10-Q 1 gnl930201710-q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
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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 October 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)


 
September 30,
2017
 
December 31,
2016
ASSETS
 
 
 
Real estate investments, at cost:
 
 
 
Land
$
396,018

 
$
376,704

Buildings, fixtures and improvements
2,079,734

 
1,967,930

Acquired intangible lease assets
615,656

 
587,061

Total real estate investments, at cost
3,091,408

 
2,931,695

Less accumulated depreciation and amortization
(308,463
)
 
(216,055
)
Total real estate investments, net
2,782,945

 
2,715,640

Cash and cash equivalents
71,301

 
69,831

Restricted cash
5,314

 
7,497

Derivatives, at fair value (Note 8)
842

 
28,700

Unbilled straight-line rent
40,963

 
30,459

Prepaid expenses and other assets
20,246

 
17,577

Related party notes receivable acquired in Merger (Note 3)
—

 
5,138

Due from related parties
16

 
16

Deferred tax assets
1,674

 
1,586

Goodwill and other intangible assets, net
22,588

 
13,931

Deferred financing costs, net
7,412

 
1,092

Total assets
$
2,953,301

 
$
2,891,467

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Mortgage notes payable, net of deferred financing costs ($4,043 and $5,103 as of September 30, 2017 and December 31, 2016, respectively)
$
794,919

 
$
749,884

Term Loan Payable, net of deferred financing costs ($3,402 and $0 as of September 30, 2017 and December 31, 2016, respectively)
226,552

 
—

Mortgage (discount) premium, net
(2,172
)
 
(2,503
)
Revolving credit facility
418,034

 
616,614

Mezzanine facility, net of discount
—

 
55,383

Below-market lease liabilities, net
31,408

 
33,041

Derivatives, at fair value (Note 8)
13,776

 
15,457

Due to related parties
1,233

 
2,162

Accounts payable and accrued expenses
24,553

 
22,861

Prepaid rent
20,511

 
18,429

Deferred tax liability
15,583

 
15,065

Taxes payable
6,797

 
9,059

Dividends payable
461

 
34

Total liabilities
1,551,655

 
1,535,486

Commitments and contingencies (Note 10)


 


Equity:
 
 
 
Preferred stock, $0.01 par value, 16,670,000 shares authorized:
 
 
 
7.25% Series A cumulative redeemable preferred shares, liquidation preference $25.00 per share, 4,600,000 shares authorized, 4,000,000 shares issued and outstanding as of September 30, 2017 and no shares issued and outstanding as of December 31, 2016.
40

 
—

Common stock, $0.01 par value, 100,000,000 shares authorized, 67,286,817 and 66,258,559 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively
2,003

 
1,990

Additional paid-in capital
1,826,236

 
1,708,541

Accumulated other comprehensive income
9,118

 
(16,695
)
Accumulated deficit
(437,962
)
 
(346,058
)
Total stockholders' equity
1,399,435

 
1,347,778

Non-controlling interest
2,211

 
8,203

 Total equity
1,401,646

 
1,355,981

Total liabilities and equity
$
2,953,301

 
$
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 September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
 
Rental income
 
$
61,270

 
$
50,756

 
$
179,976

 
$
154,003

Operating expense reimbursements
 
3,600

 
2,495

 
12,717

 
7,398

Total revenues
 
64,870

 
53,251

 
192,693

 
161,401

 
 
 
 
 
 
 
 
 
 Expenses:
 
 
 
 
 
 
 
 
Property operating
 
7,202

 
4,201

 
22,008

 
13,390

Fire loss (recovery)
 
(305
)
 
—

 
195

 
—

Operating fees to related parties
 
6,390

 
4,862

 
17,833

 
14,638

Acquisition and transaction related
 
1,141

 
2,479

 
2,280

 
2,377

General and administrative
 
2,468

 
1,714

 
6,291

 
5,298

Equity based compensation
 
(391
)
 
1,293

 
(2,610
)
 
2,407

Depreciation and amortization
 
29,879

 
23,482

 
84,490

 
71,050

Total expenses
 
46,384

 
38,031

 
130,487

 
109,160

Operating income
 
18,486

 
15,220

 
62,206

 
52,241

Other income (expense):
 
 
 
 
 
 
 
 
Interest expense
 
(12,479
)
 
(8,914
)
 
(35,644
)
 
(30,117
)
Gains on dispositions of real estate investments
 
275

 
1,320

 
1,089

 
1,320

(Losses) gains on derivative instruments
 
(3,125
)
 
375

 
(6,585
)
 
3,856

Unrealized (losses) gains on undesignated foreign currency advances and other hedge ineffectiveness
 
