10-Q 1 gnl331201710-q.htm GLOBAL NET LEASE INC. 3.31.17 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 March 31, 2017
 
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
image3a07.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., 4th 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 or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2
of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer ¨
(Do not check if a smaller reporting company)
Smaller reporting company o
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 April 30, 2017, the registrant had 66,451,066 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)


 
March 31,
2017
 
December 31,
2016
 
(Unaudited)
 
 
ASSETS
 
 
 
Real estate investments, at cost:
 
 
 
Land
$
382,010

 
$
376,704

Buildings, fixtures and improvements
1,989,383

 
1,967,930

Acquired intangible lease assets
594,319

 
587,061

Total real estate investments, at cost
2,965,712

 
2,931,695

Less accumulated depreciation and amortization
(242,508
)
 
(216,055
)
Total real estate investments, net
2,723,204

 
2,715,640

Cash and cash equivalents
72,354

 
69,831

Restricted cash
5,149

 
7,497

Derivatives, at fair value (Note 8)
24,292

 
28,700

Unbilled straight-line rent
34,206

 
30,459

Prepaid expenses and other assets
19,579

 
17,577

Related party notes receivable acquired in Merger (Note 3)
3,211

 
5,138

Due from related parties
16

 
16

Deferred tax assets
1,591

 
1,586

Goodwill and other intangible assets, net
13,408

 
13,931

Deferred financing costs, net
626

 
1,092

Total assets
$
2,897,636

 
$
2,891,467

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Mortgage notes payable, net of deferred financing costs ($4,726 and $5,103 for March 31, 2017 and December 31, 2016, respectively)
$
758,610

 
$
749,884

Mortgage (discount) premium, net
(2,400
)
 
(2,503
)
Credit facility
698,203

 
616,614

Mezzanine facility, net of discount
—

 
55,383

Below-market lease liabilities, net
30,901

 
33,041

Derivatives, at fair value (Note 8)
13,508

 
15,457

Due to related parties
1,348

 
2,162

Accounts payable and accrued expenses
22,581

 
22,861

Prepaid rent
20,476

 
18,429

Deferred tax liability
15,670

 
15,065

Taxes payable
7,492

 
9,059

Dividends payable
29

 
34

Total liabilities
1,566,418

 
1,535,486

Commitments and contingencies (Note 10)


 


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, 66,269,225 and 66,258,559 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively
1,990

 
1,990

Additional paid-in capital
1,708,870

 
1,708,541

Accumulated other comprehensive loss
(13,388
)
 
(16,695
)
Accumulated deficit
(373,917
)
 
(346,058
)
Total stockholders' equity
1,323,555

 
1,347,778

Non-controlling interest
7,663

 
8,203

 Total equity
1,331,218

 
1,355,981

Total liabilities and equity
$
2,897,636

 
$
2,891,467

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 March 31,
 
 
2017
 
2016
Revenues:
 
 
 
 
Rental income
 
$
58,492

 
$
51,511

Operating expense reimbursements
 
4,345

 
3,443

Total revenues
 
62,837

 
54,954

 
 
 
 
 
 Expenses:
 
 
 
 
Property operating
 
7,236

 
5,647

Operating fees to related parties
 
5,730

 
4,817

Acquisition and transaction related
 
696

 
(129
)
General and administrative
 
1,770

 
1,704

Equity based compensation
 
16

 
1,044

Depreciation and amortization
 
27,114

 
23,756

Total expenses
 
42,562

 
36,839

Operating income
 
20,275

 
18,115

Other income (expense):
 
 
 
 
Interest expense
 
(11,531
)
 
(10,569
)
Gains on dispositions of real estate investments
 
957

 
—

Losses on derivative instruments
 
(470
)
 
(349
)
Unrealized losses on undesignated foreign currency advances and other hedge ineffectiveness
 
(882
)
 
(98
)
Other income (expense)
 
7

 
9

Total other expense, net
 
(11,919
)
 
(11,007
)
Net income before income tax
 
8,356

 
7,108

Income tax expense
 
(906
)
 
(550
)
Net income
 
7,450

 
6,558

Non-controlling interest
 
(21
)
 
(70
)
Net income attributable to stockholders
 
$
7,429

 
$
6,488

 
 
 
 
 
Basic and Diluted Earnings Per Share:
 
 
 
 
Basic and diluted net income per share attributable to stockholders
 
$
0.11

 
$
0.11

Basic and diluted weighted average shares outstanding
 
66,271,008

 
56,312,211

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 March 31,
 
 
2017
 
2016
Net income
 
$
7,450

 
$
6,558

 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
Cumulative translation adjustment
 
1,703

 
66

Designated derivatives, fair value adjustments
 
1,611

 
(8,386
)
Other comprehensive income (loss)
 
3,314

 
(8,320
)
 
 
 
 
 
Comprehensive income (loss)
 
$
10,764

 
$
(1,762
)
Amounts attributable to non-controlling interest
 
 
 
 
Net income
 
(21
)
 
(70
)
Cumulative translation adjustment
 
(1
)
 
(32
)
Designated derivatives, fair value adjustments
 
(6
)
 
120

Comprehensive (income) loss attributable to non-controlling interest
 
(28
)
 
18

 
 
 
 
 
Comprehensive income (loss) attributable to stockholders
 
$
10,736

 
$
(1,744
)
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 Three Months Ended March 31, 2017
(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, 2016
 
66,258,559

 
$
1,990

 
$
1,708,541

 
$
(16,695
)
 
$
(346,058
)
 
$
1,347,778

 
$
8,203

 
$
1,355,981

Dividends declared
 
—

 
—

 
—

 
—

 
(35,288
)
 
(35,288
)
 
—

 
(35,288
)
Equity-based compensation
 
10,666

 
—

 
335

 
—

 
—

 
335

 
(319
)
 
16

Distributions to non-controlling interest holders
 
—

 
—

 
—

 
—

 
—

 
—

 
(255
)
 
(255
)
Net Income
 
—

 
—

 
—

 
—

 
7,429

 
7,429

 
21

 
7,450

Cumulative translation adjustment
 
—

 
—

 
—

 
1,702

 
—

 
1,702

 
1

 
1,703

Designated derivatives, fair value adjustments
 
—

 
—

 
—

 
1,605

 
—

 
1,605

 
6

 
1,611

Rebalancing of ownership percentage
 
—

 
—

 
(6
)
 
—

 
—

 
(6
)
 
