Real Estate

6 Months Ended

Jun. 30, 2019

As of June 30, 2019, the Company’s real estate portfolio consisted of 101 properties in 25 states consisting substantially of office, warehouse, and manufacturing facilities and two land parcels held for future development with a combined acquisition value of approximately $4.2 billion, including the allocation of the purchase price to above and below-market lease valuation.

Depreciation expense for buildings and improvements for the six months ended June 30, 2019 was $34.6 million. Amortization expense for intangibles, including, but not limited to, tenant origination and absorption costs for the six months ended June 30, 2019 was $36.2 million.

2019 Acquisitions

The Mergers were accounted for as an asset acquisition under ASC 805, Business Combinations, with EA-1 treated as the accounting acquirer and the Mergers accounted for as a reverse acquisition. The total purchase price was allocated to the individual assets acquired and liabilities assumed based upon their relative fair values. Intangible assets were recognized at their relative fair values in accordance with ASC 350, Intangibles. Based on an evaluation of the relevant factors and the guidance in ASC 805 requiring significant management judgment, the entity considered the acquirer for accounting purposes is not the legal acquirer. In order to make this consideration, various factors have been analyzed including which entity issued its equity interests, relative voting rights, existence of minority interests (if any), control of the board of directors, management composition, existence of a premium as it applies to the exchange ratio, relative size, transaction initiation, operational structure, relative composition of employees, surviving brand and name, and other factors. The strongest factor identified was the relative size of EA-1 and GCEAR. Based on financial measures, EA-1 was a significantly larger entity than GCEAR and its stockholders hold the majority of the voting shares of the Company.

The assets (including identifiable intangible assets) and liabilities (including executory contracts and other commitments) of the Company as of the effective time of the Mergers were recorded at their respective relative fair values and added to those of EA-1. Transaction costs incurred by EA-1 were capitalized in the period in which the costs were incurred and services were received. The total purchase price was allocated to the individual assets acquired and liabilities assumed based upon their relative fair values. Intangible assets were recognized at their relative fair values in accordance with ASC 805.

Upon the effective time of the Mergers on April 30, 2019, each of EA-1's 167.0 million issued and outstanding shares of common stock were converted into the right to receive 1.04807 newly issued shares of the Class E Common Stock of the Company. GCEAR's 78.1 million issued and outstanding shares of common stock remained outstanding as of April 30, 2019. As the Mergers were accounted for as a reverse acquisition, the total consideration transferred was computed by dividing the Company's outstanding shares as of April 30, 2019 by the exchange ratio of 1.04807 and multiplied by EA-1’s estimated value per share of $10.02 (including transaction costs) as of April 30, 2019. Consideration transferred is calculated as such (in thousands except share and per share data):



GCEAR's common shares outstanding as of April 30, 2019	78,054,934
Exchange ratio	1.04807
Implied EA-1 common stock issued in consideration	74,474,924

GCEAR's operating partnership units outstanding as of April 30, 2019	527,045
Exchange ratio	1.04807
Implied EA-1 operating partnership units issued in consideration	502,872
EA-1's net asset value per share as of April 30, 2019	$	10.02
Total consideration	$	751,278

The following table summarizes the final purchase price allocation based on a valuation report prepared by the Company's third-party valuation specialist that was subject to management's review and approval:



	Amount
Assets:
Cash assumed	$	35,659
Land	135,875
Building and improvements	912,164
Tenant origination and absorption cost	214,428
Intangibles	3,627
Construction in progress	263
Other assets	8,188
Total assets	1,310,204
Liabilities:
Debt (net of $1.1 million premium)	498,906
Below market leases	12,476
Due to Affiliates	8,804
Distribution payable	1,854
Restricted reserves	11,050
Accounts payable and other liabilities	15,498
Total liabilities	548,588
Fair value of net assets acquired	761,616
Less: EA-1's Merger expenses	10,338
Fair value of net assets acquired, less EA-1's Merger expenses	$	751,278

Merger-related expenses

In connection with the Mergers, the Company incurred various transaction and administrative costs. These costs included advisory fees, legal, tax, accounting, valuation fees, and other costs. These costs were capitalized as a component of the cost of the assets acquired. The costs that were obligations of GCEAR and expensed prior to the Mergers are not included in the Company's consolidated statements of operations.

The following is a breakdown of the Company's costs incurred during the six months ended June 30, 2019 related to the Mergers:



	Amount
Advisory and valuation fees	$	8,592
Legal, accounting and tax fees	1,384
Other fees	362
Total Merger-related fees	$	10,338

Real Estate - Valuation and Purchase Price Allocation

The Company allocates the purchase price to the relative fair value of the tangible assets of a property by valuing the property as if it were vacant. This “as-if vacant” value is estimated using an income, or discounted cash flow, approach that relies upon Level 3 inputs, which are unobservable inputs based on the Company's review of the assumptions a market participant would use. These Level 3 inputs include discount rates, capitalization rates, market rents and comparable sales data for similar properties. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. In calculating the “as-if vacant” value for acquisitions completed during the six months ended June 30, 2019, the Company used a discount rate of 6.25% to 11.75%.

