10-Q 1 gnl630201710-q.htm GLOBAL NET LEASE INC. 6.30.17 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 June 30, 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
image3a08.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 July 31, 2017, the registrant had 67,286,817 shares of common stock outstanding.

GLOBAL NET LEASE, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
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)
(Unaudited)


 
June 30,
2017
 
December 31,
2016
ASSETS
 
 
 
Real estate investments, at cost:
 
 
 
Land
$
389,781

 
$
376,704

Buildings, fixtures and improvements
2,040,217

 
1,967,930

Acquired intangible lease assets
608,052

 
587,061

Total real estate investments, at cost
3,038,050

 
2,931,695

Less accumulated depreciation and amortization
(276,336
)
 
(216,055
)
Total real estate investments, net
2,761,714

 
2,715,640

Cash and cash equivalents
67,411

 
69,831

Restricted cash
5,139

 
7,497

Derivatives, at fair value (Note 8)
15,495

 
28,700

Unbilled straight-line rent
38,198

 
30,459

Prepaid expenses and other assets
19,600

 
17,577

Related party notes receivable acquired in Merger (Note 3)
1,285

 
5,138

Due from related parties
16

 
16

Deferred tax assets
1,645

 
1,586

Goodwill and other intangible assets, net
22,154

 
13,931

Deferred financing costs, net
320

 
1,092

Total assets
$
2,932,977

 
$
2,891,467

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Mortgage notes payable, net of deferred financing costs ($4,409 and $5,103 for June 30, 2017 and December 31, 2016, respectively)
$
773,046

 
$
749,884

Mortgage (discount) premium, net
(2,367
)
 
(2,503
)
Credit facility
722,108

 
616,614

Mezzanine facility, net of discount
—

 
55,383

Below-market lease liabilities, net
31,479

 
33,041

Derivatives, at fair value (Note 8)
13,118

 
15,457

Due to related parties
1,428

 
2,162

Accounts payable and accrued expenses
23,181

 
22,861

Prepaid rent
20,864

 
18,429

Deferred tax liability
15,120

 
15,065

Taxes payable
7,366

 
9,059

Dividends payable
55

 
34

Total liabilities
1,605,398

 
1,535,486

Commitments and contingencies (Note 10)


 


Equity:
 
 
 
Preferred stock, $0.01 par value, 16,670,000 shares authorized, none issued and outstanding
—

 
—

Common stock, $0.01 par value, 100,000,000 shares authorized, 67,277,514 and 66,258,559 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively
2,003

 
1,990

Additional paid-in capital
1,729,596

 
1,708,541

Accumulated other comprehensive loss
(2,689
)
 
(16,695
)
Accumulated deficit
(404,209
)
 
(346,058
)
Total stockholders' equity
1,324,701

 
1,347,778

Non-controlling interest
2,878

 
8,203

 Total equity
1,327,579

 
1,355,981

Total liabilities and equity
$
2,932,977

 
$
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 June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
 
Rental income
 
$
60,214

 
$
51,736

 
$
118,706

 
$
103,247

Operating expense reimbursements
 
4,772

 
1,460

 
9,117

 
4,903

Total revenues
 
64,986

 
53,196

 
127,823

 
108,150

 
 
 
 
 
 
 
 
 
 Expenses:
 
 
 
 
 
 
 
 
Property operating
 
7,570

 
3,542

 
14,806

 
9,189

Fire loss
 
500

 
—

 
500

 
—

Operating fees to related parties
 
5,713

 
4,959

 
11,443

 
9,776

Acquisition and transaction related
 
443

 
27

 
1,139

 
(102
)
General and administrative
 
2,053

 
1,880

 
3,823

 
3,584

Equity based compensation
 
(2,235
)
 
70

 
(2,219
)
 
1,114

Depreciation and amortization
 
27,497

 
23,812

 
54,611

 
47,568

Total expenses
 
41,541

 
34,290

 
84,103

 
71,129

Operating income
 
23,445

 
18,906

 
43,720

 
37,021

Other income (expense):
 
 
 
 
 
 
 
 
Interest expense
 
(11,634
)
 
(10,634
)
 
(23,165
)
 
(21,203
)
(Losses) gains on dispositions of real estate investments
 
(143
)
 
—

 
814

 
—

(Losses) gains on derivative instruments
 
(2,990
)
 
3,830

 
(3,460
)
 
3,481

Unrealized (losses) gains on undesignated foreign currency advances and other hedge ineffectiveness
 
(2,971
)
 
4,252

 
(3,853
)
 
4,154

Other income
 
3

 
8

 
10

 
17

Total other expense, net
 
(17,735
)
 
(2,544
)
 
(29,654
)
 
(13,551
)
Net income before income tax
 
5,710

 
16,362

 
14,066

 
23,470

Income tax expense
 
(510
)
 
(430
)
 
(1,416
)
 
(980
)
Net income
 
5,200

 
15,932

 
12,650

 
22,490

Non-controlling interest
 
—

 
(169
)
 
(21
)
 
(239
)
Net income attributable to stockholders
 
$
5,200

 
$
15,763

 
$
12,629

 
$
22,251

 
 