88

 
1,459

 
(3,765
)
 
5,613

Other income
 
2

 
4

 
12

 
21

Total other expense, net
 
(15,239
)
 
(5,756
)
 
(44,893
)
 
(19,307
)
Net income before income tax
 
3,247

 
9,464

 
17,313

 
32,934

Income tax expense
 
(760
)
 
(448
)
 
(2,176
)
 
(1,428
)
Net income
 
2,487

 
9,016

 
15,137

 
31,506

Non-controlling interest
 
—

 
(73
)
 
(21
)
 
(312
)
Preferred dividends
 
(383
)
 
—

 
(383
)
 
—

Net income attributable to common stockholders
 
$
2,104

 
$
8,943

 
$
14,733

 
$
31,194

 
 
 
 
 
 
 
 
 
Basic and Diluted Earnings Per Share:
 
 
 
 
 
 
 
 
Basic and diluted net income per share attributable to stockholders
 
$
0.03

 
$
0.16

 
$
0.21

 
$
0.54

Basic and diluted weighted average shares outstanding
 
67,286,615

 
56,463,396

 
66,739,723

 
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 September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Net income
 
$
2,487

 
$
9,016

 
$
15,137

 
$
31,506

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Cumulative translation adjustment
 
9,103

 
(188
)
 
19,903

 
(274
)
Designated derivatives, fair value adjustments
 
2,710

 
762

 
5,939

 
(11,452
)
Other comprehensive income (loss)
 
11,813

 
574

 
25,842

 
(11,726
)
 
 
 
 
 
 
 
 
 
Comprehensive income
 
14,300

 
9,590

 
40,979

 
19,780

Amounts attributable to non-controlling interest
 
 
 
 
 
 
 
 
Net income
 
—

 
(73
)
 
(21
)
 
(312
)
Cumulative translation adjustment
 
(3
)
 
4

 
(18
)
 
5

Designated derivatives, fair value adjustments
 
(3
)
 
(18
)
 
(11
)
 
111

Comprehensive income attributable to non-controlling interest
 
(6
)
 
(87
)
 
(50
)
 
(196
)
 
 
 
 
 
 
 
 
 
Preferred dividends
 
(383
)
 
—

 
(383
)
 
—

 
 
 
 
 
 
 
 
 
Comprehensive income attributable to stockholders
 
$
13,911

 
$
9,503

 
$
40,546

 
$
19,584

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

4
GLOBAL NET LEASE, INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the Nine Months Ended September 30, 2017
(In thousands, except share data)
(Unaudited)

 
 
Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of
Shares
 
Par Value
 
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
 
—

 
—

 
820,988

 
8

 
18,721

 
—

 
—

 
18,729

 
—

 
18,729

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
 
—

 
—

 
—

 
—

 
(187
)
 
—

 
—

 
(187
)
 
—

 
(187
)
Issuance of preferred shares, net
 
4,000,000

 
40

 
—

 
—

 
96,308

 
—

 
—

 
96,348

 
—

 
96,348

Common dividends declared
 
—

 
—

 
—

 
—

 
—

 
—

 
(106,637
)
 
(106,637
)
 
—

 
(106,637
)
Preferred dividends declared
 
—

 
—

 
—

 
—

 
—

 
—

 
(383
)
 
(383
)
 
—

 
(383
)
Equity-based compensation
 
—

 
—

 
25,429

 
—

 
545

 
—

 
—

 
545

 
(3,155
)
 
(2,610
)
Distributions to non-controlling interest holders
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(574
)
 
(574
)
Net Income
 
—

 
—

 
—

 
—

 
—

 
—

 
15,116

 
15,116

 
21

 
15,137

Cumulative translation adjustment
 
—

 
—

 
—

 
—

 
—

 
19,885

 
—

 
19,885

 
18

 
19,903

Designated derivatives, fair value adjustments
 
—

 
—

 
—

 
—

 
—

 
5,928

 
—

 
5,928

 
11

 
5,939

Rebalancing of ownership percentage
 
—

 
—

 
—

 
—

 
(316
)
 
—

 
—

 
(316
)
 
316

 
—

Balance, September 30, 2017
 
4,000,000

 
$
40,000

 
67,286,817

 
$
2,003

 
$
1,826,236

 
$
9,118

 
$
(437,962
)

$
1,399,435

 
$
2,211

 
$
1,401,646

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

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


 
 
Nine Months Ended September 30,
 
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
Net income
 
$
15,137

 
$
31,506

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

 
 
