0001526113-16-000021.txt : 20161109 0001526113-16-000021.hdr.sgml : 20161109 20161109163537 ACCESSION NUMBER: 0001526113-16-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 81 CONFORMED PERIOD OF REPORT: 20160930 FILED AS OF DATE: 20161109 DATE AS OF CHANGE: 20161109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Global Net Lease, Inc. CENTRAL INDEX KEY: 0001526113 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 452771978 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-37390 FILM NUMBER: 161984728 BUSINESS ADDRESS: STREET 1: 405 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 212-415-6500 MAIL ADDRESS: STREET 1: 405 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: American Realty Capital Global Trust, Inc. DATE OF NAME CHANGE: 20120810 FORMER COMPANY: FORMER CONFORMED NAME: American Realty Capital Global Daily Net Asset Value Trust, Inc. DATE OF NAME CHANGE: 20111014 FORMER COMPANY: FORMER CONFORMED NAME: American Realty Capital Global Trust, Inc. DATE OF NAME CHANGE: 20110719 10-Q 1 gnl930201610-q.htm GLOBAL NET LEASE INC. 9.30.16 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
 
OR
o
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: 001-37390
image3a02.gif
Global Net Lease, Inc.
(Exact name of registrant as specified in its charter)
Maryland
 
45-2771978
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
405 Park Ave., 14th Floor, New York, NY
 
10022
(Address of principal executive offices)
 
(Zip Code)
(212) 415-6500
(Registrant's telephone number, including area code)

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 o

Indicate by check mark whether the registrant submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2
of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o

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

As of October 31, 2016, the registrant had 170,242,113 shares of common stock outstanding.

GLOBAL NET LEASE, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
GLOBAL NET LEASE, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)


 
September 30,
2016
 
December 31,
2015
 
(Unaudited)
 
 
ASSETS
 
 
 
Real estate investments, at cost:
 
 
 
Land
$
327,548

 
$
341,911

Buildings, fixtures and improvements
1,633,826

 
1,685,919

Construction in progress
—

 
180

Acquired intangible lease assets
496,907

 
518,294

Total real estate investments, at cost
2,458,281

 
2,546,304

Less accumulated depreciation and amortization
(199,130
)
 
(133,329
)
Total real estate investments, net
2,259,151

 
2,412,975

Cash and cash equivalents
50,273

 
69,938

Restricted cash
3,660

 
3,319

Derivatives, at fair value (Note 7)
4,996

 
5,812

Unbilled straight-line rent
29,588

 
23,048

Prepaid expenses and other assets
17,103

 
15,345

Due from related parties
16

 
136

Deferred tax assets
2,565

 
2,552

Goodwill and other intangible assets, net
3,071

 
2,988

Assets held for sale, net
31,984

 
—

Deferred financing costs, net
3,816

 
4,409

Total assets
$
2,406,223

 
$
2,540,522

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Mortgage notes payable, net of deferred financing costs ($5,719 and $7,446 for September 30, 2016 and December 31, 2015, respectively)
$
502,808

 
$
524,262

Mortgage premium, net
315

 
676

Credit facility
671,023

 
717,286

Below-market lease liabilities, net
25,669

 
27,978

Derivatives, at fair value (Note 7)
16,093

 
6,028

Due to related parties
680

 
399

Accounts payable and accrued expenses
17,058

 
18,659

Prepaid rent
14,040

 
15,491

Deferred tax liability
4,113

 
4,016

Taxes payable
3,596

 
5,201

Dividends payable
30

 
407

Total liabilities
1,255,425

 
1,320,403

Commitments and contingencies (Note 9)


 


Equity:
 
 
 
Preferred stock, $0.01 par value, 50,000,000 authorized, none issued and outstanding
—

 
—

Common stock, $0.01 par value, 300,000,000 shares authorized, 170,242,113 and 168,936,633 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
1,705

 
1,692

Additional paid-in capital
1,488,996

 
1,480,162

Accumulated other comprehensive loss
(15,259
)
 
(3,649
)
Accumulated deficit
(331,754
)
 
(272,812
)
Total stockholders' equity
1,143,688

 
1,205,393

Non-controlling interest
7,110

 
14,726

 Total equity
1,150,798

 
1,220,119

Total liabilities and equity
$
2,406,223

 
$
2,540,522

The accompanying notes are an integral part of these consolidated financial statements.

2
GLOBAL NET LEASE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
 
Rental income
 
$
50,756

 
$
47,836

 
$
154,003

 
$
142,502

Operating expense reimbursements
 
2,495

 
2,416

 
7,398

 
6,787

Total revenues
 
53,251

 
50,252

 
161,401

 
149,289

 
 
 
 
 
 
 
 
 
 Expenses:
 
 
 
 
 
 
 
 
Property operating
 
4,201

 
3,329

 
13,390

 
10,695

Operating fees to related parties
 
4,862

 
4,902

 
14,638

 
10,211

Acquisition and transaction related
 
2,479

 
4,680

 
2,377

 
5,977

Listing fees
 
—

 
—

 
—

 
18,503

Vesting of Class B Units
 
—

 
—

 
—

 
14,480

Change in fair value of listing note (Note 2)
 
—

 
(1,050
)
 
—

 
3,380

General and administrative
 
1,714

 
2,040

 
5,298

 
5,734

Equity based compensation
 
1,293

 
1,917

 
2,407

 
2,435

Depreciation and amortization
 
23,482

 
22,949

 
71,050

 
66,152

Total expenses
 
38,031

 
38,767

 
109,160

 
137,567

Operating income
 
15,220

 
11,485

 
52,241

 
11,722

Other income (expense):
 
 
 
 
 
 
 
 
Interest expense
 
(8,914
)
 
(9,041
)
 
(30,117
)
 
(24,799
)
Income from investments
 
—

 
8

 
—

 
15

Realized losses on investment securities
 
—

 
(66
)
 
—

 
(66
)
Gains on dispositions of real estate investments
 
1,320

 
—

 
1,320

 
—

Gains on derivative instruments
 
375

 
2,310

 
3,856

 
2,785

Unrealized gains on undesignated foreign currency advances and other hedge ineffectiveness
 
1,459

 
1,505

 
5,613

 
2,445

Unrealized losses on non-functional foreign currency advances not designated as net investment hedges
 
—

 
—

 
—

 
(2,935
)
Other income (expense)
 
4

 
(10
)
 
21

 
15

Total other expense, net
 
(5,756
)
 
(5,294
)
 
(19,307
)
 
(22,540
)
Net income (loss) before income tax
 
9,464

 
6,191

 
32,934

 
(10,818
)
Income tax expense
 
(448
)
 
(703
)
 
(1,428
)
 
(3,646
)
Net income (loss)
 
9,016

 
5,488

 
31,506

 
(14,464
)
Non-controlling interest
 
(73
)
 
(56
)
 
(312
)
 
87

Net income (loss) attributable to stockholders
 
$
8,943

 
$
5,432

 
$
31,194

 
$
(14,377
)
 
 
 
 
 
 
 
 
 
Basic and Diluted Earnings Per Share:
 
 
 
 
 
 
 
 
Basic and diluted net income (loss) per share attributable to stockholders
 
$
0.05

 
$
0.03

 
$
0.18

 
$
(0.08
)
Basic and diluted weighted average shares outstanding
 
169,390,187

 
168,948,345

 
169,092,853

 
176,124,355

The accompanying notes are an integral part of these consolidated financial statements.

3
GLOBAL NET LEASE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)



 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
 
 
(Revised)
 
 
 
(Revised)
Net income (loss)
 
$
9,016

 
$
5,488

 
$
31,506

 
$
(14,464
)
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Cumulative translation adjustment
 
(188
)
 
(1,528
)
 
(274
)
 
2,641

Designated derivatives, fair value adjustments
 
762

 
(3,785
)
 
(11,452
)
 
(1,539
)
Other comprehensive income (loss)
 
574

 
(5,313
)
 
(11,726
)
 
1,102

 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
 
$
9,590

 
$
175

 
$
19,780

 
$
(13,362
)
Amounts attributable to non-controlling interest
 
 
 
 
 
 
 
 
Net (income) loss
 
(73
)
 
(56
)
 
(312
)
 
87

Cumulative translation adjustment
 
4

 
177

 
5

 
286

Designated derivatives, fair value adjustments
 
(18
)
 
(81
)
 
111

 
(76
)
Comprehensive (income) loss attributable to non-controlling interest
 
(87
)
 
40

 
(196
)
 
297

 
 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to stockholders
 
$
9,503

 
$
215

 
$
19,584

 
$
(13,065
)
The accompanying notes are an integral part of these consolidated financial statements.