 
 
 
 
 
 
 
Basic and Diluted Earnings Per Share:
 
 
 
 
 
 
 
 
Basic and diluted net income per share attributable to stockholders
 
$
0.08

 
$
0.28

 
$
0.18

 
$
0.39

Basic and diluted weighted average shares outstanding
 
66,652,221

 
56,316,157

 
66,461,663

 
56,314,184

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 June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Net income
 
$
5,200

 
$
15,932

 
$
12,650

 
$
22,490

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Cumulative translation adjustment
 
9,097

 
(201
)
 
10,800

 
(86
)
Designated derivatives, fair value adjustments
 
1,618

 
(3,779
)
 
3,229

 
(12,214
)
Other comprehensive income (loss)
 
10,715

 
(3,980
)
 
14,029

 
(12,300
)
 
 
 
 
 
 
 
 
 
Comprehensive income
 
15,915

 
11,952

 
26,679

 
10,190

Amounts attributable to non-controlling interest
 
 
 
 
 
 
 
 
Net income
 
—

 
(169
)
 
(21
)
 
(239
)
Cumulative translation adjustment
 
(14
)
 
2

 
(15
)
 
1

Designated derivatives, fair value adjustments
 
(2
)
 
40

 
(8
)
 
129

Comprehensive income attributable to non-controlling interest
 
(16
)
 
(127
)
 
(44
)
 
(109
)
 
 
 
 
 
 
 
 
 
Comprehensive income attributable to stockholders
 
$
15,899

 
$
11,825

 
$
26,635

 
$
10,081

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 Six Months Ended June 30, 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

Issuance of common stock
 
811,685

 
8

 
18,510

 
—

 
—

 
18,518

 
—

 
18,518

Conversion of OP Units to common stock
 
181,841

 
5

 
2,624

 
—

 
—


2,629

 
(2,629
)

—

Common stock offering costs, commissions and dealer manager fees
 
—

 
—

 
(185
)
 
—

 
—

 
(185
)
 
—

 
(185
)
Dividends declared
 
—

 
—

 
—

 
—

 
(70,780
)
 
(70,780
)
 
—

 
(70,780
)
Equity-based compensation
 
25,429

 
—

 
430

 
—

 
—

 
430

 
(2,649
)
 
(2,219
)
Distributions to non-controlling interest holders
 
—

 
—

 
—

 
—

 
—

 
—

 
(415
)
 
(415
)
Net Income
 
—

 
—

 
—

 
—

 
12,629

 
12,629

 
21

 
12,650

Cumulative translation adjustment
 
—

 
—

 
—

 
10,785

 
—

 
10,785

 
15

 
10,800

Designated derivatives, fair value adjustments
 
—

 
—

 
—

 
3,221

 
—

 
3,221

 
8

 
3,229

Rebalancing of ownership percentage
 
—

 
—

 
(324
)
 
—

 
—

 
(324
)
 
324

 
—

Balance, June 30, 2017
 
67,277,514

 
$
2,003

 
$
1,729,596

 
$
(2,689
)
 
$
(404,209
)

$
1,324,701

 
$
2,878

 
$
1,327,579

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)


 
 
Six Months Ended June 30,
 
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
Net income
 
$
12,650

 
$
22,490

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

 
 
Depreciation
 
28,970

 
25,298

Amortization of intangibles
 
25,641

 
22,270

Amortization of deferred financing costs
 
1,823

 
4,818

Amortization of mortgage discounts and premiums, net
 
287

 
(240
)
Amortization of mezzanine discount
 
17

 
—

Amortization of below-market lease liabilities
 
(1,644
)
 
(1,258
)
Amortization of above-market lease assets
 
2,089

 
1,136

Amortization of above- and below- market ground lease assets
 
463

 
111

Bad debt expense
 
593

 
—

Unbilled straight-line rent
 
(6,917
)
 
(5,523
)
Equity based compensation
 
(2,219
)
 
1,114

Unrealized losses (gains) on foreign currency transactions, derivatives, and other
 
4,903

 
(538
)
Unrealized losses (gains) on undesignated foreign currency advances and other hedge ineffectiveness
 
3,853

 
(4,154
)
Gains on dispositions of real estate investments
 
(814
)
 
—

Changes in operating assets and liabilities, net:
 
 
 
 
Prepaid expenses and other assets
 
(2,616
)
 
(2,599
)
Deferred tax assets
 
(67
)
 
(9
)
Accounts payable and accrued expenses
 
99

 
(656
)
Prepaid rent
 
2,435

 
(1,102
)
Deferred tax liability
 
1,063

 
414

Taxes payable
 
(1,693
)
 
(1,659
)
Net cash provided by operating activities
 
68,916

 
59,913

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

Capital expenditures
 
(541
)
 
(200
)
Proceeds from sale of real estate investments
 
12,440

 
—

Net cash used in investing activities
 
(18,391
)
 
(200
)
Cash flows from financing activities:
 
 
 
 
Borrowings under credit facility
 
75,335

 
—

Repayments on credit facility
 
(5,050
)
 