In determining the fair value of intangible lease assets or liabilities, the Company also considers Level 3 inputs. Acquired above and below-market leases are valued based on the present value of the difference between prevailing market rates and the in-place rates measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases, if applicable. The estimated fair value of acquired in-place at-market tenant leases are the costs that would have been incurred to lease the property to the occupancy level of the property at the date of acquisition. Such estimates include the value associated with leasing commissions, legal and other costs, as well as the estimated period necessary to lease such property that would be incurred to lease the property to its occupancy level at the time of its acquisition. Acquisition costs associated with asset acquisitions are capitalized in the period they are incurred.

The following summarizes the purchase price allocations of the properties acquired during the six months ended June 30, 2019:



Acquisition	Land		Building		Improvements		Tenant origination and absorption costs		In-place lease valuation - above market		In-place lease valuation - (below) market			Total ⁽¹⁾		2019 Revenue ⁽²⁾
Mergers	$	135,875	$	849,236	$	62,928	$	214,428	$	3,627	$	(12,476	)	$	1,253,618	$	16,493


(1)	The allocations noted above are based on a determination of the relative fair value of the total consideration provided and represent the amount paid including capitalized acquisition costs.


(2)	The operating results of the properties acquired in the Mergers have been included in the Company's consolidated statement of operations since the acquisition date of April 30, 2019.

Intangibles

The Company allocated a portion of the acquired and contributed real estate asset value to in-place lease valuation and tenant origination and absorption cost, net of the write-off of intangibles, as of June 30, 2019 and December 31, 2018:



	June 30, 2019			December 31, 2018
In-place lease valuation (above market)	$	46,363		$	42,736
In-place lease valuation (above market) - accumulated amortization	(33,639		)	(31,995		)
In-place lease valuation (above market), net	12,724			10,741

Ground leasehold interest (below market)	2,254			2,255
Ground leasehold interest (below market) - accumulated amortization	(150		)	(137		)
Ground leasehold interest (below market), net	2,104			2,118
Intangibles - other	—			4,240
Intangible assets, net	$	14,828		$	17,099

In-place lease valuation (below market)	$	(67,622	)	$	(55,147	)
In-place lease valuation (below market) - accumulated amortization	35,444			32,032
In-place lease valuation (below market), net	$	(32,178	)	$	(23,115	)

Tenant origination and absorption cost	$	744,610		$	530,181
Tenant origination and absorption cost - accumulated amortization	(326,520		)	(296,201		)
Tenant origination and absorption cost, net	$	418,090		$	233,980

The following table sets forth the estimated annual amortization (income) expense for in-place lease valuation, net, tenant origination and absorption costs, ground leasehold improvements, and other leasing costs as of June 30, 2019 for the next five years:



Year	In-place lease valuation, net			Tenant origination and absorption costs		Ground leasehold improvements		Other leasing costs
Remaining 2019	$	(1,872	)	$	35,936	$	27	$	4,496
2020	$	(1,813	)	$	68,322	$	27	$	5,837
2021	$	(1,952	)	$	60,341	$	27	$	6,446
2022	$	(2,434	)	$	57,000	$	27	$	6,414
2023	$	(2,441	)	$	51,692	$	27	$	6,351

Tenant and Portfolio Risk

The Company monitors the credit of all tenants to stay abreast of any material changes in credit quality. The Company monitors tenant credit by (1) reviewing the credit ratings of tenants (or their parent companies) that are rated by nationally recognized rating agencies; (2) reviewing financial statements and related metrics and information that are publicly available or that are required to be provided pursuant to the lease; (3) monitoring news reports and press releases regarding the tenants and their underlying business and industry; and (4) monitoring the timeliness of rent collections.

Restricted Cash

In conjunction with the acquisition of certain assets, as required by certain lease provisions or certain lenders in conjunction with an acquisition or debt financing, or credits received by the seller of certain assets, the Company assumed or funded reserves for specific property improvements and deferred maintenance, re-leasing costs, and taxes and insurance, which are included on the consolidated balance sheets as restricted cash. Additionally, an ongoing replacement reserve is funded by certain tenants pursuant to each tenant’s respective lease as follows:



	Balance as of
	June 30, 2019		December 31, 2018
Cash reserves	$	27,535	$	12,945
Restricted lockbox	5,916		2,862
Total	$	33,451	$	15,807