4
GLOBAL NET LEASE, INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the Nine Months Ended September 30, 2016
(In thousands, except share data)
(Unaudited)

 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of
Shares
 
Par Value
 
Additional Paid-in
Capital
 
Accumulated Other Comprehensive Loss
 
Accumulated Deficit
 
Total Stockholders' Equity
 
Non-controlling interest
 
Total Equity
Balance, December 31, 2015
 
168,936,633

 
$
1,692

 
$
1,480,162

 
$
(3,649
)
 
$
(272,812
)
 
$
1,205,393

 
$
14,726

 
$
1,220,119

Conversion of OP Units to common stock (Note 1)
 
1,264,148

 
13

 
9,264

 
—

 
—

 
9,277

 
(9,277
)
 
—

Common stock offering costs, commissions and dealer manager fees
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Dividends declared
 
—

 
—

 
—

 
—

 
(90,136
)
 
(90,136
)
 
—

 
(90,136
)
Equity-based compensation
 
41,332

 
—

 
266

 
—

 
—

 
266

 
2,141

 
2,407

Distributions to non-controlling interest holders
 
—

 
—

 
—

 
—

 
—

 
—

 
(1,372
)
 
(1,372
)
Net Income
 
—

 
—

 
—

 
—

 
31,194

 
31,194

 
312

 
31,506

Cumulative translation adjustment
 
—

 
—

 
—

 
(269
)
 
—

 
(269
)
 
(5
)
 
(274
)
Designated derivatives, fair value adjustments
 
—

 
—

 
—

 
(11,341
)
 
—

 
(11,341
)
 
(111
)
 
(11,452
)
Rebalancing of ownership percentage
 
—

 
—

 
(696
)
 
—

 
—

 
(696
)
 
696

 
—

Balance, September 30, 2016
 
170,242,113

 
$
1,705

 
$
1,488,996

 
$
(15,259
)
 
$
(331,754
)

$
1,143,688

 
$
7,110

 
$
1,150,798

The accompanying notes are an integral part of this consolidated financial statement.

5
GLOBAL NET LEASE, INC.
  
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


 
 
Nine Months Ended September 30,
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net income (loss)
 
$
31,506

 
$
(14,464
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 

 
 
Depreciation
 
37,770

 
34,901

Amortization of intangibles
 
33,280

 
31,251

Amortization of deferred financing costs
 
5,769

 
6,056

Amortization of mortgage premium
 
(361
)
 
(367
)
Amortization of below-market lease liabilities
 
(1,882
)
 
(1,506
)
Amortization of above-market lease assets
 
1,688

 
1,741

Amortization of above- and below- market ground lease assets
 
125

 
69

Bad debt expense
 
160

 
—

Unbilled straight-line rent
 
(8,059
)
 
(11,573
)
Vesting of Class B Units
 
—

 
14,480

Equity based compensation
 
2,407

 
2,435

Unrealized losses (gains) on foreign currency transactions, derivatives, and other
 
1,068

 
(4,357
)
Unrealized gains on undesignated foreign currency advances and other hedge ineffectiveness
 
(5,613
)
 
(2,445
)
Unrealized losses on non-functional foreign currency advances not designated as net investment hedges
 
—

 
2,935

Gains on sale of real estate investments
 
(1,320
)
 
—

Change in fair value of listing note
 
—

 
3,380

Appreciation of investment in securities
 
—

 
27

Changes in operating assets and liabilities, net:
 
 
 
 
Prepaid expenses and other assets
 
(1,918
)
 
(3,495
)
Deferred tax assets
 
(13
)
 
(803
)
Accounts payable and accrued expenses
 
(1,601
)
 
4,332

Prepaid rent
 
(1,451
)
 
638

Deferred tax liability
 
448

 
—

Taxes payable
 
(1,956
)
 
3,166

Net cash provided by operating activities
 
90,047

 
66,401

Cash flows from investing activities:
 
 
 
 
Investment in real estate and real estate related assets
 
—

 
(223,074
)
Deposits for real estate acquisitions
 
—

 
773

Proceeds from termination of derivatives
 
—

 
10,055

Capital expenditures
 
(200
)
 
(10,242
)
Proceeds from sale of real estate investments
 
13,414

 
—

Proceeds from redemption of investment securities
 
—

 
463

Net cash provided by (used in) investing activities
 
13,214

 
(222,025
)
Cash flows from financing activities:
 
 
 
 
Borrowings under credit facility
 
16,485

 
476,208

Repayments on credit facility
 
(42,136
)
 
(370,617
)
Proceeds from mortgage notes payable
 
—

 
207,914

Payments on mortgage notes payable
 
(561
)
 
(535
)
Proceeds from issuance of common stock
 
—

 
420

Proceeds from issuance of operating partnership units
 
—

 
750

Proceeds from offering costs
 
—

 
49

Proceeds (payments) of financing costs
 
(2,905
)
 
(4,612
)
Dividends paid
 
(90,136
)
 
(68,062
)
Distributions to non-controlling interest holders
 
(1,749
)
 
(321
)
Payments on common stock repurchases, inclusive of fees
 
—

 
(2,313
)
Payments on share repurchases related to Tender Offer
 
—

 
(125,000
)
Advances from related parties, net
 
401

 
990

Restricted cash
 
(341
)
 
2,028

Net cash (used in) provided by financing activities
 
(120,942
)
 
116,899

Net change in cash and cash equivalents
 
(17,681
)
 
(38,725
)
Effect of exchange rate changes on cash
 
(1,984
)
 
6,121

Cash and cash equivalents, beginning of period
 
69,938

 
64,684

Cash and cash equivalents, end of period
 
$
50,273

 
$
32,080


6
GLOBAL NET LEASE, INC.
  
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


 
 
Nine Months Ended September 30,
 
 
2016
 
2015
Supplemental Disclosures:
 
 
 
 
Cash paid for interest
 
$
25,588

 
$
16,122

Cash paid for income taxes
 
3,027

 
3,081

Non-Cash Investing and Financing Activities:
 
 
 
 
Mortgage notes payable assumed or used to acquire investments in real estate
 
$
—

 
$
31,933

Conversion of OP Units to common stock (Note 1)
 
9,277

 
—

Common stock issued through dividend reinvestment plan
 
—

 
28,578


The accompanying notes are an integral part of these consolidated financial statements.

7
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)