6

 
—

Balance, March 31, 2017
 
66,269,225

 
$
1,990

 
$
1,708,870

 
$
(13,388
)
 
$
(373,917
)

$
1,323,555

 
$
7,663

 
$
1,331,218

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)


 
 
Three Months Ended March 31,
 
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
Net income
 
$
7,450

 
$
6,558

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 

 
 
Depreciation
 
14,280

 
12,606

Amortization of intangibles
 
12,834

 
11,150

Amortization of deferred financing costs
 
880

 
2,425

Amortization of mortgage (discount) premium, net
 
136

 
(121
)
Amortization of mezzanine discount
 
17

 
—

Amortization of below-market lease liabilities
 
(826
)
 
(622
)
Amortization of above-market lease assets
 
1,016

 
562

Amortization of above- and below- market ground lease assets
 
214

 
76

Bad debt expense
 
414

 
—

Unbilled straight-line rent
 
(3,878
)
 
(2,801
)
Equity based compensation
 
16

 
1,044

Unrealized losses on foreign currency transactions, derivatives, and other
 
1,792

 
1,809

Unrealized losses on undesignated foreign currency advances and other hedge ineffectiveness
 
882

 
98

Gains on dispositions of real estate investments
 
(957
)
 
—

Changes in operating assets and liabilities, net:
 
 
 
 
Prepaid expenses and other assets
 
(2,416
)
 
(2,363
)
Deferred tax assets
 
(13
)
 
(20
)
Accounts payable and accrued expenses
 
(522
)
 
964

Prepaid rent
 
2,047

 
(1,890
)
Deferred tax liability
 
929

 
143

Taxes payable
 
(1,567
)
 
(1,488
)
Net cash provided by operating activities
 
32,728

 
28,130

Cash flows from investing activities:
 
 
 
 
Investment in real estate and real estate related assets
 
(30,290
)
 
—

Capital expenditures
 
(388
)
 
(114
)
Proceeds from sale of real estate investments
 
12,440

 
—

Net cash used in investing activities
 
(18,238
)
 
(114
)
Cash flows from financing activities:
 
 
 
 
Borrowings under credit facility
 
75,335

 
—

Repayments on credit facility
 
—

 
(20,000
)
Repayment mezzanine facility
 
(56,537
)
 
—

Payments on mortgage notes payable
 
(206
)
 
(189
)
Proceeds from issuance of common stock
 
—

 
7

(Payments) proceeds of financing costs
 
(102
)
 
87

Dividends paid
 
(35,293
)
 
(30,020
)
Distributions to non-controlling interest holders
 
(255
)
 
(857
)
Advances from related parties, net
 
1,713

 
135

Restricted cash
 
2,348

 
(991
)
Net cash used in financing activities
 
(12,997
)
 
(51,828
)
Net change in cash and cash equivalents
 
1,493

 
(23,812
)
Effect of exchange rate changes on cash
 
1,030

 
(339
)
Cash and cash equivalents, beginning of period
 
69,831

 
69,938

Cash and cash equivalents, end of period
 
$
72,354

 
$
45,787

Supplemental Disclosures:
 
 
 
 
Cash paid for interest
 
$
10,426

 
$
8,251

Cash paid for income taxes
 
2,473

 
2,038


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

6
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(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 United States ("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 shares of common stock, $0.01 par value per share ("Common Stock") on the New York Stock Exchange ("NYSE") under the symbol "GNL" (the "Listing").
On February 28, 2017, the Company completed a reverse stock split of the Company’s Common Stock, OP Units and LTIP Units, at a ratio of 1-for-3 (the “Reverse Stock Split”). No OP Units were issued in connection with the Reverse Stock Split and the Company repurchased any fractional shares outstanding with cash. No payments were made in respect of any fractional OP Units. The Reverse Stock Split was applied to all of the Company’s outstanding shares of Common Stock and therefore did not affect any stockholder’s relative ownership percentage. As a result of the Reverse Stock Split, the number of outstanding shares of the Company’s Common Stock was reduced from 198.8 million to 66.3 million. In addition, at the market open on March 1, 2017, the Common Stock was assigned a new CUSIP number.
All references made to share or per share amounts in the accompanying consolidated financial statements and applicable disclosures have been retroactively adjusted to reflect this Reverse Stock Split.
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 March 31, 2017, the Company owned 312 properties consisting of 22.2 million rentable square feet, which were 100% leased, with a weighted average remaining lease term of 9.5 years. Based on original purchase price or acquisition value with respect to properties acquired in the Merger (as defined below), 49.5% of the Company's properties are located in the U.S. and the Commonwealth of Puerto Rico and 50.5% are located in Europe. The Company may also originate or acquire first mortgage loans secured by real estate. As of March 31, 2017, the Company did not own any mezzanine loans, preferred equity or securitized loans.
On June 30, 2014, the Company completed its initial public offering ("IPO") after selling 57.4 million of its Common Stock, at a price of $30.00 per share, subject to certain volume and other discounts. In addition, the Company issued an additional 0.4 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. The Company's DRIP was terminated effective December 9, 2016.
In connection with the Listing, the Company offered to purchase up to 4.0 million shares of its Common Stock at a price of $31.50 per share (the “Tender Offer”). As a result of the Tender Offer, on July 6, 2015, the Company purchased approximately 4.0 million shares of its Common Stock at a price of $31.50 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 603,219 units of limited partnership interests ("OP Units") to limited partners other than the Company, of which 487,252 OP Units were issued to Global Net Lease Advisors, LLC (the "Advisor") and 115,967 OP Units were issued to Moor Park Capital Partners LLP (the "Service Provider") (see Note 11 — Related Party Transactions). Subsequent to the Listing, all OP Units issued to the Advisor were transferred to individual investors. 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. On September 2, 2016, 421,378 of the OP Units were converted into Common Stock, of which 305,411 were issued to individual members and employees of AR Global Investments, LLC (the successor business to AR Capital LLC "AR Global") and 115,967 were issued to the Service Provider. There were 181,841 OP Units outstanding that were held by parties other than the Company as of March 31, 2017, all of which were converted into Common Stock on April 3, 2017.