Depreciation
 
44,065

 
37,770

Amortization of intangibles
 
40,425

 
33,280

Amortization of deferred financing costs
 
3,021

 
5,769

Amortization of mortgage discounts and premiums, net
 
548

 
(361
)
Amortization of mezzanine discount
 
17

 
—

Amortization of below-market lease liabilities
 
(2,510
)
 
(1,882
)
Amortization of above-market lease assets
 
3,202

 
1,688

Amortization of above- and below- market ground lease assets
 
705

 
125

Bad debt expense
 
1,150

 
160

Unbilled straight-line rent
 
(8,987
)
 
(8,059
)
Equity based compensation
 
(2,610
)
 
2,407

Unrealized losses (gains) on foreign currency transactions, derivatives, and other
 
8,501

 
1,068

Unrealized losses (gains) on undesignated foreign currency advances and other hedge ineffectiveness
 
3,765

 
(5,613
)
Payments for settlement of derivatives
 
(1,547
)
 
—

Gains on dispositions of real estate investments
 
(1,089
)
 
(1,320
)
Changes in operating assets and liabilities, net:
 
 
 
 
Prepaid expenses and other assets
 
(3,819
)
 
(1,918
)
Deferred tax assets
 
(96
)
 
(13
)
Accounts payable and accrued expenses
 
1,276

 
(1,601
)
Prepaid rent
 
2,082

 
(1,451
)
Deferred tax liability
 
1,526

 
448

Taxes payable
 
(2,262
)
 
(1,956
)
Net cash provided by operating activities
 
102,500

 
90,047

Cash flows from investing activities:
 
 
 
 
Investment in real estate and real estate related assets
 
(37,113
)
 
—

Capital expenditures
 
(1,203
)
 
(200
)
Proceeds from sale of real estate investments
 
12,440

 
13,414

Proceeds from settlement of derivatives
 
10,625

 
—

Net cash used in investing activities
 
(15,251
)
 
13,214

Cash flows from financing activities:
 
 
 
 
Borrowings under credit facility
 
571,203

 
16,485

Repayments on credit facility
 
(810,798
)
 
(42,136
)
Repayment of mezzanine facility
 
(56,537
)
 
—

Payments on mortgage notes payable
 
(21,836
)
 
(561
)
Proceeds from term loan
 
225,000

 
—

Proceeds from issuance of common stock
 
18,729

 
—

Proceeds from issuance of preferred stock, net
 
96,348

 
—

Payments of common stock offering costs
 
(187
)
 
—

Payments of financing costs
 
(12,539
)
 
(2,905
)
Dividends paid
 
(106,593
)
 
(90,136
)
Distributions to non-controlling interest holders
 
(574
)
 
(1,749
)
Related party notes receivable acquired in Merger
 
5,138

 
—

Advances from related parties, net
 
—

 
401

Restricted cash
 
2,183

 
(341
)
Net cash used in financing activities
 
(90,463
)
 
(120,942
)
Net change in cash and cash equivalents
 
(3,214
)
 
(17,681
)
Effect of exchange rate changes on cash
 
4,684

 
(1,984
)
Cash and cash equivalents, beginning of period
 
69,831

 
69,938

Cash and cash equivalents, end of period
 
$
71,301

 
$
50,273


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


 
 
Nine Months Ended September 30,
 
 
2017
 
2016
Supplemental Disclosures:
 
 
 
 
Cash paid for interest
 
$
32,380

20,741

$
25,588

Cash paid for income taxes
 
4,438

 
3,027

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

 
9,277

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

7
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 30, 2017, the Company owned 313 properties consisting of 22.3 million rentable square feet, which were 99.4% leased, with a weighted average remaining lease term of 9.1 years. Based on original purchase price or acquisition value with respect to properties acquired in the Mergers, 50.4% of the Company's properties are located in Europe and 49.6% 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 September 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.
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.
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.

8
GLOBAL NET LEASE, INC.

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

On September 7, 2017, the Company and the OP, entered into an underwriting agreement (the “Underwriting Agreement”) with BMO Capital Markets Corp. and Stifel, Nicolaus & Company, Incorporated, as representatives of the underwriters listed on Schedule I thereto pursuant to which the Company agreed to issue and sell 4,000,000 shares of the Company’s new class of 7.25% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share, (the “Series A Preferred Stock”), in an underwritten public offering at a public offering price equal to the liquidation preference of $25.00 per share. Pursuant to the Underwriting Agreement, the Company also granted the underwriters a 30-day option to purchase up to an additional 600,000 shares of Series A Preferred Stock. On September 12, 2017, the Company completed the initial issuance and sale of 4,000,000 shares of Series A Preferred Stock, which generated gross proceeds of $100.0 million and net proceeds of $96.3 million, after deducting underwriting discounts and offering costs paid by the Company. On October 11, 2017, the underwriters exercised an option to purchase additional shares of Series A Preferred Stock, and the Company sold an additional 259,650 shares of Series A Preferred Stock, which generated gross proceeds of $6.5 million after adjusting for the amount of dividends declared per share for the period from September 12, 2017 to September 30, 2017 and payable to holders of record as of October 6, 2017, and resulted in net proceeds of $6.3 million, after deducting underwriting discounts and offering costs paid by the Company.
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”). 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 nine months ended September 30, 2017, the Company sold 0.8 million shares of Common Stock through the ATM Program for net sales proceeds of $18.5 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 nine months ended September 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 nine months ended September 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.