Note 1 — Organization
Global Net Lease, Inc. (the "Company"), formerly known as American Realty Capital Global Trust, Inc., incorporated on July 13, 2011, is a Maryland corporation that elected and qualified to be taxed as a real estate investment trust ("REIT") for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2013. The Company operated as a non-traded REIT through June 1, 2015. On June 2, 2015 (the "Listing Date"), the Company listed its Common Stock (the "Listing") on the New York Stock Exchange ("NYSE") under the symbol "GNL".
The Company was formed to primarily acquire a diversified portfolio of commercial properties, with an emphasis on sale-leaseback transactions involving single tenant net-leased commercial properties. As of September 30, 2016, the Company owned 326 properties consisting of 18.6 million rentable square feet, which were 100% leased, with a weighted average remaining lease term of 10.5 years. Based on original purchase price, 60.2% of the Company's properties are located in the U.S. and the Commonwealth of Puerto Rico and 39.8% are located in Europe. The Company may also originate or acquire first mortgage loans secured by real estate. As of September 30, 2016, the Company has not invested in any mezzanine loans, preferred equity or securitized loans.
On June 30, 2014, the Company completed its initial public offering ("IPO") after selling 172.3 million shares of common stock, $0.01 par value per share ("Common Stock"), at a price of $10.00 per share, subject to certain volume and other discounts. In addition, the Company issued an additional 1.1 million shares pursuant to its dividend reinvestment program (the "DRIP"). On April 7, 2015, in anticipation of the Listing, the Company announced the suspension of the DRIP. On May 7, 2015, the Company filed a post-effective amendment to its registration statement on Form S-11 (File No. 001-37390) (as amended, the "Registration Statement") to deregister the unsold shares registered under the Registration Statement.
In connection with the Listing, the Company offered to purchase up to 11.9 million shares of its Common Stock at a price of $10.50 per share (the “Tender Offer”). As a result of the Tender Offer, on July 6, 2015, the Company purchased approximately 11.9 million shares of its Common Stock at a price of $10.50 per share, for an aggregate amount of $125.0 million, excluding fees and expenses relating to the Tender Offer and including fractional shares repurchased thereafter.
Substantially all of the Company's business is conducted through Global Net Lease Operating Partnership, L.P. (the "OP"), a Delaware limited partnership. At Listing, the OP had issued 1,809,678 units of limited partnership interests ("OP Units") to limited partners other than the Company, of which 1,461,753 OP Units were issued to Global Net Lease Advisors, LLC (the "Advisor"), 347,903 OP Units were issued to Moor Park Capital Partners LLP (the "Service Provider"), and 22 OP Units were issued to Global Net Lease Special Limited Partner, LLC (the "Special Limited Partner") (see Note 10 — Related Party Transactions). In accordance with the limited partnership agreement of the OP, a holder of OP Units has the right to convert OP Units, at the Company's option, for a corresponding number of shares of the Company's Common Stock or the cash value of those corresponding shares. The remaining rights of the limited partner interests are limited and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP's assets. Subsequent to the Listing, all OP Units issued to the Advisor were transferred to individual investors. On September 2, 2016, 1,264,148 of the OP Units were converted into Common Stock, of which 916,231 were issued to individual investors, 347,903 were issued to the Service Provider, and 14 were issued to the Special Limited Partner. The Company had 545,530 of OP Units outstanding as of September 30, 2016.
The Company has no direct employees. The Company has retained the Advisor to manage the Company's affairs on a day-to-day basis. The properties are managed and leased by Global Net Lease Properties, LLC (the "Property Manager"). The Advisor, Property Manager and Special Limited Partner are under common control with the parent of AR Capital Global Holdings, LLC (the "Sponsor"), as a result of which they are related parties. These related parties receive compensation and fees for various services provided to the Company. The Advisor has entered into a service provider agreement with the Service Provider, pursuant to which the Service Provider provides, subject to the Advisor's oversight, certain real estate related services, as well as sourcing and structuring of investment opportunities, performance of due diligence, and arranging debt financing and equity investment syndicates, solely with respect to investments in Europe.
The Company and American Realty Capital Global Trust II, Inc. ("Global II"), an affiliate of the Sponsor, have entered into an agreement and plan of merger, dated as of August 8, 2016, as it may be amended from time to time ("the Merger Agreement). Pursuant to the Merger Agreement, Global II will merge with and into a direct wholly owned subsidiary of the Company (the "Merger Sub"), at which time the separate existence of Global II will cease and the Company will be the parent of the Merger Sub (the "Merger").
In addition, pursuant to the Merger Agreement, American Realty Capital Global II Operating Partnership, L.P., a Delaware limited partnership and the operating partnership of Global II (the "Global II OP"), will merge with the OP, with the OP being the surviving entity (the "Partnership Merger" and together with the Merger, the "Mergers").

8
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Pursuant to the Merger Agreement, each outstanding share of Global II's common stock, including restricted shares of common stock, par value $0.01 per share ("Global II Common Stock"), other than shares owned by the Company, any subsidiary of the Company or any wholly owned subsidiary of Global II, will be converted into the right to receive 2.27 shares of Common Stock of the Company (the "Merger Consideration").
In addition, in connection with the Partnership Merger, each outstanding unit of limited partnership interest, including the Class B Units (as defined in Note 10 — Related Party Transactions), of the Global II OP will be converted into the right to receive 2.27 shares of the Company's Common Stock. Based on the closing price of the Company's Common Stock on October 31, 2016 of $7.41 and the number of shares of outstanding Global II Common Stock on September 30, 2016, the aggregate value of the Merger Consideration to be received by Global II stockholders would be approximately $212.6 million.
The completion of the Mergers are subject to various conditions, including, among other things, the approval of the Mergers and the other transactions contemplated by the Merger Agreement by the affirmative vote of a majority of the votes of the Company’s stockholders cast at a meeting of the Company’s common stockholders, a quorum being present, and the approval of the Merger and the other transactions contemplated by the Merger Agreement by Global II’s common stockholders holding a majority of the outstanding shares of Global II Common Stock.
The Merger Agreement also includes certain termination rights for both the Company and Global II and provides that, in connection with the termination of the Merger Agreement, under specified circumstances, the Company or Global II may be required to pay to the other party reasonable out-of-pocket transaction expenses up to an aggregate amount of $5.0 million.
If Global II, or the Company in certain circumstances, terminates the Merger Agreement, Global II would be required to pay the Company a termination fee equal to $6.0 million.
The Company and Global II each were sponsored, directly or indirectly, by the Sponsor. The Sponsor and its affiliates provide investment and advisory services to the Company and Global II pursuant to written advisory agreements. In connection with, and subject to the terms and conditions of, the Merger Agreement, the Sponsor and its affiliates will have the vesting of certain of their restricted interests in Global II and the Global II OP accelerated.
Note 2 — Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements of the Company included herein were prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to this Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair statement of results for the interim periods. All intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results for the entire year or any subsequent interim period.
These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2015, which are included in the Company's Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the "SEC") on February 29, 2016. There have been no significant changes to the Company's significant accounting policies during the nine months ended September 30, 2016, other than the updates described below and the subsequent notes.
Principles of Consolidation
The accompanying unaudited consolidated financial statements include the accounts of the Company, the OP and its subsidiaries. All inter-company accounts and transactions are eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity ("VIE") for which the Company is the primary beneficiary. The Company has determined that the OP is a VIE of which the Company is the primary beneficiary. Substantially all of the Company's assets and liabilities are held by the OP.

9
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Income Taxes
The Company qualified to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), beginning with the taxable year ended December 31, 2013. Commencing with such taxable year, the Company was organized to operate in such a manner as to qualify for taxation as a REIT under the Code. The Company intends to continue to operate in such a manner to continue to qualify for taxation as a REIT, but no assurance can be given that it will operate in a manner so as to remain qualified as a REIT. As a REIT, the Company generally will not be subject to federal corporate income tax to the extent it distributes annually all of its REIT taxable earnings. REIT's are subject to a number of other organizational and operational requirements. The Company conducts business in various states and municipalities within the United States (including Puerto Rico), United Kingdom and continental Europe and, as a result, the Company or one of its subsidiaries file income tax returns in the United States federal jurisdiction and various states and certain foreign jurisdictions. As a result, the Company may be subject to certain federal, state, local and foreign taxes on its income and assets, including alternative minimum taxes, taxes on any undistributed income and state, local or foreign income, franchise, property and transfer taxes. Any of these taxes decrease Company's earnings and available cash.
In addition, the Company's international assets and operations, including those designated as direct or indirect qualified REIT subsidiaries or other disregarded entities of a REIT, continue to be subject to taxation in the foreign jurisdictions where those assets are held or those operations are conducted. During the period from July 13, 2011 (date of inception) to December 31, 2012, the Company elected to be taxed as a corporation, pursuant to which income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recorded for the future tax consequences attributable to differences between the financial statement carrying amounts and income tax basis of assets and liabilities and the expected benefits of utilizing net operating loss and tax credit carryforwards, using expected tax rates in effect for each taxing jurisdiction in which the Company operates for the year in which those temporary differences are expected to be recovered or settled. The Company recognizes the financial statement effects of a tax position when it is more-likely-than-not, based on technical merits, that the position will be sustained upon examination. Because, the Company elected and qualified to be taxed as a REIT commencing with the taxable year ended December 31, 2013, it does not anticipate that any applicable deferred tax assets or liabilities will be realized.
Significant judgment is required in determining the Company's tax provision and in evaluating its tax positions. The Company establishes tax reserves based on a benefit recognition model, which the Company believes could result in a greater amount of benefit (and a lower amount of reserve) being initially recognized in certain circumstances. Provided that the tax position is deemed more likely than not of being sustained, the Company recognizes the largest amount of tax benefit that is greater than 50 percent likely of being ultimately realized upon settlement. The Company derecognizes the tax position when the likelihood of the tax position being sustained is no longer more likely than not.
The Company recognizes deferred income taxes in certain of its subsidiaries taxable in the United States or in foreign jurisdictions. Deferred income taxes are generally the result of temporary differences (items that are treated differently for tax purposes than for GAAP purposes). In addition, deferred tax assets arise from unutilized tax net operating losses, generated in prior years. The Company provides a valuation allowance against its deferred income tax assets when it believes that it is more likely than not that all or some portion of the deferred income tax asset may not be realized. Whenever a change in circumstances causes a change in the estimated realizability of the related deferred income tax asset, the resulting increase or decrease in the valuation allowance is included in deferred income tax expense (benefit).
The Company derives most of its REIT income from its real estate operations in the United States. As such, the Company's real estate operations are generally not subject to federal tax, and accordingly, no provision has been made for U.S. federal income taxes in the consolidated financial statements for these operations. These operations may be subject to certain state, local, and foreign taxes, as applicable.
Our deferred tax assets and liabilities are primarily the result of temporary differences related to the following:
•
Basis differences between tax and GAAP for certain international real estate investments. For income tax purposes, in certain acquisitions, the Company assumes the seller’s basis, or the carry-over basis, in the acquired assets. The carry-over basis is typically lower than the purchase price, or the GAAP basis, resulting in a deferred tax liability with an offsetting increase to goodwill or the acquired tangible or intangible assets;
•
Timing differences generated by differences in the GAAP basis and the tax basis of assets such as those related to capitalized acquisition costs and depreciation expense; and
•
Tax net operating losses in certain subsidiaries, including those domiciled in foreign jurisdictions, that may be realized in future periods if the respective subsidiary generates sufficient taxable income.