(26,696
)
Repayment mezzanine facility
 
(56,537
)
 
—

Payments on mortgage notes payable
 
(21,758
)
 
(378
)
Proceeds from issuance of common stock
 
18,518

 
2

Proceeds from offering costs
 
(185
)
 
—

(Payments) proceeds of financing costs
 
(967
)
 
679

Dividends paid
 
(70,759
)
 
(60,039
)
Distributions to non-controlling interest holders
 
(415
)
 
(1,344
)
Related party notes receivable acquired in Merger
 
3,853

 
—

Advances to related parties, net
 
—

 
386

Restricted cash
 
2,358

 
(15
)
Net cash used in financing activities
 
(55,607
)
 
(87,405
)
Net change in cash and cash equivalents
 
(5,082
)
 
(27,692
)
Effect of exchange rate changes on cash
 
2,662

 
(1,745
)
Cash and cash equivalents, beginning of period
 
69,831

 
69,938

Cash and cash equivalents, end of period
 
$
67,411

 
$
40,501

Supplemental Disclosures:
 
 
 
 
Cash paid for interest
 
$
20,741

20,741

$
21,079

Cash paid for income taxes
 
3,109

 
2,287

Non-Cash Investing and Financing Activities:
 
 
 
 
Conversion of OP Units to common stock (Note 1)
 
2,629

 
—


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

6
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)


Note 1 — Organization
Global Net Lease, Inc. (the "Company"), which 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. On June 2, 2015 (the "Listing Date"), the Company listed shares of its common stock, $0.01 par value per share ("Common Stock") on the New York Stock Exchange ("NYSE") under the symbol "GNL" (the "Listing"). The Company invests in commercial properties, with an emphasis on sale-leaseback transactions involving single tenant net-leased commercial properties.
The Company and American Realty Capital Global Trust II, Inc. ("Global II"), an entity formerly sponsored by an affiliate of AR Capital Global Holdings, LLC, the Company's sponsor (the “Sponsor”), entered into an agreement and plan of merger on August 8, 2016 (the "Merger Agreement"). The Company and Global II each are, or 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 advisory agreements. On December 22, 2016 (the "Merger Date"), 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 Global Net Lease Operating Partnership, L.P. (the "OP"), a Delaware limited partnership, 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).
As of June 30, 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 9.3 years. Based on original purchase price or acquisition value with respect to properties acquired in the Mergers, 50.5% of the Company's properties are located in Europe and 49.5% of the Company's properties are located in the U.S. and the Commonwealth of Puerto Rico. The Company may also originate or acquire first mortgage loans, mezzanine loans, preferred equity or securitized loans secured by real estate. As of June 30, 2017, the Company did not own any first mortgage loans, mezzanine loans, preferred equity or securitized loans.
Substantially all of the Company's business is conducted through the OP. The Company has retained Global Net Lease Advisors, LLC (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 AR Global Investments, LLC (the successor business to AR Capital, LLC (the "Former Parent of the Sponsor"), "AR Global"), the parent of the Company's 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 Moor Park Capital Partners LLP (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.
On February 28, 2017, the Company completed a reverse stock split of Common Stock, limited partnership units in the OP ("OP Units") and long term incentive plan units in the OP ("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 of Common Stock resulting from the Reverse Stock Split for cash. No payments were made in respect of any fractional OP Units. The Reverse Stock Split was applied to all of the 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 Common Stock was reduced from 198.8 million to 66.3 million. In addition, Common Stock was assigned a new CUSIP number upon the market opening on March 1, 2017.
Effective May 24, 2017, following approval by the Company's board of directors, the Company filed an amendment to the Company's charter with the Maryland State Department of Assessments and Taxation, to decrease the total number of shares that the Company has authority to issue from 350.0 million to 116.7 million shares, of which (i) 100.0 million is designated as Common Stock, $0.01 par value per share; and (ii) 16.7 million is designated as preferred stock, $0.01 par value per share.

7
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)

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 has entered into an Equity Distribution Agreement with UBS Securities LLC, Robert W. Baird & Co. Incorporated, Capital One Securities, Inc., Mizuho Securities USA Inc., FBR Capital Markets & Co. and KeyBanc Capital Markets Inc. (together, the “Agents”) to sell shares of Common Stock, to raise aggregate sales proceeds of $175.0 million, from time to time, pursuant to an “at the market” equity offering program (the “ATM Program”). The Common Stock issued under the ATM Program is registered pursuant to the Company's shelf registration statement on Form S-3 (Registration No. 333-214579). During the three and six months ended June 30, 2017, the Company sold 0.8 million shares of Common Stock through the ATM Program for net sales proceeds of $18.3 million.
Note 2 — Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements of the Company included herein were prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to this Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair statement of results for the interim periods. All intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and six months ended June 30, 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 six months ended June 30, 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.
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.