9
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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.

10
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 and nine months ended September 30, 2017, the Company recognized an income tax expense of $0.8 million and $2.2 million, respectively. For the three and nine months ended September 30, 2016, the Company recognized an income tax expense of $0.4 million and $1.4 million, respectively. 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 nine months ended September 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.
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.

11
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 the 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. All four of the Company's acquisitions during 2017 have been classified as asset acquisitions.
Pending Adoption:
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an update (“ASU 2014-09”) establishing Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). ASU 2014-09, as amended by subsequent ASUs on the topic, establishes a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Under ASC 606, 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. ASC 606 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. A reporting entity may apply the amendments in ASC 606 using either a modified retrospective approach, by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or a full retrospective approach. The Company will adopt this guidance effective January 1, 2018 and currently expects to utilize the modified retrospective approach upon adoption and does not expect that this will result in a significant cumulative-effect adjustment to equity.
The Company has progressed in its project plan in evaluating our various revenue streams in order to identify any differences in the timing, measurement or presentation of revenue recognition under ASC 606 and ASC Topic 842, Leases (“ASC 842”). Based on the Company’s evaluation of its various revenue streams, the Company believes that gains on sales of real estate could be affected by adoption of ASC 606. The Company expects that this standard could have an impact on the timing of gains on certain sales of real estate as a result of more transactions generally qualifying as sales of real estate and revenue being recognized at an earlier date than under current accounting guidance. Specifically, the Company expects that this would impact partial sales of real estate in situations where the Company no longer retains a controlling financial interest. If the Company were to enter into partial sales of real estate, the Company would derecognize the real estate asset consistent with the principles outlined in ASC 606 and any retained non-controlling ownership interest would be measured at fair value consistent with the guidance on noncash consideration in ASC 606.
The Company is continuing to evaluate any differences in the timing, measurement, or presentation of revenue recognition and the impact on the Company's consolidated financial statements and internal accounting processes resulting from ASC 606 as well as ASC Topic 842, Leases as discussed below.
In February 2016, the FASB issued an update ASU 2016-02 establishing ASC Topic 842, Leases (“ASC 842”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASC 842 supersedes previous leasing standards and is effective for reporting periods beginning after December 15, 2018. Early adoption is permitted. ASC 842 will impact the lease accounting model for both lessees and lessors. The Company will adopt this guidance effective January 1, 2019.
The Company is a lessee for some properties in which it has ground leases as of September 30, 2017. For these leases, the Company will be required to record a right-of-use asset and lease liability equal to the present value of the remaining lease payments upon adoption of this update. The new standard requires lessees to apply a dual lease classification 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 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.
From a lessor perspective the Company expects that the new standard will impact the presentation of lease and non-lease components of revenue such as rent, and operating expense reimbursements including common area maintenance, taxes, and insurance from leases for which the Company is a lessor. The Company does not expect this guidance to impact its existing lessor revenue recognition pattern. The Company anticipates that it will elect the following practical expedients, which must be elected

12
GLOBAL NET LEASE, INC.

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

as a package and applied consistently by an entity to all of its leases, which allow the Company to not have to reassess the following upon adoption: (i) whether any expired or existing contract contains a lease, (ii) lease classification related to expired or existing leases, or (iii) whether costs incurred on existing leases qualify as initial direct costs. The Company is continuing to evaluate any differences in the timing, measurement, or presentation of lessor revenues as well as the impact of the new lessee accounting model on the Company’s consolidated financial position, results of operations and disclosures.
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 Company will adopt this guidance effective January 1, 2018. The Company expects that there will be no impact from this adoption to the Company's consolidated financial position, results of operations and cash flows.
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 Company will adopt this guidance effective January 1, 2018. The Company expects that there will be no impact from this adoption to the Company's consolidated financial position, results of operations and cash flows.
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 Company will adopt this guidance effective January 1, 2018, using a retrospective transition method. As a result, the Company will restate its statements of cash flows for all periods presented to include restricted cash in the beginning and ending cash balances and remove all transfers between cash and restricted cash from operating, investing and financing activities.
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 Company will adopt this guidance effective January 1, 2018. The Company expects that any future sales of real estate in which the Company retains a non-controlling interest in the property would result in the full gain amount being recognized at the time of the partial sale. Historically, the Company has not retained any interest in properties it has sold.
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, all do not change as a result of the modification. The Company will adopt this guidance effective January 1, 2018. The Company expects that any future modifications to the Company's issued share-based awards will be accounted for using modification accounting, unless the modification meets all of the exception criteria noted above. As a result, the modification would be treated as an exchange of the original award for a new award, with any incremental fair value being treated as additional compensation cost.