10
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The Company recognizes current income tax expense for state and local income taxes and taxes incurred in its foreign jurisdictions. The Company's current income tax expense fluctuates from period to period based primarily on the timing of its taxable income. For the three and nine months ended September 30, 2016, the Company recognized an income tax expense of $0.4 million and $1.4 million, respectively. For the three and nine months ended September 30, 2015, the Company recognize an income tax expense of $0.7 million and $3.6 million, respectively. Deferred income tax (expense) benefit is generally a function of the period’s temporary differences and the utilization of net operating losses generated in prior years that had been previously recognized as deferred income tax assets from state and local taxes in the United States or in foreign jurisdictions.
Assets held for sale
When assets are identified by management as held for sale, the Company stops recognizing depreciation and amortization expense on the identified assets and estimates the sales price, net of costs to sell, of those assets. If the carrying amount of the assets classified as held for sale exceeds the estimated net sales price, the Company records an impairment charge equal to the amount by which the carrying amount of the assets exceeds the Company's estimate of the net sales price of the assets.
Reclassifications
Certain reclassifications have been made to the 2015 consolidated financial statements to conform to the current period presentation.
Revision to previously issued financial statements
During the six months ended June 30, 2016, the Company identified certain historical errors in the preparation of its consolidated statements of comprehensive income (loss) and consolidated statement of changes in equity since 2014 which impacted the quarterly financial statements for the periods ended March 31, June 30 and September 30, 2015 and 2014 and the years ended December 31, 2015 and 2014. Specifically, the Company had been reflecting the fair value adjustments for its cross currency derivatives designated as net investment hedges on its foreign investments as part of “Designated derivatives - fair value adjustments” within Other Comprehensive Income ("OCI") rather than treating them as part of “Cumulative translation adjustments” also in OCI consistent with the treatment of the hedged item as required by ASC 815. The Company concluded that the errors noted above were not material to any historical periods presented. However, in order to correctly present the cumulative translation adjustment and designated derivatives, fair value adjustment in the appropriate period, management revised previously issued financial statements. The Company will revise its future presentations of OCI when the periods are refiled in 2016 and 2017 for comparative purposes. The effects of these revisions are summarized below:
(In thousands)
 
As originally Reported
 
Adjustment
 
As Revised
Year ended December 31, 2014
 
 
 
 
 
 
Cumulative translation adjustment
 
$
(11,990
)
 
$
12,466

 
$
476

Designated derivatives, fair value adjustments
 
6,082

 
(12,466
)
 
(6,384
)
Total OCI
 
$
(5,908
)
 
$
—

 
$
(5,908
)
(In thousands)
 
As originally Reported
 
Adjustment
 
As Revised
Three months ended September 30, 2015
 
 
 
 
 
 
Cumulative translation adjustment
 
$
836

 
$
(2,364
)
 
$
(1,528
)
Designated derivatives, fair value adjustments
 
(6,149
)
 
2,364

 
(3,785
)
Total OCI
 
$
(5,313
)
 
$
—

 
$
(5,313
)
(In thousands)
 
As originally Reported
 
Adjustment
 
As Revised
Nine months ended September 30, 2015
 
 
 
 
 
 
Cumulative translation adjustment
 
$
(4,651
)
 
$
7,292

 
$
2,641

Designated derivatives, fair value adjustments
 
5,753

 
(7,292
)
 
(1,539
)
Total OCI
 
$
1,102

 
$
—

 
$
1,102


11
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

(In thousands)
 
As originally Reported
 
Adjustment
 
As Revised
Year ended December 31, 2015
 
 
 
 
 
 
Cumulative translation adjustment
 
$
(5,169
)
 
$
6,426

 
$
1,257

Designated derivatives, fair value adjustments
 
6,982

 
(6,426
)
 
556

Total OCI
 
$
1,813

 
$
—

 
$
1,813

(In thousands)
 
As originally Reported
 
Adjustment
 
As Revised
Three months ended March 31, 2016
 
 
 
 
 
 
Cumulative translation adjustment
 
$
2,996

 
$
(2,930
)
 
$
66

Designated derivatives, fair value adjustments
 
(11,316
)
 
2,930

 
(8,386
)
Total OCI
 
$
(8,320
)
 
$
—

 
$
(8,320
)
Classification correction
During the quarter ended March 31, 2016, the Company identified that one of its bank accounts was legally restricted but had been erroneously classified as cash and cash equivalents rather than as restricted cash in its balance sheets and cash flow statements since 2014 and impacted the quarterly financial statements for the periods ended June 30 and September 30, 2014 and the year ended December 31, 2014. The account had a balance of $1.7 million at December 31, 2015. The Company evaluated the impact to all periods and concluded that prior financial statements were not materially misstated and the impact to the current period financial statements was not material. The Company correctly classified this bank account as restricted cash at March 31, 2016 and reflected a cash out-flow from financing activities for $1.7 million during the three months ended March 31, 2016.
Out-of-period adjustments
During the first and second quarters of 2015, the Company had recorded the following out-of period adjustments to correct errors from prior periods: (i) additional rental income and accrued rent of $0.3 million related to the straight-line rent effect of correctly including termination payments required under leases with cancellation clauses that were considered probable when assessing the lease term and (ii) additional taxes of $0.9 million representing current foreign taxes payable of $1.2 million and a deferred tax asset of $0.3 million, both relating to 2014. The Company also recorded an out-of-period adjustment in the fourth quarter 2015 to correct an additional error in income taxes of $0.5 million relating to 2014 which resulted from errors in estimating its income tax expense. The Company concluded that these adjustments were not material to the financial position or results of operations for the current period or any of the prior periods, accordingly, the Company recorded the related adjustments in the periods they were identified during the year ended December 31, 2015.
In addition, the Company identified errors in accounting for certain cross currency derivatives that were no longer designated as hedges subsequent to their restructuring on February 4, 2015 (see Note 7 — Derivatives and Hedging Activities). Gains that should have been included in net income (loss) were instead included in other comprehensive income (loss) of approximately $0.5 million during the three month period ended March 31, 2015. The Company has concluded that this adjustment is not material to the financial position or results of operations for the prior periods. The Company recorded the related adjustment in the period it was identified during the year ended December 31, 2015.
Listing Note
Concurrent with the Listing, the Company, as the general partner of the OP, caused the OP, subject to the terms of the Second Amended and Restated Limited Partnership Agreement, to issue a note (the "Listing Note") to the Special Limited Partner, to evidence the OP’s obligation to distribute to the Special Limited Partner an aggregate amount (the "Listing Amount") equal to 15.0% of the difference (to the extent the result is a positive number) between:
•
the sum of (i) the "market value" (as defined in the Listing Note) of all of the Company’s outstanding shares of Common Stock plus (ii) the sum of all distributions or dividends (from any source) paid by the Company to its stockholders prior to the Listing; and
•
the sum of (i) the total amount raised in the Company’s IPO and its DRIP prior to the Listing ("Gross Proceeds") plus (ii) the total amount of cash that, if distributed to those stockholders who purchased shares in the IPO and under the DRIP, would have provided those stockholders a 6.0% cumulative, non-compounded, pre-tax annual return (based on a 365-day year) on the Gross Proceeds.