7
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

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 Global Net Lease Special Limited Partner, LLC (the "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 entity formerly sponsored by an affiliate of the Sponsor, entered into an agreement and plan of merger on August 8, 2016 (the "Merger Agreement"). On December 22, 2016, pursuant to the Merger Agreement, Global II merged with and into Mayflower Acquisition LLC (the "Merger Sub"), a Maryland limited liability company and wholly owned subsidiary of the Company, at which time the separate existence of Global II ceased and the Company became 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"), merged with the OP, with the OP being the surviving entity (the "Partnership Merger" and together with the Merger, the "Mergers"). As a result of the Mergers, the Company acquired the business of Global II, which immediately prior to the effective time of the Merger, owned a portfolio of commercial properties, including single tenant net-leased commercial properties two of which were located in the U.S., three of which were located in the United Kingdom and 10 of which were located in continental Europe (see Note 3 — Merger Transaction).
The Company and Global II each were sponsored, directly or indirectly, by the Sponsor. The Sponsor and its affiliates provide or provided asset management services to the Company and Global II pursuant to written advisory agreements. In connection with the Merger Agreement, the Sponsor and its affiliates had 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 months ended March 31, 2017 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, 2016, 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 28, 2017. There have been no significant changes to the Company's significant accounting policies during the three months ended March 31, 2017, 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.

8
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(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 income. REIT's are subject to a number of other organizational and operational requirements. The Company conducts business in various states and municipalities within the U.S. (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 U.S. 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 U.S. 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 taxable income from its real estate operations in the U.S. and has historically distributed all of its REIT taxable income to its shareholders. 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.
The Company's 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.

9
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(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 months ended March 31, 2017 and 2016, the Company recognized an income tax expense of $0.9 million and $0.6 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 U.S. or in foreign jurisdictions.
Revision to previously issued financial statements
During the six months ended June 30, 2016, the Company identified 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 has revised its presentations of OCI for the first quarter of 2017 for comparative purposes. The effects of these revisions are summarized below:
(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
)
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 8 — 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

10
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

•
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.
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 13 — 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 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. The Company has adopted the provisions of this guidance effective January 1, 2017, 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 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. The Company has adopted the provisions of this guidance effective January 1, 2017, 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 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. The Company has adopted the provisions of this guidance effective January 1, 2017, 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.

11
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

In January 2017, the FASB issued ASU 2017-01 Clarifying the Definition of a Business (Topic 805) guidance that revises the definition of a business. Amongst other things, this new guidance is applicable when evaluating whether an acquisition (disposal) should be treated as either a business acquisition (disposal) or an asset acquisition (disposal). Under the revised guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset or group of similar assets, the assets acquired would not be considered a business. The revised guidance is effective for reporting periods beginning after December 15, 2017, and the amendments will be applied prospectively. The Company has adopted the provisions of this guidance effective January 1, 2017, and has applied the provisions prospectively. While Company's acquisitions have historically been classified as either business combinations or asset acquisitions, certain acquisitions that were classified as business combinations by the Company likely would have been considered asset acquisitions under the new standard. As a result, future transaction costs are more likely to be capitalized since the Company expects most of its future acquisitions to be classified as asset acquisitions under this new standard.
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 evaluating the impact of the implementation of this guidance, including performing a preliminary review of all revenue streams to identify any differences in the timing, measurement or presentation of revenue recognition. The Company is continuing to evaluate the allowable methods of adoption.
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 2016-08 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 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 evaluating the impact of the implementation of this guidance, including performing a preliminary review of all revenue streams to identify any differences in the timing, measurement or presentation of revenue recognition. The Company is continuing to evaluate the allowable methods of adoption.

12
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

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 evaluating the impact of the implementation of this guidance, including performing a preliminary review of all revenue streams to identify any differences in the timing, measurement or presentation of revenue recognition. The Company is continuing to evaluate the allowable methods of adoption.
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 November 2016, the FASB issued ASU 2016-18 Restricted Cash (a consensus of the FASB Emerging Issues Task Force) (Topic 230) guidance on the classification of restricted cash in the statement of cash flows. The amendment requires restricted cash to be included in the beginning-of-period and end-of-period total cash amounts. Therefore, transfers between cash and restricted cash will no longer be shown on the statement of cash flows. The 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 January 2017, the FASB issued ASU 2017-04 Intangibles - Goodwill and Other (Topic 350) guidance on simplifying subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The amendments in this update modify the concept of impairment from the condition that exists to when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The revised guidance is effective for reporting periods beginning after December 15, 2019, and the amendments will be applied prospectively. Early application is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of this new guidance.
In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets guidance related to partial sales of non-financial assets, eliminates rules specifically addressing the sales of real estate, clarifies the definition of in substance non-financial assets, removes exception to the financial asset derecognition model and clarifies the accounting for contributions of non-financial assets to joint ventures. The revised guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted, but only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of this new guidance.
Note 3 — Merger Transaction
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, was converted into the right to receive 2.27 shares of the Company's Common Stock (such consideration, the “Stock Merger Consideration”), and each outstanding unit of limited partnership interest and Class B interest of the Global II OP (collectively, “Global II OP Units”) was converted into the right to receive 2.27 shares of the Company's Common Stock (the “Partnership Merger Consideration” and, together with the Stock Merger Consideration, the “Merger Consideration”), in each case with cash paid in lieu of fractional shares.
In addition, as provided in the Merger Agreement, all outstanding restricted stock of Global II became fully vested and entitled to receive the Merger Consideration.
The Company issued 9.6 million of its Common Stock as consideration in the Merger. Based upon the closing price of the shares of the Company's Common Stock of $23.10 on December 21, 2016, as reported on the NYSE, and the number of shares of Global II Common Stock outstanding, including unvested restricted shares and OP Units, net of any fractional shares on December 21, 2016, the aggregate fair value of the Merger Consideration paid to former holders of Global II Common Stock and former holders of units of Global II OP Units was $220.9 million.

13
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

On December 22, 2016 (the "Merger Date"), pursuant to the Merger Agreement, Global II merged with and into the Merger Sub. In addition, Global II OP, merged with the OP (see Note 1 — Organization for details). The fair value of the consideration transferred for the Mergers totaled $220.9 million and consisted of the following:
 
 
As of Merger Date
Fair value of consideration transferred:
 
 
Cash
 
$
—

Common stock
 
220,868

Total consideration transferred
 
$
220,868

Accounting Treatment of the Mergers
The Mergers are accounted for under the acquisition method for business combinations pursuant to GAAP, with the Company as the accounting acquirer of Global II. The consideration to be transferred by the Company to acquire Global II establishes a new accounting basis for the assets acquired, liabilities assumed and any non-controlling interests, measured at their respective fair value as of the Merger Date. To the extent fair value of the Merger Consideration exceeds fair value of net assets acquired, any such excess represents goodwill. Alternatively, if fair value of net assets acquired exceeds fair value of the Merger Consideration, the transaction could result in a bargain purchase gain that is recognized immediately in earnings and attributable to the Company's common stockholders. Adjustments to estimated fair value of identifiable assets and liabilities of Global II, as well as adjustments to the Merger Consideration may change the determination and amount of goodwill and/or bargain purchase gain and may impact depreciation, amortization and accretion based on revised fair value of assets acquired and liabilities assumed. The actual value of the Merger Consideration is based upon the market price of the Company's Common Stock at the time of closing of the Merger.