13
GLOBAL NET LEASE, INC.

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

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.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. The transition guidance provides companies with the option of early adopting the new standard using a modified retrospective transition method in any interim period after issuance of the update, or alternatively requires adoption for fiscal years beginning after December 15, 2018. This adoption method will require the Company to recognize the cumulative effect of initially applying the ASU as an adjustment to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that the Company adopts the update. While the Company continues to assess all potential impacts of the standard, the Company currently expects adoption to have an immaterial impact on the Company's consolidated financial statements.
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 shares of common 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 of common stock 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


14
GLOBAL NET LEASE, INC.

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

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.

15
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 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.

16
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 30, 2017, the Company had received the full amount of $5.1 million in payments with respect to the excess organization and offering costs incurred by Global II.
Note 4 — Real Estate Investments, Net
Property Acquisitions
The following table presents the allocation of the assets acquired and liabilities assumed during the nine months ended September 30, 2017 based on contract purchase price and exchange rate at the time of purchase. All of the Company's acquisitions during the nine months ended September 30, 2017 were asset acquisitions. There were no acquisitions during the nine months ended September 30, 2016.
 
 
Nine Months Ended
(Dollar amounts in thousands)
 
September 30, 2017
Real estate investments, at cost:
 
 
Land
 
$
6,359

Buildings, fixtures and improvements
 
27,220

Total tangible assets
 
33,579

Intangibles acquired:
 
 
In-place leases
 
4,859

Above market lease assets
 
47

Below market lease liabilities
 
(1,372
)
Total assets acquired, net
 
37,113

Cash paid for acquired real estate investments
 
$
37,113

Number of properties purchased
 
4

Dispositions
As of September 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 September 30, 2017. During the three and nine months ended September 30, 2016, the Company sold three properties for a total contract sales price of $13.9 million resulting in a gain of $1.3 million, which is reflected in gains on dispositions of real estate investments in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2016. During the nine months ended September 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 gains on dispositions of real estate investments in the accompanying consolidated statements of operations for the nine months ended September 30, 2017. Also included in gains on dispositions of real estate investments during the three and nine months ended September 30, 2017 is a $0.3 million and $0.8 million reduction in the Gain Fee (as defined below), respectively, payable to the Advisor, which was estimated and accrued for the year ended December 31, 2016, as a result of reinvestments during the nine months ended September 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.
Write-off of intangibles
In connection with the financial difficulties of a tenant, the Company wrote off the tenant related lease intangibles with a carrying amount of $1.8 million, net of accumulated amortization during the three and nine months ended September 30, 2017. This amount is included in depreciation and amortization in the Company's Consolidated Statement of Operations.

17
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 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)
 
$
60,522

2018
 
243,191

2019
 
246,194

2020
 
249,170

2021
 
247,218

2022
 
237,629

Thereafter
 
852,026

 
 
$
2,135,950

___________________________________________
(1) 
Assumes exchange rates of £1.00 to $1.34 for GBP and €1.00 to $1.18 for EUR as of September 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 September 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 September 30, 2017 and 2016.
 
 
September 30,
Country, State or Territory
 
2017
 
2016
United Kingdom
 
22.4%
 
17.3%
United States and Puerto Rico:
 
 
 
 
Texas
 
*
 
11.2%
United States and Puerto Rico
 
51.0%
 
50.2%
___________________________________________
*
Annualized rental income on a straight-line basis was not 10% or greater of total annualized rental income as of the period specified.

