Real Estate

As of December 31, 2019, the Company’s real estate portfolio consisted of 99 properties in 25 states consisting substantially of office, warehouse, and manufacturing facilities and one land parcel 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 years ended December 31, 2019, 2018, and 2017 was $80.4 million, $60.1 million, and $56.0 million, respectively. Amortization expense for intangibles, including but not limited to, tenant origination and absorption costs for the years ended December 31, 2019, 2018, and 2017 was $73.0 million, $59.0 million, and $60.6 million, respectively.

2019 Acquisitions

The purchase price and other acquisition items for the property acquired during the year ended December 31, 2019 are shown below:

Property

Location

Tenant/Major Lessee

Acquisition Date

Purchase Price

Approx. Square Feet

Acquisition Fees and Expenses ⁽¹⁾

Year of Lease Expiration

McKesson II

Scottsdale, AZ

McKesson Corporation

9/20/2019

37,674

124,900

1,059

2029


(1)	The former advisor received acquisition fees equal to 2.5%. In addition, the Company incurred third-party costs associated with the acquisition.

Mergers

The Mergers were accounted for as an asset acquisition under ASC 805, 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):



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

GCEAR's operating partnership units outstanding	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	$	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:



	As of April 30, 2019
Assets:
Cash assumed	$	35,659
Land	135,875
Building and improvements	913,739
Tenant origination and absorption cost	214,428
Intangibles	3,627
Construction in progress	263
Other assets	5,964
Total assets	1,309,555
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	14,849
Total liabilities	547,939
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 the year ended December 31, 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 year ended December 31, 2019, the Company used a discount rate of 5.75% 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 year ended December 31, 2019:



Acquisition	Land		Building		Improvements		Tenant origination and absorption costs		In-place lease valuation - above market		In-place lease valuation - (below) market			Land Leasehold Value (Above Market)			Total ⁽¹⁾		2019 Revenue ⁽²⁾
Mergers	$	135,875	$	850,811	$	62,928	$	214,428	$	3,627	$	(12,476	)	$	—		$	1,255,193	$	66,004
McKesson II ⁽³⁾	$	—	$	25,446	$	4,681	$	11,513	$	239	$	—		$	(3,072	)	$	38,807	$	958


(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 have been included in the Company's consolidated statement of operations since the acquisition date.


(3)	The Company recorded a ROU asset of $16.3 million and a corresponding liability to the Company's existing ground lease agreements as part of the acquisition (see Note 14, Operating Leases, for details).

Intangibles

The Company allocated a portion of the acquired and contributed real estate asset value to in-place lease valuation, tenant origination and absorption cost, and other intangibles, net of the write-off of intangibles for the years ended December 31, 2019 and 2018.

The following summarizes a list of the Company's intangibles as of December 31, 2019 and 2018:



	December 31,
	2019			2018
In-place lease valuation (above market)	$	44,012		$	42,736
In-place lease valuation (above market) - accumulated amortization	(33,322		)	(31,995		)
In-place lease valuation (above market), net	10,690			10,741

Ground leasehold interest (below market)	2,254			2,255
Ground leasehold interest (below market) - accumulated amortization	(164		)	(137		)
Ground leasehold interest (below market), net	2,090			2,118
Intangibles - other	—			4,240
Intangible assets, net	$	12,780		$	17,099

In-place lease valuation (below market)	$	(67,622	)	$	(55,147	)
Land Leasehold interest (above market)	(3,073		)	—
In-place lease valuation (below market) - accumulated amortization	38,890			32,032
Intangible liabilities, net	$	(31,805	)	$	(23,115	)

Tenant origination and absorption cost	$	744,773		$	530,181
Tenant origination and absorption cost - accumulated amortization	(354,379		)	(296,201		)
Tenant origination and absorption cost, net	$	390,394		$	233,980

The intangible assets are amortized over the remaining lease term of each property, which on a weighted-average basis, was approximately 7.36 years and 6.6 years as of December 31, 2019 and 2018, respectively. The amortization of the intangible assets and other leasing costs for the respective periods is as follows:



	Amortization (income) expense for the year ended December 31,
	2019			2018			2017
Above and below market leases, net	$	(3,201	)	$	(685	)	$	1,689
Tenant origination and absorption cost	$	69,502		$	55,464		$	59,046
Ground leasehold amortization (below market)	$	(52	)	$	27		$	27
Other leasing costs amortization	$	3,581		$	3,557		$	1,527

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 December 31, 2019 for the next five years:



Year	In-place lease valuation, net			Tenant origination and absorption costs		Ground leasehold improvements			Other leasing costs
2020	$	(2,150	)	$	64,739	$	(291	)	$	4,911
2021	$	(2,066	)	$	57,151	$	(290	)	$	5,668
2022	$	(2,467	)	$	54,050	$	(290	)	$	5,673
2023	$	(2,415	)	$	49,246	$	(290	)	$	5,571
2024	$	(1,593	)	$	41,479	$	(291	)	$	5,533

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 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:



	December 31,
	2019		2018
Cash reserves ⁽¹⁾	$	48,129	$	12,945
Restricted Lockbox	10,301		2,862
Total	$	58,430	$	15,807


(1)	Approximately $28.7 million is held in escrow pending a tax-deferred real estate exchange, as permitted by Section 1031 of the Internal Revenue Code, with the sale of 10 Commerce Center Parkway property.

Sale of Properties

Lynnwood Land

On July 30, 2019, the Company sold the Lynnwood IV land parcel located in Lynnwood, WA for total proceeds of $1.8 million, less closing costs and other closing credits. The carrying value of the land parcel was approximately $1.3 million. Upon the sale, the Company recognized a gain of approximately $0.3 million.

7601 Technology Way

On September 5, 2019, the Company sold the 7601 Technology Way property located in Denver, Colorado for total proceeds of $48.8 million, less closing costs and other closing credits. The carrying value of the property on the closing date was approximately $37.6 million. Upon the sale of the property, the Company recognized a gain of approximately $8.1 million.

10 Commerce Center Parkway

On October 14, 2019, the Company sold the FedEx Freight property located in West Jefferson, Ohio for total proceeds of $30.3 million, less closing costs and other closing credits. The property sold for an approximate amount equal to the carrying value.

2160 East Grand Avenue

On November 20, 2019, the Company sold the 2160 East Grand Avenue property located in El Segundo, California for total proceeds of $63.5 million, less closing costs and other closing credits. The carrying value of the property on the closing date was approximately $41.5 million. Upon the sale of the property, the Company recognized a gain of approximately $21.5 million.

Impairments

2200 Channahon Road & Houston Way I

During the year ended December 31, 2019, the Company recorded an impairment provision of approximately $30.7 million as it was determined that the carrying value of the real estate would not be recoverable on two properties. This impairment resulted from changes in projected cash flows the property was expected to generate. In determining the fair value of property, the Company considered Level 3 inputs. See Note 9, Fair Value Measurements, for details.