14
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

Allocation of Consideration
The consideration transferred pursuant to the Merger was allocated to the assets acquired and liabilities assumed for Global II, based upon their estimated fair values as of the Merger Date. As of December 31, 2016, the allocations in the table below from land, buildings and fixtures and improvements, acquired intangible lease assets and liabilities, were provisionally assigned to each class of assets and liabilities, pending final confirmation, which will be made with assistance from a third party specialist for the Merger acquisitions acquired on the Merger Date. The following table summarizes the provisional fair values of the assets acquired and liabilities assumed, including all measurement period adjustments as of March 31, 2017.
(Dollar amounts in thousands)
 
Global II
Total consideration:
 
 
Fair value of Company's shares of common stock issued, net of fractional shares
 
$
220,868

Assets Acquired at Fair Value
 
 
Land
 
70,921

Buildings, fixtures and improvements
 
390,542

Acquired intangible lease assets
 
112,866

Total real estate investments, at fair value
 
574,329

Restricted cash
 
7,575

Derivatives, at fair value
 
21,808

Prepaid expenses and other assets
 
1,317

Related party notes receivable acquired in Merger
 
5,138

Due from related parties
 
1,463

Deferred tax assets
 
368

Goodwill and other intangible assets, net
 
10,282

Total Assets Acquired at Fair Value
 
622,280

Liabilities Assumed at Fair Value
 
 
Mortgage notes payable
 
279,032

Mortgage (discount) premium, net
 
(2,724
)
Mezzanine facility
 
107,047

Mezzanine discount, net
 
(26
)
Acquired intangible lease liabilities, net
 
8,516

Derivatives, at fair value
 
3,911

Accounts payable and accrued expenses
 
7,212

Prepaid rent
 
6,001

Deferred tax liability
 
9,763

Taxes payable
 
1,661

Dividend payable
 
2

Total Liabilities Assumed at Fair Value
 
420,395

Net assets acquired excluding cash
 
201,885

Cash acquired on acquisition
 
$
18,983

See Note 4 — Real Estate Investments, Net for pro forma disclosures relating to the Global II Merger in 2016 and other property acquisitions during the three months ended March 31, 2017.


15
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

Acquired Related Party Receivable
On December 16, 2016, Global II entered into a letter agreement (the “Letter Agreement”) with American Realty Capital Global II Advisors, LLC (“Global II Advisor”), and AR Global, the parent of the Global II Advisor, pursuant to which the Global II Advisor agreed to reimburse Global II $6.3 million in organization and offering costs incurred by Global II in its IPO (the “Global II IPO”) that exceeded 2.0% of gross offering proceeds in the Global II IPO (the “Excess Amount”). Global II's IPO was suspended in November 2015 and lapsed in accordance with its terms in August 2016. The Letter Agreement was negotiated on behalf of Global II, and approved, by the independent directors of Global II.
The Letter Agreement provided for reimbursement of the Excess Amount to Global II through (1) the tender of 22,115 Class B Units of limited partnership interest of Global II’s OP ("Global II Class B Units"), previously issued to the Global II Advisor as payment in lieu of cash for its provision of asset management services, and (2) the payment of the balance of the Excess Amount in equal cash installments over an eight month period. The value of the Excess Amount was determined using a valuation for each Global II Class B Unit based on the 30-day volume weighted average price of each share of of Company Stock on the Merger Date.
Upon consummation of the Merger, Class B Units were tendered to the Company and the balance of the excess amount of $5.1 million was payable in eight equal monthly installments beginning on January 15, 2017. Such receivable was acquired by the Company in the Merger. During the three months ended March 31, 2017, the Company received $1.9 million in payments with respect to the excess organization and offering costs incurred by Global II. AR Global has unconditionally and irrevocably guaranteed Global II Advisor’s obligations to repay the monthly installments.
Note 4 — Real Estate Investments, Net
Property Acquisitions
The following table presents the allocation of the assets acquired and liabilities assumed during the three months ended March 31, 2017 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 three months ended March 31, 2016.
 
 
Three Months Ended
(Dollar amounts in thousands)
 
March 31, 2017
Real estate investments, at cost:
 
 
Land
 
$
5,443

Buildings, fixtures and improvements
 
22,131

Total tangible assets
 
27,574

Intangibles acquired:
 
 
In-place leases
 
4,003

Above market lease assets
 
47

Below market lease liabilities
 
(1,334
)
Total assets acquired, net
 
30,290

Mortgage notes payable used to acquire real estate investments
 
—

Cash paid for acquired real estate investments
 
$
30,290

Number of properties purchased
 
3

Dispositions
As of March 31, 2017 and December 31, 2016, the Company did not have any properties that are classified as assets held for sale. The Company did not sell any real estate assets during the three months ended March 31, 2016. During the three months ended March 31, 2017, the Company sold its property located in Fort Washington, Pennsylvania for a total contract sales price of $13.0 million for a gain of $0.4 million, which is reflected in gains on dispositions of real estate investments in the accompanying consolidated statements of operations for the three months ended March 31, 2017. Also included in gains on dispositions of real estate investments is approximately $0.6 million reduction in the Gain Fee payable to the Advisor as a result of reinvestments during the three months ended March 31, 2017 (see Note 11 —  Related Party Transactions for details).

16
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

Future Minimum Rents
The following table presents future minimum base rental cash payments due to the Company over the next five calendar years and thereafter as of March 31, 2017. 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)
2017 (remainder)
 
$
171,422

2018
 
232,008

2019
 
234,884

2020
 
237,695

2021
 
235,617

2022
 
226,038

Thereafter
 
805,696

 
 
$
2,143,360

___________________________________________
(1) 
Based on the exchange rates as of March 31, 2017.
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 March 31, 2017 and 2016.
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 March 31, 2017 and 2016.
 