18
GLOBAL NET LEASE, INC.

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

Note 5 — Credit Borrowings
Prior Credit Facility
On July 25, 2013, the Company, through the OP, entered into a credit facility (as amended from time to time thereafter, the "Prior Credit Facility") that provided for borrowings of up to $740.0 million (subject to borrowing base availability). The Company had $616.6 million (including £177.2 million and €258.9 million) outstanding under the Prior Credit Facility as of December 31, 2016.
The Company had the option, based upon its consolidated leverage ratio, to have draws under the Prior 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 Prior 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 Prior Credit Facility agreement required the Company to pay an unused fee per annum of 0.25% if the unused balance of the Prior 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 Prior Credit Facility is less than 50% of the available facility.The unused borrowing capacity under the Credit facility as of December 31, 2016 was $113.0 million.
On July 24, 2017, the Company terminated the Prior 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 Credit Facility (as described below) and $4.9 million from cash on hand.
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 at closing) senior unsecured term loan facility (the “Term Facility” and, together with the Revolving Credit Facility, the “Credit Facility”). The aggregate total commitments under the Credit Facility are $725.0 million based on USD equivalents at closing. 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 Credit Facility, with total commitments under the Credit Facility not to exceed $950.0 million.
At the closing of the Credit Facility, the Company, through the OP, borrowed $720.9 million based on USD equivalent at closing (including €194.6 million under the Term Facility, and $409.0 million, £40.0 million and €30.0 million under the Revolving Credit Facility). On September 18, 2017, the Company repaid $80.0 million denominated in USD outstanding under the Revolving Credit Facility using proceeds from the issuance of Series A Preferred Stock. As of September 30, 2017, the Company had $648.0 million (including €194.6 million under the Term Facility and $329.0 million, £40.0 million and €30.0 million under the Revolving Credit Facility) outstanding under the Credit Facility. On October 27, 2017, the Company repaid an additional $120.0 million denominated in USD outstanding under the Revolving Credit Facility using proceeds from a new loan. See Note 15 — Subsequent Events, CMBS Loan Agreement, for additional details.
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 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. As of September 30, 2017, the Credit Facility had a weighted average effective interest rate of 2.7% after giving effect to interest rate swaps in place.
The 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.

19
GLOBAL NET LEASE, INC.

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

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. As of September 30, 2017, approximately $82.0 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, EUR, Canadian Dollars, British Pounds Sterling ("GBP") or Swiss Francs. Amounts borrowed may not, however, be converted to, or repaid in, another currency once borrowed.
The Company, through the OP, may reduce the amount committed under the Revolving Credit Facility and repay outstanding borrowings under the 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 Credit Facility agreement and to accelerate the payment on any unpaid principal amount of all outstanding loans. The 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 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.
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. 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 September 30, 2017 was $1.5 billion.
Note 6 — Mortgage Notes Payable
Mortgage notes payable as of September 30, 2017 and December 31, 2016 consisted of the following:
 
 
 
 
Encumbered Properties
 
Outstanding Loan Amount (1)
 
Effective Interest Rate
 
Interest Rate
 
 
Country
 
Portfolio
 
 
September 30, 2017
 
December 31, 2016
 
 
 
Maturity
 
 
 
 
 
 
(In thousands)
 
(In thousands)
 
 
 
 
 
 
Finland:
 
Finnair
 
4
 
$
33,553

 
$
29,878

 
2.2%
(2) 
Fixed
 
Sep. 2020
 
 
Tokmanni
 
1
 
34,233

 
30,483

 
2.4%
(2) 
Fixed
 
Oct. 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
France:
 
Auchan (5)
 
1
 
9,806

 
8,732

 
1.7%
(2) 
Fixed
 
Dec. 2019
 
 
Pole Emploi (5)
 
1
 
6,852

 
6,102

 
1.7%
(2) 
Fixed
 
Dec. 2019
 
 
Sagemcom (5)
 
1
 
42,414

 
37,768

 
1.7%
(2) 
Fixed
 
Dec. 2019
 
 
Worldline (5)
 
1
 
5,907

 
5,260

 
1.9%
(2) 
Fixed
 
Jul. 2020

20
GLOBAL NET LEASE, INC.

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

 
 
 
 
Encumbered Properties
 
Outstanding Loan Amount (1)
 
Effective Interest Rate
 
Interest Rate
 
 
Country
 
Portfolio
 
 
September 30, 2017
 
December 31, 2016
 
 
 
Maturity
 
 
DCNS (5)
 
1
 
11,224

 
9,994

 
1.5%
(2) 
Fixed
 
Dec. 2020
 
 
ID Logistics II (5)
 
2
 
12,405

 
11,046

 
1.3%
 
Fixed
 
Jun. 2021
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Germany
 
Rheinmetall
 
1
 
12,523

 
11,152

 
2.6%
(2) 
Fixed
 
Jan. 2019
 
 
OBI DIY
 
1
 
5,317

 
4,734

 
2.4%
 
Fixed
 
Jan. 2019
 
 
RWE AG
 
3
 
73,841

 
65,753

 
1.6%
(2) 
Fixed
 
Oct. 2019
 
 
Rexam
 
1
 
6,214

 
5,534

 
1.8%
(2) 
Fixed
 
Oct. 2019
 
 
Metro Tonic
 
1
 
31,308

 
27,879

 
1.7%
(2) 
Fixed
 
Dec. 2019
 
 
ID Logistics I (5)
 
