of the applicable share class, subject to the other limitations and conditions of the amended and restated New Share Redemption Program detailed above.

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Redemptions

During the three months ended September 30, 2018, we redeemed shares as follows:



For the Month Ended	Total Number of Shares Redeemed	Weighted Average Price Paid per Share		Total Number of Shares Redeemed as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
July 31, 2018	—	$	—	—	₍₃₎
August 31, 2018 ⁽¹⁾	585,525	$	9.65	585,525	₍₃₎
September 30, 2018 ⁽²⁾	693,487	$	9.62	693,487	₍₃₎


(1)	Shares redeemed in the month of August 2018 were pursuant to redemption requests under our IPO Share Redemption Program received during the quarter ended June 30, 2018.


(2)	Shares redeemed in the month of September 2018 were pursuant to redemption requests under our New Share Redemption Program received during the quarter ended September 30, 2018.


(3)	A description of the maximum number of shares that could be purchased under our New Share Redemption Program is included in the narrative preceding this table.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION


(a)	During the quarter ended September 30, 2018, there was no information required to be disclosed in a report on Form 8-K which was not disclosed in a report on Form 8-K.


(b)	During the quarter ended September 30, 2018, there were no material changes to the procedures by which security holders may recommend nominees to our board of directors.

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ITEM 6. EXHIBITS

The exhibits required to be filed with this report are set forth on the Exhibit Index hereto and incorporated by reference herein.

EXHIBIT INDEX

The following exhibits are included in this Quarterly Report on Form 10-Q for the period ended September 30, 2018 (and are numbered in accordance with Item 601 of Regulation S-K).



Exhibit No.		Description
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 Executive 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 II, Inc. financial information for the period ended September 30, 2018 formatted in XBRL: (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Operations (unaudited), (iii) Consolidated Statements of Comprehensive (Loss) Income (unaudited), (iv) Consolidated Statements of Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited) and (vi) Notes to Consolidated Financial Statements (unaudited).
*	Filed herewith.
**	Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC. (Registrant)
Dated:	November 9, 2018	By:	/s/ Javier F. Bitar
			Javier F. Bitar
			On behalf of the Registrant and as Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)