12
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The market value used to calculate the Listing Amount was not determinable until January 2016, which was the end of a measurement period of 30 consecutive trading days, that commenced on the 180th calendar day following the Listing. The Special Limited Partner had the right to receive distributions of Net Sales Proceeds, as defined in the Listing Note, until the Listing Note is paid in full; provided that, the Special Limited Partner had the right, but not the obligation, to convert the entire special limited partner interest into OP Units. Those OP Units would be convertible for the cash value of a corresponding number of shares of Common Stock or, at the Company's option, a corresponding number of shares of Common Stock in accordance with the terms contained in the Second Amended and Restated Limited Partnership Agreement.
Until the amount of the Listing Note was determined, the Listing Note was considered a liability which was marked to fair value at each reporting date, with changes in the fair value recorded in the consolidated statements of operations. The final value of the Listing Note on maturity at January 2016 was determined to be zero.
Multi-Year Outperformance Agreement
Concurrent with the Listing and modifications to the Advisor agreement, the Company entered into a Multi-Year Outperformance Agreement (the “OPP”) with the OP and the Advisor (see Note 12 — Share-Based Compensation). The Company records equity based compensation expense associated with the awards over the requisite service period of five years. The cumulative equity-based compensation expense is adjusted each reporting period for changes in the estimated market-related performance.
Recently Issued Accounting Pronouncements
Adopted:
In February 2015, the Financial Accounting Standards Board ("FASB") issued ASU 2015-02 Consolidation (Topic 810) - Amendments to the Consolidation Analysis. The new guidance applies to entities in all industries and provides a new scope exception to registered money market funds and similar unregistered money market funds. It makes targeted amendments to the current consolidation guidance and ends the deferral granted to investment companies from applying the VIE guidance. The standard does not add or remove any of the characteristics that determine if an entity is a VIE. However, when decision-making over the entity’s most significant activities has been outsourced, the standard changes how a reporting entity assesses if the equity holders at risk lack decision making rights. Previously, the reporting entity would be required to determine if there is a single equity holder that is able to remove the outsourced decision maker that has a variable interest. The new standard requires that the reporting entity first consider the rights of all of the equity holders at risk. If the equity holders have certain rights that are deemed to give them the power to direct the entity’s most significant activities, then the entity does not have this VIE characteristic. The new standard also introduces a separate analysis specific to limited partnerships and similar entities for assessing if the equity holders at risk lack decision making rights. Limited partnerships and similar entities will be VIEs unless the limited partners hold substantive kick-out rights or participating rights. In order for such rights to be substantive, they must be exercisable by a simple majority vote (or less) of all of the partners (exclusive of the general partner and its related parties). A right to liquidate an entity is viewed as akin to a kick-out right. The guidance for limited partnerships under the voting model has been eliminated in conjunction with the introduction of this separate analysis, including the rebuttable presumption that a general partner unilaterally controls a limited partnership and should therefore consolidate it. A limited partner with a controlling financial interest obtained through substantive kick out rights would consolidate a limited partnership. The standard eliminates certain of the criteria that must be met for an outsourced decision maker or service provider’s fee arrangement to not be a variable interest. Under current guidance, a reporting entity first assesses whether it meets power and economics tests based solely on its own variable interests in the entity to determine if it is the primary beneficiary required to consolidate the VIE. Under the new standard, a reporting entity that meets the power test will also include indirect interests held through related parties on a proportionate basis to determine whether it meets the economics test and is the primary beneficiary on a standalone basis. The standard is effective for annual periods beginning after December 15, 2015. We have evaluated the impact of the adoption of ASU 2015-02 on the Company's consolidated financial position and have determined under ASU 2015-02 the Company's operating ownership is considered a VIE. However, the Company meets the disclosure exemption criteria as the Company is the primary beneficiary of the VIE and the OP's interest is considered a majority voting interest. As such, this standard will not have a material impact on the Company's consolidated financial statements.

13
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

In April 2015, the FASB issued ASU 2015-03 Interest-Imputation of Interest (Subtopic 835-30). The guidance changes the presentation of debt issuance costs on the balance sheet. The amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. In August 2015, the FASB added that, for line of credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line, regardless of whether or not there are any outstanding borrowings. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company adopted this guidance effective January 1, 2016. As a result, the Company reclassified $7.4 million of deferred debt issuance costs related to the Company's mortgage notes payable from deferred costs, net to mortgage notes payable in the Company's consolidated balance sheets as of December 31, 2015. As permitted under the revised guidance, the Company elected to not reclassify the deferred debt issuance costs associated with its Credit Facility (as defined in Note 4 — Credit Borrowings). The deferred debt issuance costs associated with the Credit Facility, net of accumulated amortization, and deferred leasing costs, net of accumulated amortization, are included in deferred costs, net on the Company's accompanying consolidated balance sheets as of September 30, 2016 and December 31, 2015.
In August 2015, FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which amends ASC 835-30, Interest - Imputation of Interest. This update clarifies the presentation and subsequent measurement of debt issuance costs associated with lines of credit. These costs may be deferred and presented as an asset and subsequently amortized ratably over the term of the revolving debt arrangement. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company has adopted the provisions of this guidance effective January 1, 2016, and has applied the provisions prospectively. The adoption of this guidance has not had a material impact on the Company's consolidated financial position, results of operations or cash flows.
In September 2015, the FASB issued ASU 2015-16, Business Combination (Topic 805). The guidance eliminates the requirement to adjust provisional amounts from a business combination and the related impact on earnings by restating prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of measurement period adjustments on current and prior periods, including the prior period impact on depreciation, amortization and other income statement items and their related tax effects, shall be recognized in the period the adjustment amount is determined. The cumulative adjustment would be reflected within the respective financial statement line items affected. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company has adopted the provisions of this guidance effective January 1, 2016, and has applied the provisions prospectively. The adoption of this guidance has not had a material impact on the Company's consolidated financial position, results of operations or cash flows.
Pending Adoption:
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Under the revised guidance, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance allows entities to apply either a full retrospective or modified retrospective transition method upon adoption. In July 2015, the FASB finalized a one-year delay of the revised guidance, although entities will be allowed to early adopt the guidance as of the original effective date. The new guidance will be effective in the Company's 2018 fiscal year. The Company is currently evaluating the impact of the revised guidance on the consolidated financial statements and has not yet determined the method by which the Company will adopt the standard.
In August 2014, the FASB issued ASU 2014-15, Disclosures of Uncertainties about an Entities Ability to Continue as a Going Concern, which requires management to assess a company’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. The assessment is required for each annual and interim reporting period. Management’s assessment should evaluate whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern. Substantial doubt is deemed to exist when it is probable that the company will be unable to meet its obligations within one year from the financial statement issuance date. If conditions or events give rise to substantial doubt about the entity's ability to continue as a going concern, the guidance requires management to disclose information that enables users of the financial statements to understand the conditions or events that raised the substantial doubt, management's evaluation of the significance of the conditions or events that led to the doubt, the entity’s ability to continue as a going concern and management’s plans that are intended to mitigate or that have mitigated the conditions or events that raised substantial doubt about the entity's ability to continue as a going concern. The guidance is effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter, early application is permitted. The Company believes that adoption of this guidance will not have a material impact on the Company's consolidated financial position, results of operations or cash flows.

14
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

In January 2016, the FASB issued ASU 2016-01 Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10). The revised guidance amends the recognition and measurement of financial instruments. The new guidance significantly revises an entity’s accounting related to equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. Among other things, it also amends the presentation and disclosure requirements associated with the fair value of financial instruments. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is not permitted for most of the amendments in the update. The Company is currently evaluating the impact of this new guidance.
In February 2016, the FASB issued ASU 2016-02 Leases (ASC 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The ASU is expected to impact the Company’s consolidated financial statements as the Company has certain operating and land lease arrangements for which it is the lessee. ASC 842 supersedes the previous leases standard, ASC 840 Leases. The standard is effective on January 1, 2019, with early adoption permitted. The Company is in the process of evaluating the impact of this new guidance.
In March 2016, the FASB issued ASU 2016-05 Derivatives and Hedging (Topic 815), Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. Under the new guidance, the novation of a derivative contract in a hedge accounting relationship does not, in and of itself, require dedesignation of that hedge accounting relationship. The hedge accounting relationship could continue uninterrupted if all of the other hedge accounting criteria are met, including the expectation that the hedge will be highly effective when the creditworthiness of the new counterparty to the derivative contract is considered. The guidance is effective for fiscal years beginning after December 15, 2016, and interim periods therein. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of this new guidance.
In March 2016, the FASB issued ASU 2016-08 Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The guidance requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation. This guidance is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.
In March 2016, the FASB issued an update on ASU 2016-09 Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The guidance changes the accounting for certain aspects of share-based compensation. Among other things, the revised guidance allows companies to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The revised guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.
In April 2016, the FASB issued ASU 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments in this update do not change the core principle of the guidance in Topic 606 but rather, clarify aspects of identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The amendment is effective on the same date as ASU 2014-09, which is not yet effective. The Company is currently evaluating the impact of the revised guidance on the consolidated financial statements and has not yet determined the method by which the Company will adopt the standard.
In May 2016, the FASB issued ASU 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments provide clarifying guidance in a few narrow areas and add some practical expedients to the guidance. The amendments are expected to reduce the degree of judgment necessary to comply with Topic 606, which the FASB expects will reduce the potential for diversity arising in practice and reduce the cost and complexity of applying the guidance. The amendment is effective on the same date as ASU 2014-09, which is not yet effective. The Company is currently evaluating the impact of the revised guidance on the consolidated financial statements and has not yet determined the method by which the Company will adopt the standard.

15
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

In August 2016, the FASB issued ASU 2016-15 Statement of Cash Flows (Topic 230) guidance on how certain transactions should be classified and presented in the statement of cash flows as either operating, investing or financing activities. Among other things, the update provides specific guidance on where to classify debt prepayment and extinguishment costs, payments for contingent consideration made after a business combination and distributions received from equity method investments. The revised guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.
In October 2016, the FASB issued ASU 2016-17 Interest Held through Related Parties that Are under Common Control (Topic 810) guidance where a reporting entity will need to evaluate if it should consolidate a VIE. The amendments change the evaluation of whether a reporting entity is the primary beneficiary of a VIE by changing how a single decision maker of a VIE treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The revised guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.
Note 3 — Real Estate Investments and Properties Held for Sale
The following table reflects the number and related base purchase prices of properties remaining as of December 31, 2015 and during the nine months ended September 30, 2016:
 
 
Number of Properties
 
Base Purchase Price(1)
 
 
 
 
(In thousands)
As of December 31, 2015
 
329
 
$
2,633,562

Dispositions for the nine months ended September 30, 2016
 
(3)
 
(12,843
)
Portfolio as of September 30, 2016
 
326
 
$
2,620,719

________________________________________________
(1) 
Contract purchase price, excluding acquisition related costs, based on the exchange rate at the date of purchase, where applicable.
The Company concluded that the properties sold and held for sale do not represent a strategic shift in operations and as a result are not considered to be discontinued operations. During the nine months ended September 30, 2016, the Company sold its properties located in Hephzibah, Georgia ("Fresenius II"), Raleigh, North Carolina ("Garden Ridge"), and Spencerville, Ohio ("Dollar General") and entered into 10 purchase and sales agreements to sell 30 properties which are scheduled to be sold during the fourth quarter of 2016. The following table summarizes the properties sold during the three and nine months ended September 30, 2016 and properties that are classified as assets held for sale as of September 30, 2016. The Company did not sell any real estate assets during the three and nine months ended September 30, 2015.
Portfolio
 
State
 
Disposition Date
 
Number of Properties
 
Square Feet
 
Contract Sales Price
 
Gains on Sale (1)
 
 
 
 
 
 
 
 
 
 
(In thousands)
 
(In thousands)
Properties Sold
 
 
 
 
 
 
 
 
 
 
 
 
Fresenius II
 
Georgia
 
September 2, 2016
 
1
 
6,192

 
$
3,333

 
$
483

Garden Ridge
 
North Carolina
 
September 29, 2016
 
1
 
119,258

 
9,190

 
803

Dollar General
 
Ohio
 
September 29, 2016
 
1
 
9,026

 
1,423

 
34

Total
 
 
 
 
 
3
 
134,476

 
$
13,946

 
$
1,320

Assets Held for Sale
 
 
 
 
 
 
 
 
 
 
 
 
Dollar General - Choctaw
 
Oklahoma
 
October 13, 2016
 
1
 
9,100

 
1,497

 
(2) 
Dollar General - 15-Pack
 
(3) 
 
October 28, 2016
 
15
 
145,938

 
21,661

 
(2) 
Family Dollar - 8-Pack
 
Florida
 
October 13, 2016
 
8
 
63,510

 
13,239

 
(2) 
Total
 
 
 
 
 
24
 
218,548

 
$
36,397

 
$
—

________________________________________________
(1) 
Reflected within gains on dispositions of real estate investments in the consolidated statements of operations for the nine months ended September 30, 2016
(2) 
Property sold subsequent to September 30, 2016 and therefore gain (loss) on sale is not disclosed above.
(3) 
Consists of properties sold in Pennsylvania, Ohio and Oklahoma.

16
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The sale of Fresenius II, Garden Ridge and Dollar General did not represent a strategic shift that has a major effect on the Company’s operations and financial results. Accordingly, the results of operations of Fresenius II, Garden Ridge and Dollar General remain classified within continuing operations for all periods presented until the respective dates of their sale.
The following table details the major classes of assets associated with the above 24 assets classified as held for sale as of September 30, 2016.
(In thousands)
 
September 30, 2016

Real estate held for sale, at cost:
 
 
Land
 
$
6,521

Buildings, fixtures and improvements
 
19,071

Acquired intangible lease assets
 
8,833

Total real estate held for sale, at cost
 
34,425

Less accumulated depreciation and amortization
 
(2,441
)
Real estate assets held for sale, net
 
$
31,984

The following table presents the allocation of the assets acquired and liabilities assumed during the nine months ended September 30, 2015 based on contract purchase price, excluding acquisition related costs, based on the exchange rate at the time of purchase. There were no acquisitions during the nine months ended September 30, 2016.
(Dollar amounts in thousands)
 
September 30, 2015
Real estate investments, at cost:
 
 
Land
 
$
23,831

Buildings, fixtures and improvements
 
190,314

Total tangible assets
 
214,145

Intangibles acquired:
 
 
In-place leases
 
45,736

Above market lease assets
 
1,002

Below market lease liabilities
 
(7,181
)
Below market ground lease assets
 
3,409

Above market ground lease liabilities
 
(2,104
)
Total assets acquired, net
 
255,007

Mortgage notes payable used to acquire real estate investments
 
(31,933
)
Cash paid for acquired real estate investments
 
$
223,074

Number of properties purchased
 
22

The following table presents unaudited pro forma information as if acquisitions completed during the three and nine months ended September 30, 2015 had been consummated on January 1, 2015.
(In thousands, except per share data)
 
Three Months Ended September 30, 2015
 
Nine Months Ended September 30, 2015
Pro forma revenues
 
$
53,727

 
$
161,841

Pro forma net income
 
$
11,635

 
$
3,474

Pro forma basic and diluted net income per share
 
$
0.07

 
$
0.02


17
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The following table presents future minimum base rental cash payments due to the Company over the next five calendar years and thereafter as of September 30, 2016. These amounts exclude contingent rent payments, as applicable, that may be collected from certain tenants based on provisions related to sales thresholds and increases in annual rent based on exceeding certain economic indices among other items.
(In thousands)
 
Future Minimum
Base Rent Payments (1)
2016 (remainder)
 
$
47,177

2017
 
190,475

2018
 
193,487

2019
 
195,904

2020
 
198,041

2021
 
196,057

Thereafter
 
947,472

 
 
$
1,968,613

___________________________________________
(1) 
Based on the exchange rates as of September 30, 2016.
There were no tenants whose annualized rental income on a straight-line basis represented 10.0% or greater of consolidated annualized rental income on a straight-line basis for all portfolio properties as of September 30, 2016 and 2015.
The following table lists the countries and states where the Company has concentrations of properties where annualized rental income on a straight-line basis represented greater than 10.0% of consolidated annualized rental income on a straight-line basis as of September 30, 2016 and 2015.
 
 
September 30,
Country or State
 
2016
 
2015
United Kingdom
 
17.3%
 
19.6%
United States:
 
 
 
 
Texas
 
11.2%
 
11.4%

18
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Note 4 — Credit Borrowings
Credit Facility
On July 25, 2013, the Company, through the OP, entered into a credit facility (the "Credit Facility") that provided for aggregate revolving loan borrowings of up to $50.0 million (subject to borrowing base availability). The Credit Facility has been amended at various times, and maximum borrowings have increased to $740.0 million, with the most recent increase being on August 24, 2015. The Company had $671.0 million (including £160.2 million and €278.9 million) and $717.3 million (including £160.2 million and €288.4 million) outstanding under the Credit Facility as of September 30, 2016 and December 31, 2015, respectively.
Availability of borrowings is based on a pool of eligible unencumbered real estate assets. On July 25, 2016, the Company extended the maturity date of the Credit Facility to July 25, 2017, with an additional one-year extension option remaining, for an extension fee of $1.5 million, subject to certain conditions.
The Company has the option, based upon its consolidated leverage ratio, to have draws under the Credit Facility priced at either the Alternate Base Rate (as described below) plus 0.60% to 1.20% or at Adjusted LIBOR (as described below) plus 1.60% to 2.20%. The Alternate Base Rate is defined in the Credit Facility as a rate per annum equal to the greatest of (a) the fluctuating annual rate of interest announced from time to time by the lender as its “prime rate” in effect on such day, (b) the federal funds effective rate in effect on such day plus half of 1% and (c) the Adjusted LIBOR for a one-month interest period on such day plus 1%. Adjusted LIBOR refers to LIBOR multiplied by the statutory reserve rate, as determined by the Federal Reserve System of the United States. The Credit Facility agreement requires the Company to pay an unused fee per annum of 0.25% if the unused balance of the Credit Facility exceeds or is equal to 50% of the available facility or a fee per annum of 0.15% if the unused balance of the Credit Facility is less than 50% of the available facility. As of September 30, 2016, the Credit Facility reflected variable and fixed rate borrowings with a carrying value and fair value of $671.0 million, and a weighted average effective interest rate of 2.4% after giving effect to interest rate swaps in place. The unused borrowing capacity under the Credit Facility as of September 30, 2016 and December 31, 2015 was $69.0 million and $22.7 million, respectively.
The Credit Facility agreement provides for quarterly interest payments for each Alternate Base Rate loan and periodic payments for each Adjusted LIBOR loan, based upon the applicable LIBOR loan period, with all principal outstanding being due on the extended maturity date in July 2017. The Credit Facility agreement may be prepaid at any time, in whole or in part, without premium or penalty, subject to prior notice to the lender. In the event of a default, the lender has the right to terminate their obligations under the Credit Facility agreement and to accelerate the payment on any unpaid principal amount of all outstanding loans. The Credit Facility requires the Company to meet certain financial covenants, including the maintenance of certain financial ratios (such as specified debt to equity and debt service coverage ratios) as well as the maintenance of a minimum net worth. As of September 30, 2016, the Company was in compliance with the financial covenants under the Credit Facility. In October 2016, the Company paid down $25.0 million of its US dollar advances.
The total gross carrying value of unencumbered assets as of September 30, 2016 was $1.5 billion.
A portion of foreign currency draws under the Credit Facility are designated as net investment hedges of the Company's investments during the periods reflected in the consolidated statements of operations (see Note 7 — Derivatives and Hedging Activities for further discussion).
Bridge Loan Facility
On August 8, 2016, in connection with the execution of the Merger Agreement, the OP entered into a bridge loan commitment letter, pursuant to which UBS Securities LLC and UBS AG, Stamford Branch agreed to provide a $150.0 million senior secured bridge loan facility (the "Bridge Loan Facility") for a term of 364 days from date of the merger transaction. Amounts drawn on the Bridge Loan Facility are subject to interest at LIBOR plus 3.25% per annum with a minimum floor of 4.00%. The margin rate of 3.25% per annum will increase by 0.75% 90 days after the date of funding and increases by 0.75% every 90 days thereafter with a maximum increase rate of 2.25%. The Bridge Loan Facility requires a 1.50% fee of the commitment amount upon execution and a fee equal to 0.375% of the commitments 180 days after signing. The Bridge Loan Facility is subject to a duration fee of 1.0% on outstanding draws 90 days after the date of funding. In addition, the Bridge Loan Facility requires a repayment fee of 0.5% on repayments made within 30 days of funding and a repayment fee of 1.0% fee on repayments made after 30 days after funding. The Bridge Loan Facility is subject to cross default provisions with the Company’s Credit Facility.

19
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Note 5 — Mortgage Notes Payable
Mortgage notes payable as of September 30, 2016 and December 31, 2015 consisted of the following:
 
 
 
 
Encumbered Properties
 
Outstanding Loan Amount (1)
 
Effective Interest Rate
 
Interest Rate
 
 
Country
 
Portfolio
 
 
September 30, 2016
 
December 31, 2015
 
 
 
Maturity
 
 
 
 
 
 
(In thousands)
 
(In thousands)
 
 
 
 
 
 
Finland:
 
Finnair
 
4
 
$
31,840

 
$
30,976

 
2.2%
(2) 
Fixed
 
Sep. 2020
 
 
Tokmanni
 
1
 
32,485

 
31,603

 
2.4%
(2) 
Fixed
 
Oct. 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Germany:
 
Rheinmetall
 
1
 
11,884

 
11,561

 
2.6%
(2) 
Fixed
 
Jan. 2019
 
 
OBI DIY
 
1
 
5,045

 
4,908

 
2.4%
 
Fixed
 
Jan. 2019
 
 
RWE AG
 
3
 
70,070

 
68,169

 
1.6%
(2) 
Fixed
 
Oct. 2019
 
 
Rexam
 
1
 
5,897

 
5,737

 
1.8%
(2) 
Fixed
 
Oct. 2019
 
 
Metro Tonic
 
1
 
29,710

 
28,904

 
1.7%
(2) 
Fixed
 
Dec. 2019
 
 
Total EUR denominated
 
12
 
186,931

 
181,858

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United Kingdom:
 
McDonald's
 
1
 
986

 
1,125

 
4.1%
(2) 
Fixed
 
Oct. 2017
 
 
Wickes Building Supplies I
 
1
 
2,525

 
2,882

 
3.7%
(2) 
Fixed
 
May 2018
 
 
Everything Everywhere
 
1
 
5,188

 
5,922

 
4.0%
(2) 
Fixed
 
Jun. 2018
 
 
Thames Water
 
1
 
7,782

 
8,882

 
4.1%
(2) 
Fixed
 
Jul. 2018
 
 
Wickes Building Supplies II
 
1
 
2,140

 
2,443

 
4.2%
(2) 
Fixed
 
Jul. 2018
 
 
Northern Rock
 
2
 
6,809

 
7,772

 
4.5%
(2) 
Fixed
 
Sep. 2018
 
 
Wickes Building Supplies III
 
1
 
2,464

 
2,813

 
4.4%
(2) 
Fixed
 
Nov. 2018
 
 
Provident Financial
 
1
 
16,537

 
18,875

 
4.1%
(2) 
Fixed
 
Feb. 2019
 
 
Crown Crest
 
1
 
24,968

 
28,498

 
4.3%
(2) 
Fixed
 
Feb. 2019
 
 
Aviva
 
1
 
20,363

 
23,242

 
3.8%
(2) 
Fixed
 
Mar. 2019
 
 
Bradford & Bingley
 
1
 
9,806

 
11,192

 
3.5%
(2) 
Fixed
 
May 2020
 
 
Intier Automotive Interiors
 
1
 
6,128

 
6,995

 
3.5%
(2) 
Fixed
 
May 2020
 
 
Capgemini
 
1
 
7,134

 
8,142

 
3.2%
(2) 
Fixed
 
Jun. 2020
 
 
Fujitisu
 
3
 
32,129

 
36,684

 
3.2%
(2) 
Fixed
 
Jun. 2020
 
 
Amcor Packaging
 
7
 
4,055

 
4,628

 
3.6%
(2) 
Fixed
 
Jul. 2020
 
 
Fife Council
 
1
 
2,378

 
2,715

 
3.6%
(2) 
Fixed
 
Jul. 2020
 
 
Malthrust
 
3
 
4,150

 
4,737

 
3.6%
(2) 
Fixed
 
Jul. 2020
 
 
Talk Talk
 
1
 
4,961

 
5,663

 
3.6%
(2) 
Fixed
 
Jul. 2020
 
 
HBOS
 
3
 
6,991

 
7,979

 
3.6%
(2) 
Fixed
 
Jul. 2020
 
 
DFS Trading
 
5
 
13,151

 
15,010

 
3.4%
(2) 
Fixed
 
Aug. 2020
 
 
DFS Trading
 
2
 
3,079

 
3,514

 
3.4%
(2) 
Fixed
 
Aug. 2020
 
 
HP Enterprise Services
 
1
 
12,045

 
13,748

 
3.4%
(2) 
Fixed
 
Aug. 2020
 
 
Total GBP denominated
 
40
 
195,769

 
223,461

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States:
 
Quest Diagnostics
 
1
 
52,800

 
52,800

 
2.5%
(3) 
Variable
 
Sep. 2018
 
 
Western Digital
 
1
 
17,759

 
17,982

 
5.3%
 
Fixed
 
Jul. 2021
 
 
AT&T Services
 
1
 
33,550

 
33,550

 
2.5%
(4) 
Variable
 
Dec. 2020
Puerto Rico:
 
Encanto Restaurants
 
18
 
21,718

 
22,057

 
6.3%
 
Fixed
 
Jun. 2017
 
 
Total USD denominated
 
21
 
125,827

 
126,389

 
 
 
 
 
 
 
 
Gross mortgage notes payable
 
73
 
508,527

 
531,708

 
3.0%
 
 
 
 
 
 
Deferred financing costs, net of accumulated amortization
 
—
 
(5,719
)
 
(7,446
)
 
—%
 
 
 
 
 
 
Mortgage notes payable, net of deferred financing costs
 
73
 
$
502,808

 
$
524,262

 
3.0%
 
 
 
 
_______________________________
(1) 
Amounts borrowed in local currency and translated at the spot rate as of the respective measurement date.
(2) 
Fixed as a result of an interest rate swap agreement.
(3) 
The interest rate is 2.0% plus 1-month LIBOR.

20
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

(4) 
The interest rate is 2.0% plus 1-month Adjusted LIBOR as defined in the mortgage agreement.
The following table presents future scheduled aggregate principal payments on the gross mortgage notes payable over the next five calendar years and thereafter as of September 30, 2016:
(In thousands)
 
Future Principal Payments (1)
2016 (remainder)
 
$
197

2017
 
22,904

2018
 
80,045

2019
 
184,828

2020
 
204,253

2021
 
16,300

Thereafter
 
—

Total
 
$
508,527

_________________________
(1) 
Based on the exchange rates as of September 30, 2016.
The Company's mortgage notes payable agreements require compliance with certain property-level financial covenants including debt service coverage ratios. As of September 30, 2016, the Company was in compliance with financial covenants under its mortgage notes payable agreements.
Note 6 — Fair Value of Financial Instruments
The Company determines fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. This alternative approach also reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The guidance defines three levels of inputs that may be used to measure fair value:
Level 1 — Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3 — Unobservable inputs that reflect the entity's own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where 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 input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between levels will be rare.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with those derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of September 30, 2016 and December 31, 2015, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of the Company's derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

21
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The valuation of derivative instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and implied volatilities. In addition, credit valuation adjustments are incorporated into the fair values to account for the Company's potential nonperformance risk and the performance risk of the counterparties.
Financial Instruments Measured at Fair Value on a Recurring Basis
The following table presents information about the Company's assets and liabilities (including derivatives that are presented net) measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, aggregated by the level in the fair value hierarchy within which those instruments fall.
(In thousands)
 
Quoted Prices in Active Markets
Level 1
 
Significant Other Observable Inputs
Level 2
 
Significant Unobservable Inputs
Level 3
 
Total
September 30, 2016
 
 
 
 
 
 
 
 
Cross currency swaps, net (GBP & EUR)
 
$
—

 
$
1,606

 
$
—

 
$
1,606

Foreign currency forwards, net (GBP & EUR)
 
$
—

 
$
3,390

 
$
—

 
$
3,390

Interest rate swaps, net (GBP & EUR)
 
$
—

 
$
(16,093
)
 
$
—

 
$
(16,093
)
OPP (see Note 12)
 
$
—

 
$
—

 
$
(12,400
)
 
$
(12,400
)
December 31, 2015
 
 
 
 
 
 
 
 
Cross currency swaps, net (GBP & EUR)
 
$
—

 
$
3,042

 
$
—

 
$
3,042

Foreign currency forwards, net (GBP & EUR)
 
$
—

 
$
2,203

 
$
—

 
$
2,203

Interest rate swaps, net (GBP & EUR)
 
$
—

 
$
(5,461
)
 
$
—

 
$
(5,461
)
OPP (see Note 12)
 
$
—

 
$
—

 
$
(14,300
)
 
$
(14,300
)
The valuation of the OPP is determined using a Monte Carlo simulation. This analysis reflects the contractual terms of the OPP, including the performance periods and total return hurdles, as well as observable market-based inputs, including interest rate curves, and unobservable inputs, such as expected volatility. As a result, the Company has determined that its OPP valuation in its entirety is classified in Level 3 of the fair value hierarchy.
A review of the fair value hierarchy classification is conducted on a quarterly basis. Changes in the type of inputs may result in a reclassification for certain assets. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2016.
Level 3 Valuations
The following is a reconciliation of the beginning and ending balances for the changes in the instrument with Level 3 inputs in the fair value hierarchy for the nine months ended September 30, 2016:
(In thousands)
 
OPP
Beginning balance as of December 31, 2015
 
$
14,300

   Fair value adjustment
 
(1,900
)
Ending balance as of September 30, 2016
 
$
12,400

The following table provides quantitative information about the significant Level 3 input used:
Financial Instrument
 
Fair Value at September 30, 2016
 
Principal Valuation Technique
 
Unobservable Inputs
 
Input Value
 
 
(In thousands)
 
 
 
 
 
 
OPP
 
$
12,400

 
Monte Carlo Simulation
 
Expected volatility
 
25.0%
The following discussion provides a description of the impact on a fair value measurement of a change in each unobservable input in isolation. For the relationship described below, the inverse relationship would also generally apply.

22
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

Expected volatility is a measure of the variability in possible returns for an instrument, parameter or market index given how much the particular instrument, parameter or index changes in value over time. Generally, the higher the expected volatility of the underlying, the wider the range of potential future returns. An increase in expected volatility, in isolation, would generally result in an increase in the fair value measurement of an instrument.
Financial Instruments not Measured at Fair Value on a Recurring Basis
The Company is required to disclose the fair value of financial instruments for which it is practicable to estimate value. The fair value of short-term financial instruments such as cash and cash equivalents, due to/from related parties, accounts payable and dividends payable approximate their carrying value on the consolidated balance sheets due to their short-term nature. The fair values of the Company's remaining financial instruments that are not reported at fair value on the consolidated balance sheets are reported below.
 
 
 
 
Carrying Amount(1)
 
Fair Value
 
Carrying Amount(2)
 
Fair Value
(In thousands)
 
Level
 
September 30,
2016
 
September 30,
2016
 
December 31,
2015
 
December 31,
2015
Mortgage notes payable (1) (2)
 
3
 
$
508,842

 
$
500,768

 
$
532,384

 
$
534,041

Credit Facility
 
3
 
$
671,023

 
$
671,023

 
$
717,286

 
$
717,286

__________________________________________________________
(1)
Carrying value includes $508.5 million gross mortgage notes payable and $0.3 million mortgage premiums, net as of September 30, 2016.
(2)
Carrying value includes $531.7 million gross mortgage notes payable and $0.7 million mortgage premiums, net as of December 31, 2015.
The fair value of the gross mortgage notes payable is estimated using a discounted cash flow analysis, based on the Advisor's experience with similar types of borrowing arrangements. On July 25, 2016, the Company extended the maturity date of the Credit Facility to July 25, 2017 with an additional one-year extension option remaining, subject to certain conditions. Advances under the Credit Facility are considered to be reported at fair value due to the short-term nature of the maturity.
Note 7 — Derivatives and Hedging Activities
Risk Management Objective
The Company may use derivative financial instruments, including interest rate swaps, caps, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings. Certain foreign investments expose the Company to fluctuations in foreign interest rates and exchange rates. These fluctuations may impact the value of the Company’s cash receipts and payments in terms of the Company’s functional currency. The Company enters into derivative financial instruments to protect the value or fix the amount of certain obligations in terms of its functional currency, the U.S. dollar ("USD").
The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure as well as to hedge specific anticipated transactions. The Company does not intend to utilize derivatives for speculative or other purposes other than interest rate and currency risk management. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, the Company only enters into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which the Company and its related parties may also have other financial relationships. The Company does not anticipate that any such counterparties will fail to meet their obligations.

23
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)

The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the Balance Sheet as of September 30, 2016 and December 31, 2015:
(In thousands)
 
Balance Sheet Location
 
September 30, 2016
 
December 31, 2015
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Interest rate swaps (GBP)
 
Derivatives assets, at fair value
 
$
—

 
$
567

Interest rate swaps (GBP)
 
Derivatives liabilities, at fair value
 
(10,486
)
 
(3,313
)
Interest rate swaps (EUR)
 
Derivatives liabilities, at fair value
 
(4,769
)
 
(2,715
)
Total
 
 
 
$
(15,255
)
 
$
(5,461
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Foreign currency forwards (EUR-USD)
 
Derivative assets, at fair value
 
$
336

 
$
1,113

Foreign currency forwards (GBP-USD)
 
Derivative assets, at fair value
 
3,055

 
1,090

Interest rate swaps (EUR)
 
Derivatives liabilities, at fair value
 
(838
)
 
—

Cross currency swaps (GBP)
 
Derivative assets, at fair value
 
683

 
509

Cross currency swaps (EUR)
 
Derivative assets, at fair value
 
922

 
2,533

Total
 
 
 
$
4,158

 
$
5,245

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company's derivatives as of September 30, 2016 and December 31, 2015. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the accompanying consolidated balance sheets.
 
 
 
 
 
 
 
 
 
 
Gross Amounts Not Offset on the Balance Sheet
 
 

(In thousands)
 
Gross Amounts of Recognized Assets
 
Gross Amounts of Recognized (Liabilities)
 
Gross Amounts Offset on the Balance Sheet
 
Net Amounts of Assets (Liabilities) presented on the Balance Sheet