1
 
4,726

 
4,208

 
1.0%
 
Fixed
 
Oct. 2021
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Luxembourg:
 
DB Luxembourg (5)
 
1
 
42,532

 
37,873

 
1.4%
(2) 
Fixed
 
May 2020
The Netherlands:
 
ING Amsterdam (5)
 
1
 
51,984

 
46,290

 
1.7%
(2) 
Fixed
 
Jun. 2020
 
 
Total EUR denominated
 
22
 
384,839

 
342,686

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United Kingdom:
 
McDonald's
 
1
 
1,018

 
938

 
4.1%
(2) 
Fixed
 
Oct. 2017
 
 
Wickes Building Supplies I
 
1
 
2,608

 
2,402

 
3.7%
(2) 
Fixed
 
May 2018
 
 
Everything Everywhere
 
1
 
5,359

 
4,936

 
4.0%
(2) 
Fixed
 
Jun. 2018
 
 
Thames Water
 
1
 
8,039

 
7,405

 
4.1%
(2) 
Fixed
 
Jul. 2018
 
 
Wickes Building Supplies II
 
1
 
2,211

 
2,036

 
4.2%
(2) 
Fixed
 
Jul. 2018
 
 
Northern Rock
 
2
 
7,034

 
6,479

 
4.4%
(2) 
Fixed
 
Sep. 2018
 
 
Wickes Building Supplies III
 
1
 
2,546

 
2,345

 
4.3%
(2) 
Fixed
 
Nov. 2018
 
 
Provident Financial
 
1
 
17,082

 
15,735

 
4.1%
(2) 
Fixed
 
Feb. 2019
 
 
Crown Crest
 
1
 
25,790

 
23,757

 
4.2%
(2) 
Fixed
 
Feb. 2019
 
 
Aviva
 
1
 
21,034

 
19,376

 
3.8%
(2) 
Fixed
 
Mar. 2019
 
 
Bradford & Bingley
 
1
 
10,129

 
9,330

 
3.5%
(2) 
Fixed
 
May 2020
 
 
Intier Automotive Interiors
 
1
 
6,330

 
5,831

 
3.5%
(2) 
Fixed
 
May 2020
 
 
Capgemini
 
1
 
7,369

 
6,788

 
3.2%
(2) 
Fixed
 
Jun. 2020
 
 
Fujitsu
 
3
 
33,199

 
30,581

 
3.2%
(2) 
Fixed
 
Jun. 2020
 
 
Amcor Packaging
 
7
 
4,188

 
3,858

 
3.5%
(2) 
Fixed
 
Jul. 2020
 
 
Fife Council
 
1
 
2,457

 
2,263

 
3.5%
(2) 
Fixed
 
Jul. 2020
 
 
Malthrust
 
3
 
4,287

 
3,949

 
3.5%
(2) 
Fixed
 
Jul. 2020
 
 
Talk Talk
 
1
 
5,125

 
4,721

 
3.5%
(2) 
Fixed
 
Jul. 2020
 
 
HBOS
 
3
 
7,221

 
6,652

 
3.5%
(2) 
Fixed
 
Jul. 2020
 
 
DFS Trading
 
5
 
13,584

 
12,513

 
3.4%
(2) 
Fixed
 
Aug. 2020
 
 
DFS Trading
 
2
 
3,180

 
2,930

 
3.4%
(2) 
Fixed
 
Aug. 2020
 
 
HP Enterprise Services
 
1
 
12,442

 
11,461

 
3.4%
(2) 
Fixed
 
Aug. 2020
 
 
Foster Wheeler (5)
 
1
 
52,652

 
48,501

 
2.6%
(2) 
Fixed
 
Oct. 2018
 
 
Harper Collins (5)
 
1
 
37,614

 
34,648

 
3.4%
(2) 
Fixed
 
Oct. 2019
 
 
NCR Dundee (5)
 
1
 
7,556

 
6,960

 
2.9%
(2) 
Fixed
 
Apr. 2020
 
 
Total GBP denominated
 
43
 
300,054

 
276,395

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States:
 
Quest Diagnostics
 
1
 
52,799

 
52,800

 
3.2%
(3) 
Variable
 
Sep. 2018
 
 
Western Digital
 
1
 
17,445

 
17,682

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

 
33,550

 
3.2%
(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
 
114,069

 
135,906

 
 
 
 
 
 
 
 