8
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)

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.
The Company recognizes current income tax expense for state and local income taxes and taxes incurred in its foreign jurisdictions. The Company's current income tax expense fluctuates from period to period based primarily on the timing of its taxable income. For the three and six months ended June 30, 2017, the Company recognized an income tax expense of $0.5 million and $1.4 million, respectively. For the three and six months ended June 30, 2016, the Company recognized an income tax expense of $0.4 million and $1.0 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.
Out-of-period adjustment
During the three and six months ended June 30, 2017, the Company recorded $0.5 million of additional rental income and unbilled straight-line rent due to an error in the calculation of straight-line rent for one of the Company's properties acquired during 2014. The Company concluded that this adjustment was not material to the financial position or results of operations for the current period or any prior period.

9
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)

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 make distributions to the Special Limited Partner which it was entitled to receive pursuant to its special limited partner interest in the OP. The final value of the Listing Note on maturity at January 2016 was determined to be zero. No amounts were paid on maturity or can be paid subsequently to the Special Limited Partner with respect to the Listing Note.
Multi-Year Outperformance Agreement
Concurrent with the Listing and modifications to the Fourth Amended and Restated Advisory Agreement (the "Advisory Agreement") by and among the Company, the OP and the Advisor, 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.
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.

10
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)

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.
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.

11
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)

In August 2016, the FASB issued ASU 2016-15 Statement of Cash Flows (Topic 230) guidance on how certain transactions should be classified and presented in the statement of cash flows as either operating, investing or financing activities. Among other things, the update provides specific guidance on where to classify debt prepayment and extinguishment costs, payments for contingent consideration made after a business combination and distributions received from equity method investments. The revised guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.
In 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.
In May 2017, the FASB issued ASU 2017-09 Compensation—Stock Compensation (Topic 718) guidance that clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The update states that modification accounting should be used unless the fair value of the award, the vesting terms of the award, and the classification of the award as either equity or liability, does not change as a result of the modification. The revised guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted for reporting periods for which financial statements have not yet been issued. The Company is currently evaluating the impact of this new guidance.
In July 2017, the FASB issued ASU 2017-11 Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception guidance that changes the method to determine the classification of certain financial instruments with a down round feature as liabilities or equity instruments and clarify existing disclosure requirements for equity-classified instruments. A down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. As a result, a freestanding equity-linked financial instrument no longer would be accounted for as a derivative liability, rather, an entity that presents earnings per share is required to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features. The revised guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. Adoption should be applied retrospectively to outstanding financial instruments with a down round feature with a cumulative-effect adjustment to the statement of financial position. The Company is currently evaluating the impact of this new guidance.

12
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)

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 Common Stock (such consideration, the “Stock Merger Consideration”), and each outstanding unit of limited partnership interest and Class B interest of Global II OP (collectively, “Global II OP Units”) was converted into the right to receive 2.27 shares of 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 shares of its Common Stock as consideration in the Merger. Based upon the closing price of the shares of 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.
On December 22, 2016, 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 were accounted for under the acquisition method for business combinations pursuant to GAAP, with the Company as the accounting acquirer of Global II. The consideration transferred by the Company to acquire Global II established 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. The actual value of the Merger Consideration was based upon the market price of Common Stock at the time of closing of the Merger.

13
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 assigned to each class of assets and liabilities and made with assistance from a third party specialist for the Merger acquisitions acquired on the Merger Date. The following table summarizes the fair values of the assets acquired and liabilities assumed, including all measurement period adjustments as of June 30, 2017.
(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
 
70,176

Buildings, fixtures and improvements
 
384,428

Acquired intangible lease assets
 
111,097

Total real estate investments, at fair value
 
565,701

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
 
18,204

Total assets acquired at fair value
 
621,574

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
 
8,510

Derivatives, at fair value
 
3,911

Accounts payable and accrued expenses
 
7,212

Prepaid rent
 
6,001

Deferred tax liability
 
9,063

Taxes payable
 
1,661

Dividend payable
 
2

Total liabilities assumed at fair value
 
419,689

Net assets acquired excluding cash
 
201,885

Cash acquired on acquisition
 
$
18,983

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.

14
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)

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 Common Stock on the Merger Date.
Upon consummation of the Merger, Class B Units were tendered to Global II 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. As of June 30, 2017, the Company had received $3.9 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 six months ended June 30, 2017 based on contract purchase price and exchange rate at the time of purchase. There were no acquisitions during the six months ended June 30, 2016.
 
 
Six Months Ended
(Dollar amounts in thousands)
 
June 30, 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 June 30, 2017 and December 31, 2016, the Company did not have any properties that were classified as assets held for sale. The Company did not sell any real estate assets during the three months ended June 30, 2017 or during the three and six months ended June 30, 2016. During the six months ended June 30, 2017, the Company sold its property located in Fort Washington, Pennsylvania for a total contract sales price of $13.0 million resulting in a gain of $0.4 million, which is reflected in (losses) gains on dispositions of real estate investments in the accompanying consolidated statements of operations for the six months ended June 30, 2017. Also included in (losses) gains on dispositions of real estate investments is $0.6 million reduction in the Gain Fee (defined below) payable to the Advisor, which was estimated and accrued for the year ended December 31, 2016, as a result of reinvestments during the six months ended June 30, 2017 (see Note 11 —  Related Party Transactions for details) and a $0.1 million reduction to gain on disposition associated with a property sold in 2016 related post-closing settlement of deferred rent.

15
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 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 indexes among other items.
(In thousands)
 
Future Minimum
Base Rent Payments (1)
2017 (remainder)
 
$
118,259

2018
 
238,770

2019
 
241,714

2020
 
244,624

2021
 
242,628

2022
 
233,032

Thereafter
 
833,697

 
 
$
2,152,724

___________________________________________
(1) 
Assumes exchange rates of £1.00 to $1.30 for GBP and €1.00 to $1.14 for Euro as of June 30, 2017 for illustrative purposes, as applicable.
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 as of June 30, 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 10.0% or greater of consolidated annualized rental income on a straight-line basis as of June 30, 2017 and 2016.
 
 
June 30,
Country or State
 
2017
 
2016
United Kingdom
 
22.2%
 
17.6%
United States and Puerto Rico:
 
 
 
 
Texas
 
*
 
11.6%
United States and Puerto Rico
 
49.1%
 
50.0%
___________________________________________
*
Annualized rental income on a straight-line basis was not 10% or greater of total annualized rental income as of the period specified.

16
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 $722.1 million (including £160.2 million and €255.7 million) and $616.6 million (including £177.2 million and €258.9 million) outstanding under the Credit Facility as of June 30, 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.
The Company had 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 was 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 was defined as LIBOR multiplied by the statutory reserve rate, as determined by the Federal Reserve System of the United States. The Credit Facility agreement required the Company to pay an unused fee per annum of 0.25% if the unused balance of the Credit Facility exceeded or was 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 June 30, 2017, the Credit Facility reflected variable and fixed rate borrowings with a carrying value and fair value of $722.1 million, and a weighted average effective interest rate of 2.7% after giving effect to interest rate swaps in place. The unused borrowing capacity under the Credit Facility as of June 30, 2017 and December 31, 2016 was $4.8 million and $113.0 million, respectively.
The Credit Facility agreement provided 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 was permitted to 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 had 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 required 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 June 30, 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).
On July 24, 2017, the Company terminated the Credit Facility and repaid the outstanding balance of $725.8 million (including €255.7 million, £160.2 million, and $221.6 million) of which $720.9 million was repaid with proceeds from the New Credit Facility (as described below) and $4.9 million from cash on hand.
Revolving and Term Loan Credit Facility
On July 24, 2017, the Company, through the OP, entered into a credit agreement with KeyBank National Association (“KeyBank”), as agent, and the other lender parties thereto, that provides for a $500.0 million senior unsecured multi-currency revolving credit facility (the “Revolving Credit Facility”) and a €194.6 million ($225.0 million U.S. Dollar ("USD") equivalent) senior unsecured term loan facility (the “Term Facility” and, together with the Revolving Credit Facility, the “New Credit Facility”). The aggregate total commitments under the New Credit Facility are $725.0 million based on USD equivalents. Upon request of the Company, subject in all respects to the consent of the lenders in their sole discretion, these aggregate total commitments may be increased up to an aggregate additional amount of $225.0 million, allocated to either or among both portions of the New Credit Facility, with total commitments under the New Credit Facility not to exceed $950.0 million.
The Revolving Credit Facility is interest-only and matures on July 24, 2021, subject to one one-year extension at the Company’s option. The Term Facility is interest-only and matures on July 24, 2022. Borrowings under the New Credit Facility bear interest at a variable rate per annum based on an applicable margin that varies based on the ratio of consolidated total indebtedness and the consolidated total asset value of the Company and its subsidiaries plus either (i) LIBOR, as applicable to the currency being borrowed, or (ii) a “base rate” equal to the greatest of (a) KeyBank’s “prime rate,” (b) 0.5% above the Federal Funds Effective Rate or (c) 1.0% above one-month LIBOR. The applicable interest rate margin will initially be determined based on a range from 0.60% to 1.20% per annum with respect to base rate borrowings and 1.60% to 2.20% per annum with respect to LIBOR borrowings.

17
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)

The New Credit Facility requires the Company through the OP to pay an unused fee per annum of 0.25% of the unused balance of the Revolving Credit Facility if the unused balance exceeds or is equal to 50% of the total commitment or a fee per annum of 0.15% of the unused balance of the Revolving Credit Facility if the unused balance is less than 50% of the total commitment. From and after the time the Company obtains an investment grade credit rating, the unused fee will be replaced with a facility fee based on the total commitment under the Revolving Credit Facility multiplied by 0.30%, decreasing as the Company’s credit rating increases.
The availability of borrowings under the Revolving Credit Facility is based on the value of a pool of eligible unencumbered real estate assets owned by the Company and compliance with various ratios related to those assets.
The Company, through the OP, may reduce the amount committed under the Revolving Credit Facility and repay outstanding borrowings under the New Credit Facility, in whole or in part, at any time without premium or penalty, other than customary “breakage” costs payable on LIBOR borrowings. In the event of a default, the lender has the right to terminate its obligations under the New Credit Facility agreement and to accelerate the payment on any unpaid principal amount of all outstanding loans. The New Credit Facility also imposes certain affirmative and negative covenants on the OP, the Company and certain of its subsidiaries including restrictive covenants with respect to, among other things, liens, indebtedness, investments, distributions, mergers and asset sales, as well as financial covenants requiring the OP to maintain, among other things, ratios related to leverage, secured leverage, fixed charge coverage and unencumbered debt services, as well as a minimum consolidated tangible net worth.
The Company and certain of its subsidiaries have guaranteed the OP's obligations under the New Credit Facility pursuant to a guarantee and a related contribution agreement which governs contribution rights of the guarantors in the event any amounts become payable under the guaranty.
At closing, the Company, through the OP, borrowed $720.9 million based on USD equivalent consisting of (i) €194.6 million ($225.0 million USD equivalent) borrowed under the Term Facility and (ii) $409.0 million, £40.0 million ($52.2 million USD equivalent) and €30.0 million ($34.7 million USD equivalent) borrowed under the Revolving Credit Facility. The proceeds from the New Credit Facility, along with $4.9 million from cash on hand, were used to repay the $725.8 million of indebtedness outstanding under the Credit Facility.
The availability of borrowings under the Revolving Credit Facility is based on the value of a pool of eligible unencumbered real estate assets owned by the Company and compliance with various ratios related to those assets. Following the closing, $4.1 million was available for future borrowings under the Revolving Credit Facility. Any future borrowings may, at the option of the Company, be denominated in USD, Euros, Canadian Dollars, British Pounds Sterling or Swiss Francs. Amounts borrowed may not, however, be converted to, or repaid in, another currency once incurred.
In connection with the Company’s replacement of its existing Credit Facility with its New Credit Facility, and the change in borrowings by currency resulting therefrom, the Company terminated its existing £160.3 million notional GBP-LIBOR interest rate swap and entered into a new $150.0 million notional five year USD-LIBOR interest rate swap. Additionally, the Company novated its existing €224.4 million notional Euribor interest rate swap from its existing counterparty to a new counterparty.
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 with 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 subject to certain conditions. The Mezzanine Facility bore interest at a rate of 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 June 30, 2017 was $1.5 billion.

18
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)

Note 6 — Mortgage Notes Payable
Mortgage notes payable as of June 30, 2017 and December 31, 2016 consisted of the following:
 
 
 
 
Encumbered Properties
 
Outstanding Loan Amount (1)
 
Effective Interest Rate
 
Interest Rate
 
 
Country
 
Portfolio
 
 
June 30, 2017
 
December 31, 2016
 
 
 
Maturity
 
 
 
 
 
 
(In thousands)
 
(In thousands)
 
 
 
 
 
 
Finland:
 
Finnair
 
4
 
$
32,442

 
$
29,878

 
2.2%
(2) 
Fixed
 
Sep. 2020
 
 
Tokmanni
 
1
 
33,099

 
30,483

 
2.4%
(2) 
Fixed
 
Oct. 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
France:
 
Auchan (5)
 
1
 
9,481

 
8,732

 
1.7%
(2) 
Fixed
 
Dec. 2019
 
 
Pole Emploi (5)
 
1
 
6,626

 
6,102

 
1.7%
(2) 
Fixed
 
Dec. 2019
 
 
Sagemcom (5)
 
1
 
41,010

 
37,768

 
1.7%
(2) 
Fixed
 
Dec. 2019
 
 
Worldline (5)
 
1
 
5,712

 
5,260

 
1.9%
(2) 
Fixed
 
Jul. 2020
 
 
DCNS (5)
 
1
 
10,852

 
9,994

 
1.5%
(2) 
Fixed
 
Dec. 2020
 
 
ID Logistics II (5)
 
2
 
11,994

 
11,046

 
1.3%
 
Fixed
 
Jun. 2021
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Germany
 
Rheinmetall
 
1
 
12,109

 
11,152

 
2.6%
(2) 
Fixed
 
Jan. 2019
 
 
OBI DIY
 
1
 
5,140

 
4,734

 
2.4%
 
Fixed
 
Jan. 2019
 
 
RWE AG
 
3
 
71,396

 
65,753

 
1.6%
(2) 
Fixed
 
Oct. 2019
 
 
Rexam
 
1
 
6,009

 
5,534

 
1.8%
(2) 
Fixed
 
Oct. 2019
 
 
Metro Tonic
 
1
 
30,272

 
27,879

 
1.7%
(2) 
Fixed
 
Dec. 2019
 
 
ID Logistics I (5)
 
1
 
4,569

 
4,208

 
1.0%
 
Fixed
 
Oct. 2021
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Luxembourg:
 
DB Luxembourg (5)
 
1
 
41,124

 
37,873

 
1.4%
(2) 
Fixed
 
May 2020
The Netherlands:
 
ING Amsterdam (5)
 
1
 
50,263

 
46,290

 
1.7%
(2) 
Fixed
 
Jun. 2020
 
 
Total EUR denominated
 
22
 
372,098

 
342,686

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United Kingdom:
 
McDonald's
 
1
 
988

 
938

 
4.1%
(2) 
Fixed
 
Oct. 2017
 
 
Wickes Building Supplies I
 
1
 
2,531

 
2,402

 
3.7%
(2) 
Fixed
 
May 2018
 
 
Everything Everywhere
 
1
 
5,201

 
4,936

 
4.0%
(2) 
Fixed
 
Jun. 2018
 
 
Thames Water
 
1
 
7,802

 
7,405

 
4.1%
(2) 
Fixed
 
Jul. 2018
 
 
Wickes Building Supplies II
 
1
 
2,145

 
2,036

 
4.2%
(2) 
Fixed
 
Jul. 2018
 
 
Northern Rock
 
2
 
6,826

 
6,479

 
4.4%
(2) 
Fixed
 
Sep. 2018
 
 
Wickes Building Supplies III
 
1
 
2,471

 
2,345

 
4.3%
(2) 
Fixed
 
Nov. 2018
 
 
Provident Financial
 
1
 
16,578

 
15,735

 
4.1%
(2) 
Fixed
 
Feb. 2019
 
 
Crown Crest
 
1
 
25,030

 
23,757

 
4.2%
(2) 
Fixed
 
Feb. 2019
 
 
Aviva
 
1
 
20,414

 
19,376

 
3.8%
(2) 
Fixed
 
Mar. 2019
 
 
Bradford & Bingley
 
1
 
9,830

 
9,330

 
3.5%
(2) 
Fixed
 
May 2020
 
 
Intier Automotive Interiors
 
1
 
6,144

 
5,831

 
3.5%
(2) 
Fixed
 
May 2020
 
 
Capgemini
 
1
 
7,151

 
6,788

 
3.2%
(2) 
Fixed
 
Jun. 2020
 
 
Fujitsu
 
3
 
32,221

 
30,581

 
3.2%
(2) 
Fixed
 
Jun. 2020
 
 
Amcor Packaging
 
7
 
4,065

 
3,858

 
3.5%
(2) 
Fixed
 
Jul. 2020
 
 
Fife Council
 
1
 
2,384

 
2,263

 
3.5%
(2) 
Fixed
 
Jul. 2020
 
 
Malthrust
 
3
 
4,161

 
3,949

 
3.5%
(2) 
Fixed
 
Jul. 2020
 
 
Talk Talk
 
1
 
4,973

 
4,721

 
3.5%
(2) 
Fixed
 
Jul. 2020
 
 
HBOS
 
3
 
7,008

 
6,652

 
3.5%
(2) 
Fixed
 
Jul. 2020
 
 
DFS Trading
 
5
 
13,184

 
12,513

 
3.4%
(2) 
Fixed
 
Aug. 2020
 
 
DFS Trading
 
2
 
3,086

 
2,930

 
3.4%
(2) 
Fixed
 
Aug. 2020
 
 
HP Enterprise Services
 
1
 
12,076

 
11,461

 
3.4%
(2) 
Fixed
 
Aug. 2020
 
 
Foster Wheeler (5)
 
1
 
51,101

 
48,501

 
2.6%
(2) 
Fixed
 
Oct. 2018
 
 
Harper Collins (5)
 
1
 
36,505

 
34,648

 
3.4%
(2) 
Fixed
 
Oct. 2019

19
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)

 
 
 
 
Encumbered Properties
 
Outstanding Loan Amount (1)
 
Effective Interest Rate
 
Interest Rate
 
 
Country
 
Portfolio
 
 
June 30, 2017
 
December 31, 2016
 
 
 
Maturity
 
 
NCR Dundee (5)
 
1
 
7,334

 
6,960

 
2.9%
(2) 
Fixed
 
Apr. 2020
 
 
Total GBP denominated
 
43
 
291,209

 
276,395

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States:
 
Quest Diagnostics
 
1
 
52,800

 
52,800

 
3.0%
(3) 
Variable
 
Sep. 2018
 
 
Western Digital
 
1
 
17,523

 
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 (6)
 
18

—

 
21,599

 
6.3%
 
Fixed
 
Jun. 2017
 
 
Total USD denominated
 
5
 
114,148

 
135,906

 
 
 
 
 
 
 
 
Gross mortgage notes payable
 
70
 
777,455

 
754,987

 
2.6%
 
 
 
 
 
 
Deferred financing costs, net of accumulated amortization
 
—
 
(4,409
)
 
(5,103
)
 
—%
 
 
 
 
 
 
Mortgage notes payable, net of deferred financing costs
 
70
 
$
773,046

 
$
749,884

 
2.6%
 
 
 
 
_______________________________
(1) 
Amounts borrowed in local currency and translated at the spot rate as of the periods presented.
(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.
(6) 
The effective interest rate of 6.3% and 18 properties is not included in the calculation of weighted average effective interest rate and encumbered properties total as of June 30, 2017, respectively, as the loan was paid off as of June 30, 2017.
In connection with the Mergers, the OP assumed outstanding gross mortgage notes payable encumbering properties owned by Global II 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 Company's gross mortgage notes payable over the next five calendar years and thereafter as of June 30, 2017:
(In thousands)
 
Future Principal Payments (1)
2017 (remainder)
 
$
1,149

2018
 
131,213

2019
 
280,924

2020
 
321,030

2021
 
43,139

2022
 
—

Thereafter
 
—

Total
 
$
777,455

_________________________
(1) 
Assumes exchange rates of £1.00 to $1.30 for GBP and €1.00 to $1.14 for Euro as of June 30, 2017 for illustrative purposes, as applicable.
The Company's mortgage notes payable agreements require compliance with certain property-level financial covenants including debt service coverage ratios. As of June 30, 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
June 30, 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 June 30, 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 June 30, 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
June 30, 2017
 
 
 
 
 
 
 
 
Cross currency swaps, net (GBP & EUR)
 
$
—

 
$
11,648

 
$
—

 
$
11,648

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

 
$
2,337

 
$
—

 
$
2,337

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

 
$
(11,931
)
 
$
—

 
$
(11,931
)
Put options (GBP & EUR)
 
$
—

 
$
323

 
$
—

 
$
323

OPP (see Note 13)
 
$
—

 
$
—

 
$
(5,300
)
 
$
(5,300
)
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
June 30, 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 six months ended June 30, 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 six months ended June 30, 2017:
(In thousands)
 
OPP
Beginning Balance as of December 31, 2016
 
$
13,400

   Fair value adjustment
 
(8,100
)
Ending balance as of June 30, 2017
 
$
5,300

The following table provides quantitative information about the significant Level 3 input used:
Financial Instrument
 
Fair Value at June 30, 2017
 
Principal Valuation Technique
 
Unobservable Inputs
 
Input Value
 
 
(In thousands)
 
 
 
 
 
 
OPP
 
$
5,300

 
Monte Carlo Simulation
 
Expected volatility
 
20.0%
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 instrument, parameter or market index, 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, restricted cash, due to/from related parties, prepaid expenses and other assets, accounts payable, deferred rent 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
 
Fair Value
 
Carrying Amount
 
Fair Value
(In thousands)
 
Level
 
June 30,
2017
 
June 30,
2017
 
December 31,
2016
 
December 31,
2016
Mortgage notes payable (1) (2)
 
3
 
$
775,088

 
$
770,686

 
$
752,484

 
$
747,870

Credit Facility (3)
 
3
 
$
722,108

 
$
722,108

 
$
616,614

 
$
616,614

Mezzanine Facility (4)
 
3
 
$
—

 
$
—

 
$
55,383

 
$
55,400

__________________________________________________________
(1) 
Carrying value includes $777.5 million gross mortgage notes payable and $2.4 million mortgage discount/(premium), net as of June 30, 2017.
(2) 
Carrying value includes $755.0 million gross mortgage notes payable and $2.5 million mortgage discount/(premium), net as of December 31, 2016.
(3) 
On July 24, 2017, the Company terminated the Credit Facility and repaid the outstanding balance primarily with proceeds from the New Credit Facility (see Note 5 — Credit Borrowings for further details).
(4) 
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. 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 required the Company to pay interest based on a fixed rate and as such the advances were considered to approximate fair value.

22
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 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 for 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 June 30, 2017 and December 31, 2016:
(In thousands)
 
Balance Sheet Location
 
June 30, 2017
 
December 31, 2016
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign currency forwards (EUR-USD)
 
Derivative assets, at fair value
 
$
179

 
$
972

Cross currency swaps (GBP)
 
Derivative assets, at fair value
 
12,480

 
16,868

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

 
3,003

Cross currency swaps (EUR)
 
Derivative liabilities, at fair value
 
(1,058
)
 
—

Interest rate swaps (GBP)
 
Derivative liabilities, at fair value
 
(6,545
)
 
(8,595
)
Interest rate swaps (EUR)
 
Derivative liabilities, at fair value
 
(3,364
)
 
(4,262
)
Total
 
 
 
$
1,692

 
$
7,986

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Foreign currency forwards (GBP-USD)
 
Derivative assets, at fair value
 
$
2,265

 
$
3,918

Foreign currency forwards (GBP-USD)
 
Derivative liabilities, at fair value
 
(32
)
 
—

Foreign currency forwards (EUR-USD)
 
Derivative assets, at fair value
 
22

 
2,108

Foreign currency forwards (EUR-USD)
 
Derivative liabilities, at fair value
 
(97
)
 
—

Put options (GBP)
 
Derivative assets, at fair value
 
13

 
131

Put options (EUR)
 
Derivative assets, at fair value
 
310

 
392

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

 
477

Cross currency swaps (EUR)
 
Derivative assets, at fair value
 
226

 
831

Interest rate swaps (EUR)
 
Derivative liabilities, at fair value
 
(2,022
)
 
(2,600
)
Total
 
 
 
$
685

 
$
5,257


23
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company's derivatives as of June 30, 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
June 30, 2017
 
$
15,495

 
$
(13,118
)
 
$
—

 
$
2,377

 
$
—

 
$
—

 
$
2,377

December 31, 2016
 
$
28,700

 
$
(15,457
)
 
$
—

 
$
13,243

 
$
—

 
$
—

 
$
13,243

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 June 30, 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:
 
 
June 30, 2017
 
December 31, 2016
Derivatives