 
March 31,
Country or State
 
2017
 
2016
United Kingdom
 
21.8%
 
18.6%
United States:
 
 
 
 
Texas
 
*
 
11.4%
___________________________________________
*
Geography's annualized rental income on a straight-line basis was not greater than 10% of total annualized rental income for all portfolio properties as of the period specified.


17
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

Note 5 — 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 $698.2 million (including £177.2 million and €310.2 million) and $616.6 million (including £177.2 million and €258.9 million) outstanding under the Credit Facility as of March 31, 2017 and December 31, 2016, 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, for an extension fee of $1.5 million. There is an additional one-year extension option remaining, 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 March 31, 2017, the Credit Facility reflected variable and fixed rate borrowings with a carrying value and fair value of $698.2 million, and a weighted average effective interest rate of 2.6% after giving effect to interest rate swaps in place. The unused borrowing capacity under the Credit Facility as of March 31, 2017 and December 31, 2016 was $33.1 million and $113.0 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 its 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 March 31, 2017, the Company was in compliance with the financial covenants under the Credit Facility.
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 8 — 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 (the "Bridge Commitment"), pursuant to which UBS Securities LLC and UBS AG, Stamford Branch agreed to provide a $150.0 million senior secured bridge loan facility for a term of 364 days from the date of the merger transaction. The Bridge Commitment required a 1.50% fee of the commitment amount upon execution. Upon closing of the Merger, the Company did not exercise its rights under the Bridge Commitment and as a result thereof, the Bridge Commitment was automatically terminated at the Merger.
Mezzanine Facility
In connection with the Merger, the Company assumed a mezzanine loan agreement (the "Mezzanine Facility") with an estimated aggregate fair value of $107.0 million. The Mezzanine Facility, which provided for aggregate borrowings up to €128.0 million ($136.7 million based upon an exchange rate as of March 31, 2017) subject to certain conditions. The Mezzanine Facility bore interest at 8.25% per annum, payable quarterly, and was scheduled to mature on August 13, 2017.
On March 30, 2017, the Company terminated the Mezzanine Facility agreement and repaid in full the outstanding balance of $56.5 million (or €52.7 million). The outstanding balance of the Mezzanine Facility was $55.4 million (or €52.7 million) as of December 31, 2016. The Company had no unused borrowing capacity under the Mezzanine Facility as of December 31, 2016.
Unencumbered Assets
The total gross carrying value of unencumbered assets as of March 31, 2017 was $1.5 billion.

18
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

Note 6 — Mortgage Notes Payable
Mortgage notes payable as of March 31, 2017 and December 31, 2016 consisted of the following:
 
 
 
 
Encumbered Properties
 
Outstanding Loan Amount (1)
 
Effective Interest Rate
 
Interest Rate
 
 
Country
 
Portfolio
 
 
March 31, 2017
 
December 31, 2016
 
 
 
Maturity
 
 
 
 
 
 
(In thousands)
 
(In thousands)
 
 
 
 
 
 
Finland:
 
Finnair
 
4
 
$
30,338

 
$
29,878

 
2.2%
(2) 
Fixed
 
Sep. 2020
 
 
Tokmanni
 
1
 
30,952

 
30,483

 
2.4%
(2) 
Fixed
 
Oct. 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
France:
 
Auchan (5)
 
1
 
8,866

 
8,732

 
1.7%
(2) 
Fixed
 
Dec. 2019
 
 
Pole Emploi (5)
 
1
 
6,196

 
6,102

 
1.7%
(2) 
Fixed
 
Dec. 2019
 
 
Sagemcom (5)
 
1
 
38,349

 
37,768

 
1.7%
(2) 
Fixed
 
Dec. 2019
 
 
Worldline (5)
 
1
 
5,341

 
5,260

 
1.9%
(2) 
Fixed
 
Jul. 2020
 
 
DCNS (5)
 
1
 
10,148

 
9,994

 
1.5%
(2) 
Fixed
 
Dec. 2020
 
 
ID Logistics II (5)
 
2
 
11,216

 
11,046

 
1.3%
 
Fixed
 
Jun. 2021
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Germany
 
Rheinmetall
 
1
 
11,323

 
11,152

 
2.6%
(2) 
Fixed
 
Jan. 2019
 
 
OBI DIY
 
1
 
4,807

 
4,734

 
2.4%
 
Fixed
 
Jan. 2019
 
 
RWE AG
 
3
 
66,765

 
65,753

 
1.6%
(2) 
Fixed
 
Oct. 2019
 
 
Rexam
 
1
 
5,619

 
5,534

 
1.8%
(2) 
Fixed
 
Oct. 2019
 
 
Metro Tonic
 
1
 
28,308

 
27,879

 
1.7%
(2) 
Fixed
 
Dec. 2019
 
 
ID Logistics I (5)
 
1
 
4,273

 
4,208

 
1.0%
 
Fixed
 
Oct. 2021
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Luxembourg:
 
DB Luxembourg (5)
 
1
 
38,456

 
37,873

 
1.4%
(2) 
Fixed
 
May 2020
The Netherlands:
 
ING Amsterdam (5)
 
1
 
47,002

 
46,290

 
1.7%
(2) 
Fixed
 
Jun. 2020
 
 
Total EUR denominated
 
22
 
347,959

 
342,686

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United Kingdom:
 
McDonald's
 
1
 
949

 
938

 
4.1%
(2) 
Fixed
 
Oct. 2017
 
 
Wickes Building Supplies I
 
1
 
2,431

 
2,402

 
3.7%
(2) 
Fixed
 
May 2018
 
 
Everything Everywhere
 
1
 
4,995

 
4,936

 
4.0%
(2) 
Fixed
 
Jun. 2018
 
 
Thames Water
 
1
 
7,493

 
7,405

 
4.1%
(2) 
Fixed
 
Jul. 2018
 
 
Wickes Building Supplies II
 
1
 
2,060

 
2,036

 
4.2%
(2) 
Fixed
 
Jul. 2018
 
 
Northern Rock
 
2
 
6,556

 
6,479

 
4.4%
(2) 
Fixed
 
Sep. 2018
 
 
Wickes Building Supplies III
 
1
 
2,373

 
2,345

 
4.3%
(2) 
Fixed
 
Nov. 2018
 
 
Provident Financial
 
1
 
15,922

 
15,735

 
4.1%
(2) 
Fixed
 
Feb. 2019
 
 
Crown Crest
 
1
 
24,039

 
23,757

 
4.2%
(2) 
Fixed
 
Feb. 2019
 
 
Aviva
 
1
 
19,606

 
19,376

 
3.8%
(2) 
Fixed
 
Mar. 2019
 
 
Bradford & Bingley
 
1
 
9,441

 
9,330

 
3.5%
(2) 
Fixed
 
May 2020
 
 
Intier Automotive Interiors
 
1
 
5,900

 
5,831

 
3.5%
(2) 
Fixed
 
May 2020
 
 
Capgemini
 
1
 
6,868

 
6,788

 
3.2%
(2) 
Fixed
 
Jun. 2020
 
 
Fujitsu
 
3
 
30,945

 
30,581

 
3.2%
(2) 
Fixed
 
Jun. 2020
 
 
Amcor Packaging
 
7
 
3,904

 
3,858

 
3.5%
(2) 
Fixed
 
Jul. 2020
 
 
Fife Council
 
1
 
2,290

 
2,263

 
3.5%
(2) 
Fixed
 
Jul. 2020
 
 
Malthrust
 
3
 
3,996

 
3,949

 
3.5%
(2) 
Fixed
 
Jul. 2020
 
 
Talk Talk
 
1
 
4,777

 
4,721

 
3.5%
(2) 
Fixed
 
Jul. 2020
 
 
HBOS
 
3
 
6,731

 
6,652

 
3.5%
(2) 
Fixed
 
Jul. 2020
 
 
DFS Trading
 
5
 
12,662

 
12,513

 
3.4%
(2) 
Fixed
 
Aug. 2020
 
 
DFS Trading
 
2
 
2,964

 
2,930

 
3.4%
(2) 
Fixed
 
Aug. 2020
 
 
HP Enterprise Services
 
1
 
11,597

 
11,461

 
3.4%
(2) 
Fixed
 
Aug. 2020
 
 
Foster Wheeler
 
1
 
49,077

 
48,501

 
2.6%
(2) 
Fixed
 
Oct. 2018
 
 
Harper Collins
 
1
 
35,059

 
34,648

 
3.4%
(2) 
Fixed
 
Oct. 2019

19
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

 
 
 
 
Encumbered Properties
 
Outstanding Loan Amount (1)
 
Effective Interest Rate
 
Interest Rate
 
 
Country
 
Portfolio
 
 
March 31, 2017
 
December 31, 2016
 
 
 
Maturity
 
 
NCR Dundee
 
1
 
7,043

 
6,960

 
2.9%
(2) 
Fixed
 
Apr. 2020
 
 
Total GBP denominated
 
43
 
279,678

 
276,395

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States:
 
Quest Diagnostics
 
1
 
52,800

 
52,800

 
2.8%
(3) 
Variable
 
Sep. 2018
 
 
Western Digital
 
1
 
17,600

 
17,682

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

 
33,550

 
2.9%
(4) 
Variable
 
Dec. 2020
 
 
FedEx Freight (5)
 
1
 
6,165

 
6,165

 
4.5%
 
Fixed
 
Jun. 2021
 
 
Veolia Water (5)
 
1
 
4,110

 
4,110

 
4.5%
 
Fixed
 
Jun. 2021
Puerto Rico:
 
Encanto Restaurants
 
18
 
21,474

 
21,599

 
6.3%
 
Fixed
 
Jun. 2017
 
 
Total USD denominated
 
23
 
135,699

 
135,906

 
 
 
 
 
 
 
 
Gross mortgage notes payable
 
88
 
763,336

 
754,987

 
2.8%
 
 
 
 
 
 
Deferred financing costs, net of accumulated amortization
 
—
 
(4,726
)
 
(5,103
)
 
—%
 
 
 
 
 
 
Mortgage notes payable, net of deferred financing costs
 
88
 
$
758,610

 
$
749,884

 
2.8%
 
 
 
 
_______________________________
(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.
(4) 
The interest rate is 2.0% plus 1-month Adjusted LIBOR as defined in the mortgage agreement.
(5) 
New mortgages acquired as part of the Merger on the Merger Date.
In connection with the Global II Merger, the OP assumed the outstanding gross mortgage notes payable with an estimated aggregate fair value of $279.0 million at the Merger Date.
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 March 31, 2017:
(In thousands)
 
Future Principal Payments (1)
2017 (remainder)
 
$
22,661

2018
 
128,121

2019
 
265,214

2020
 
305,276

2021
 
42,064

2022
 
—

Thereafter
 
—

Total
 
$
763,336

_________________________
(1) 
Based on the exchange rates as of March 31, 2017.
The Company's mortgage notes payable agreements require compliance with certain property-level financial covenants including debt service coverage ratios. As of March 31, 2017 and December 31, 2016, the Company was in compliance with financial covenants under its mortgage notes payable agreements.
Note 7 — 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:

20
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

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 March 31, 2017 and December 31, 2016, 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.
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 March 31, 2017 and December 31, 2016, 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
March 31, 2017
 
 
 
 
 
 
 
 
Cross currency swaps, net (GBP & EUR)
 
$
—

 
$
18,061

 
$
—

 
$
18,061

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

 
$
5,929

 
$
—

 
$
5,929

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

 
$
(13,508
)
 
$
—

 
$
(13,508
)
Put options (GBP & EUR)
 
$
—

 
302

 
$
—

 
$
302

OPP (see Note 13)
 
$
—

 
$
—

 
$
(10,900
)
 
$
(10,900
)
December 31, 2016
 
 
 
 
 
 
 
 
Cross currency swaps, net (GBP & EUR)
 
$
—

 
$
21,179

 
$
—

 
$
21,179

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

 
$
6,998

 
$
—

 
$
6,998

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

 
$
(15,457
)
 
$
—

 
$
(15,457
)
Put options (GBP & EUR)
 
$
—

 
$
523

 
$
—

 
$
523

OPP (see Note 13)
 
$
—

 
$
—

 
$
(13,400
)
 
$
(13,400
)
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.

21
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

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 three months ended March 31, 2017.
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 three months ended March 31, 2017:
(In thousands)
 
OPP
Beginning Balance as of December 31, 2016
 
$
13,400

   Fair value adjustment
 
(2,500
)
Ending balance as of March 31, 2017
 
$
10,900

The following table provides quantitative information about the significant Level 3 input used:
Financial Instrument
 
Fair Value at March 31, 2017
 
Principal Valuation Technique
 
Unobservable Inputs
 
Input Value
 
 
(In thousands)
 
 
 
 
 
 
OPP
 
$
10,900

 
Monte Carlo Simulation
 
Expected volatility
 
28.0%
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.
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
 
March 31,
2017
 
March 31,
2017
 
December 31,
2016
 
December 31,
2016
Mortgage notes payable (1) (2)
 
3
 
$
760,936

 
$
756,389

 
$
752,484

 
$
747,870

Credit Facility
 
3
 
$
698,203

 
$
698,203

 
$
616,614

 
$
616,614

Mezzanine Facility (3)
 
3
 
$
—

 
$
—

 
$
55,383

 
$
55,400

__________________________________________________________
(1) 
Carrying value includes $763.3 million gross mortgage notes payable and $2.4 million mortgage discount, net as of March 31, 2017.
(2) 
Carrying value includes $755.0 million gross mortgage notes payable and $2.5 million mortgage discount, net as of December 31, 2016.
(3) 
Carrying value includes $55.4 million Mezzanine Facility and $17,000 mezzanine discount, net as of December 31, 2016.
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. The Mezzanine Facility carried a fixed interest rate and as such the advances were considered to approximate fair value.

22
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

Note 8 — 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.
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 March 31, 2017 and December 31, 2016:
(In thousands)
 
Balance Sheet Location
 
March 31, 2017
 
December 31, 2016
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign currency forwards (EUR-USD)
 
Derivative assets, at fair value
 
$
886

 
$
972

Cross currency swaps (GBP)
 
Derivative assets, at fair value
 
15,254

 
16,868

Cross currency swaps (EUR)
 
Derivative assets, at fair value
 
2,328

 
3,003

Interest rate swaps (GBP)
 
Derivative liabilities, at fair value
 
(7,805
)
 
(8,595
)
Interest rate swaps (EUR)
 
Derivative liabilities, at fair value
 
(3,554
)
 
(4,262
)
Total
 
 
 
$
7,109

 
$
7,986

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Foreign currency forwards (GBP-USD)
 
Derivative assets, at fair value
 
3,314

 
$
3,918

Foreign currency forwards (EUR-USD)
 
Derivative assets, at fair value
 
1,729

 
2,108

Put options (GBP)
 
Derivative assets, at fair value
 
56

 
131

Put options (EUR)
 
Derivative assets, at fair value
 
246

 
392

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

 
477

Cross currency swaps (EUR)
 
Derivative assets, at fair value
 
479

 
831

Interest rate swaps (EUR)
 
Derivative liabilities, at fair value
 
(2,149
)
 
(2,600
)
Total
 
 
 
$
3,675

 
$
5,257

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company's derivatives as of March 31, 2017 and December 31, 2016. 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
 
Financial Instruments
 
Cash Collateral Received (Posted)
 
Net Amount
March 31, 2017
 
$
24,292

 
$
(13,508
)
 
$
—

 
$
10,784

 
$
—

 
$
—

 
$
10,784

December 31, 2016
 
$
28,700

 
$
(15,457
)
 
$
—

 
$
13,243

 
$
—

 
$
—

 
$
13,243


23
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

In addition to the above derivative arrangements, the Company also uses non-derivative financial instruments to hedge its exposure to foreign currency exchange rate fluctuations as part of its risk management program, including foreign denominated debt issued and outstanding with third parties to protect the value of its net investments in foreign subsidiaries against exchange rate fluctuations. The Company draws foreign currency advances under its Credit Facility to fund certain investments in the respective local currency which creates a natural hedge against the original equity invested in the real estate investments, removing the need for the final cross currency swaps (See Note 5 — Credit Borrowings). As further discussed below, in conjunction with the restructuring of the cross currency swaps on February 4, 2015, foreign currency advances of €110.5 million and £68.5 million were drawn under the Company’s Credit Facility. The Company separately designated each foreign currency draw as a net investment hedge under ASC 815. Effective May 17, 2015, the Company modified the hedging relationship and designated all current and future foreign currency draws as net investment hedges.
Interest Rate Swaps
The Company’s objectives in using interest rate swaps are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
As of March 31, 2017 and December 31, 2016, the Company had the following outstanding interest rate swaps that were designated as cash flow hedges of interest rate risk:
 
 
March 31, 2017
 
December 31, 2016
Derivatives
 
Number of
Instruments
 
Notional Amount
 
Number of
Instruments
 
Notional Amount
 
 
 
 
(In thousands)
 
 
 
(In thousands)
Interest rate swaps (GBP)
 
21
 
$
479,790

 
21
 
$
474,161

Interest rate swaps (EUR)
 
14
 
437,849

 
14
 
431,213

Total
 
35
 
$
917,639

 
35
 
$
905,374

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction impacts earnings. During 2017, such derivatives were used to hedge the variable cash flows associated with variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2017 and 2016, the Company recorded gains of $36,000 and losses of $30,000 of ineffectiveness in earnings, respectively.
Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt. During the next 12 months, the Company estimates that an additional $5.8 million will be reclassified from other comprehensive income (loss) as an increase to interest expense.
The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the three months ended March 31, 2017 and 2016.
 
 
Three Months Ended March 31,
(In thousands)
 
2017
 
2016
Amount of loss recognized in accumulated other comprehensive income (loss) from derivatives (effective portion)
 
$
(1,983
)
 
$
(9,566
)
Amount of loss reclassified from accumulated other comprehensive income (loss) into income as interest expense (effective portion)
 
$
(1,472
)
 
$
(1,259
)
Amount of gain (loss) recognized in income on derivative instruments (ineffective portion, reclassifications of missed forecasted transactions and amounts excluded from effectiveness testing)
 
$
36

 
$
(30
)

24
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

Cross Currency Swaps Previously Designated as Net Investment Hedges
The Company is exposed to fluctuations in foreign exchange rates on property investments in foreign countries which pay rental income, incur property related expenses and hold debt instruments in currencies other than its functional currency, the USD. The Company uses foreign currency derivatives including cross currency swaps to hedge its exposure to changes in foreign exchange rates on certain of its foreign investments. Cross currency swaps involve fixing the applicable exchange rate for delivery of a specified amount of foreign currency on specified dates.
On February 4, 2015, the Company restructured its cross currency swaps and replaced its initial USD equity funding in certain foreign real estate investments with foreign currency debt. As part of the restructuring, foreign currency advances of €110.5 million and £68.5 million were drawn under the Company’s Credit Facility which created a natural hedge against the original equity invested in the real estate investments, thus removing the need for the final equity notional component of the cross currency swaps. The cross currency swaps had been designated as net investment hedges through the date of the restructure. For derivatives designated as net investment hedges, the effective portion of changes in the fair value of the derivatives are reported in accumulated other comprehensive income (loss) (outside of earnings) as part of the cumulative translation adjustment. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. Amounts are reclassified out of accumulated other comprehensive income (loss) into earnings when the hedged net investment is either sold or substantially liquidated. The restructuring and settlement of the cross currency swaps resulted in a gain of approximately $19.0 million, with $10.1 million in proceeds received and $8.9 million retained by the bank as a reduction of outstanding Credit Facility balance as of December 31, 2015. The gain will remain in the cumulative translation adjustment until such time as the net investments are sold or substantially liquidated in accordance with ASC 830. Following the restructuring noted above, these cross currency swaps no longer qualified for net investment hedge accounting treatment and as such, subsequent to February 5, 2015, all changes in fair value are recognized in earnings.
Foreign Denominated Debt Designated as Net Investment Hedges
Effective May 17, 2015, all foreign currency draws under the Credit Facility were designated as net investment hedges. As such, the effective portion of changes in value due to currency fluctuations are reported in accumulated other comprehensive income (loss) (outside of earnings) as part of the cumulative translation adjustment. The undesignated portion of the change in fair value of the derivatives is recognized directly in earnings. Amounts are reclassified out of accumulated other comprehensive income (loss) into earnings when the hedged net investment is either sold or substantially liquidated, or if the Company should no longer possess a controlling interest.
As of March 31, 2017, total foreign currency advances under the Credit Facility were approximately $552.8 million, which reflects advances of £177.2 million ($221.3 million based upon an exchange rate of £1.00 to $1.25, as of March 31, 2017) and advances of €310.2 million ($331.4 million based upon an exchange rate of €1.00 to $1.07, as of March 31, 2017).
Prior to May 16, 2015, foreign currency advances, which were comprised of $92.1 million of Pound Sterling ("GBP") draws (based upon an exchange rate of £1.00 to $1.58, as of May 16, 2015) and $126.0 million of Euro ("EUR") draws (based upon an exchange rate of €1.00 to $1.14, as of May 16, 2015) were not designated as net investment hedges and, accordingly, the changes in value through May 16, 2015 due to currency fluctuations were reflected in earnings. As of March 31, 2017, total outstanding draws under the Credit Facility denominated in foreign currency was $552.8 million. The Company designates its net investment hedge position on the first day of each quarterly period. As of January 1, 2017, foreign currency draws under the Credit Facility of £177.2 million ($221.3 million based on the aforementioned exchange rate as of March 31, 2017) and €258.9 million ($276.6 million based on the aforementioned exchange rate as of March 31, 2017) were designated as net investment hedges of the total foreign currency draws outstanding on the Credit Facility of $497.9 million. As of January 1, 2017, total net investments in real estate denominated in foreign currency were £114.3 million ($142.7 million based on the aforementioned exchange rate as of March 31, 2017) and €365.4 million ($390.4 million based on the aforementioned exchange rate as of March 31, 2017), which resulted in £63.0 million ($78.6 million based on the aforementioned exchange rate as of March 31, 2017) of undesignated excess position. As of January 1, 2017, the Company’s EUR designated as net investment hedges did not result in an excess position. The Company recorded losses of $0.9 million and losses of $0.1 million for the three months ended March 31, 2017 and 2016, respectively, due to currency changes on the undesignated excess of the foreign currency advances over the related net investments. For the portion of foreign draws now designated as net investment hedges there were no additional remeasurement gains (losses) for the three months ended March 31, 2017.

25
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)

As of March 31, 2017, and December 31, 2016, the Company had the following outstanding foreign cross currency derivatives that were used to hedge its net investments in foreign operations:
 
 
March 31, 2017
 
December 31, 2016
Derivatives
 
Number of
Instruments
 
Notional Amount
 
Number of
Instruments
 
Notional Amount
 
 
 
 
(In thousands)
 
 
 
(In thousands)
Cross currency swaps (GBP - USD)
 
1
 
$
61,346

 
1
 
$
60,626

Cross currency swaps (EUR - USD)
 
3
 
38,542

 
3
 
37,957

Foreign currency forwards (EUR-USD)
 
1
 
10,100

 
1
 
10,100

Total
 
5
 
$
109,988

 
5
 
$
108,683

Non-designated Derivatives
The Company is exposed to fluctuations in the exchange rates of its functional currency, the USD, against the GBP and the EUR. The Company uses foreign currency derivatives including options, currency forward and cross currency swap agreements to manage its exposure to fluctuations in GBP-USD and EUR-USD exchange rates. While these derivatives are hedging the fluctuations in foreign currencies, they do not meet the strict hedge accounting requirements to be classified as hedging instruments. Changes in the fair value of derivatives not designated as hedges under qualifying hedging relationships are recorded directly in net income (loss). The Company recorded total losses of $0.5 million and $0.3 million on the non-designated hedges for the three months ended March 31, 2017 and 2016, respectively.
As of March 31, 2017 and December 31, 2016, the Company had the following outstanding derivatives that were not designated as hedges under qualifying hedging relationships.
 
 
March 31, 2017
 
December 31, 2016
Derivatives
 
Number of
Instruments
 
Notional Amount
 
Number of
Instruments
 
Notional Amount
 
 
 
 
(In thousands)
 
 
 
(In thousands)
Foreign currency forwards (GBP - USD)
 
16
 
$
17,054

 
21
 
$
18,058

Foreign currency forwards (EUR - USD)
 
18
 
25,996

 
20
 
28,424

Cross currency swaps (GBP - USD)
 
—
 
—

 
3
 
43,457

Cross currency swaps (EUR - USD)
 
2
 
19,752

 
3
 
30,604

Interest rate swaps (EUR)
 
5
 
129,534

 
5
 
127,570

Put options (GBP-USD)
 
4
 
2,700

 
5
 
3,375

Put options (EUR-USD)
 
4
 
5,000

 
5
 
6,250

Total
 
49
 
$
200,036

 
62
 
$
257,738


Credit-risk-related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where if the Company either defaults or is capable of being declared in default on any