Gross mortgage notes payable
 
70
 
798,962

 
754,987

 
2.6%
 
 
 
 

21
GLOBAL NET LEASE, INC.

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

 
 
 
 
Encumbered Properties
 
Outstanding Loan Amount (1)
 
Effective Interest Rate
 
Interest Rate
 
 
Country
 
Portfolio
 
 
September 30, 2017
 
December 31, 2016
 
 
 
Maturity
 
 
Deferred financing costs, net of accumulated amortization
 
—
 
(4,043
)
 
(5,103
)
 
—%
 
 
 
 
 
 
Mortgage notes payable, net of deferred financing costs
 
70
 
$
794,919

 
$
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 September 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 September 30, 2017:
(In thousands)
 
Future Principal Payments (1)
2017 (remainder)
 
$
1,100

2018
 
133,584

2019
 
290,151

2020
 
330,422

2021
 
43,705

2022
 
—

Thereafter
 
—

Total
 
$
798,962

_________________________
(1) 
Assumes exchange rates of £1.00 to $1.34 for GBP and €1.00 to $1.18 for EUR as of September 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 September 30, 2017, the Company was in breach of a loan to value financial covenant on one mortgage note payable agreement. As of September 30, 2017, the loan had an outstanding principal balance of $7.4 million. The Company cured the breach within the period required by the underlying loan agreement by repaying £0.8 million of principal on the mortgage subsequent to September 30, 2017, and the breach did not result in an event of default. The Company was in compliance with the remaining covenants under its mortgage notes payable agreements as of September 30, 2017. As of December 31, 2016, the Company was in compliance with all financial covenants under its mortgage notes payable agreements.
CMBS Loan Agreement
On October 27, 2017, 12 wholly owned subsidiaries (the “Borrowers”) of the OP entered into a loan agreement (the “Loan Agreement”) with Column Financial, Inc. and Citi Real Estate Funding Inc. (collectively, the “Lenders”). The Loan Agreement provides for a $187.0 million loan (the “Loan”) with a fixed interest rate of 4.369% and a maturity date of November 6, 2027. See Note 15 — Subsequent Events, CMBS Loan Agreement, for additional details.
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:

22
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 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 September 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
September 30, 2017
 
 
 
 
 
 
 
 
Cross currency swaps, net (GBP & EUR)
 
$
—

 
$
(2,898
)
 
$
—

 
$
(2,898
)
Foreign currency forwards, net (GBP & EUR)
 
$
—

 
$
(1,136
)
 
$
—

 
$
(1,136
)
Interest rate swaps, net (GBP & EUR)
 
$
—

 
$
(9,031
)
 
$
—

 
$
(9,031
)
Put options (GBP & EUR)
 
$
—

 
$
132

 
$
—

 
$
132

OPP (see Note 13)
 
$
—

 
$
—

 
$
(3,900
)
 
$
(3,900
)
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.

23
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine months ended September 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 nine months ended September 30, 2017:
(In thousands)
 
OPP
Beginning Balance as of December 31, 2016
 
$
13,400

   Fair value adjustment
 
(9,500
)
Ending balance as of September 30, 2017
 
$
3,900

The following table provides quantitative information about the significant Level 3 input used:
Financial Instrument
 
Fair Value at September 30, 2017
 
Principal Valuation Technique
 
Unobservable Inputs
 
Input Value
 
 
(In thousands)
 
 
 
 
 
 
OPP
 
$
3,900

 
Monte Carlo Simulation
 
Expected volatility
 
17.4%
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
 
September 30,
2017
 
September 30,
2017
 
December 31,
2016
 
December 31,
2016
Mortgage notes payable (1) (2)
 
3
 
$
796,790

 
$
793,062

 
$
752,484

 
$
747,870

Credit Facility (3)
 
3
 
$
—

 
$
—

 
$
616,614

 
$
616,614

New Credit Facility (3)
 
3
 
$
647,988

 
$
652,487

 
$
—

 
$
—

Mezzanine Facility (4)
 
3
 
$
—

 
$
—

 
$
55,383

 
$
55,400

__________________________________________________________
(1) 
Carrying value includes $799.0 million gross mortgage notes payable and $2.2 million mortgage discount/(premium), net as of September 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 Prior Credit Facility and repaid the outstanding balance primarily with proceeds from the 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 and the Credit Facility are estimated using a discounted cash flow analysis, based on the Advisor's experience with similar types of borrowing arrangements. Advances under the Prior Credit Facility were 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.

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GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 30, 2017 and December 31, 2016:
(In thousands)
 
Balance Sheet Location
 
September 30, 2017
 
December 31, 2016
Derivatives designated as hedging instruments: