10-Q 1 gnl331201810-q.htm 10-Q GNL 3.31.18 Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
 
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
image3a10.gif
Global Net Lease, Inc.
(Exact name of registrant as specified in its charter)
Maryland
 
45-2771978
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
405 Park Ave., 4th Floor, New York, NY
 
10022
(Address of principal executive offices)
 
(Zip Code)
(212) 415-6500
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer ¨
(Do not check if a smaller reporting company)
Smaller reporting company o
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
As of April 30, 2018, the registrant had 67,287,231 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)


 
March 31,
2018
 
December 31,
2017
ASSETS
 
 
 
Real estate investments, at cost (Note 3):
 
 
 
Land
$
418,878

 
$
402,318

Buildings, fixtures and improvements
2,218,176

 
2,138,405

Construction in progress
2,572

 
2,328

Acquired intangible lease assets
648,353

 
629,626

Total real estate investments, at cost
3,287,979

 
3,172,677

Less accumulated depreciation and amortization
(375,484
)
 
(339,931
)
Total real estate investments, net
2,912,495

 
2,832,746

Cash and cash equivalents
106,733

 
102,425

Restricted cash
2,690

 
5,302

Derivative assets, at fair value (Note 7)
4,512

 
2,176

Unbilled straight-line rent
45,111

 
42,739

Prepaid expenses and other assets
30,817

 
22,617

Due from related parties
16

 
16

Deferred tax assets
1,057

 
1,029

Goodwill and other intangible assets, net
23,151

 
22,771

Deferred financing costs, net
6,540

 
6,774

     Total Assets
$
3,133,122

 
$
3,038,595

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Mortgage notes payable, net (Note 4)
$
1,038,894

 
$
984,876

Revolving credit facilities (Note 5)
342,023

 
298,909

Term loan, net (Note 5)
236,783

 
229,905

Acquired intangible lease liabilities, net
31,967

 
31,388

Derivative liabilities, at fair value (Note 7)
19,738

 
15,791

Due to related parties
770

 
829

Accounts payable and accrued expenses
27,320

 
23,227

Prepaid rent
21,489

 
18,535

Deferred tax liability
16,269

 
15,861

Taxes payable
948

 
2,475

Dividends payable
2,426

 
2,556

Total Liabilities
1,738,627

 
1,624,352

Commitments and contingencies (Note 9)

 

Stockholders' Equity (Note 8):
 
 
 
7.25% Series A cumulative redeemable preferred shares, $0.01 par value, liquidation preference $25.00 per share, 13,409,650 and 5,409,650 authorized, 5,411,326 and 5,409,650 issued and outstanding as of March 31, 2018 and December 31, 2017, respectively
54

 
54

Common Stock, $0.01 par value, 100,000,000 shares authorized, 67,287,231 shares issued and outstanding as of March 31, 2018 and December 31, 2017
2,003

 
2,003

Additional paid-in capital
1,859,746

 
1,860,058

Accumulated other comprehensive income
34,593

 
19,447

Accumulated deficit
(502,026
)
 
(468,396
)
Total Stockholders' Equity
1,394,370

 
1,413,166

Non-controlling interest
125

 
1,077

 Total Equity
1,394,495

 
1,414,243

     Total Liabilities and Equity
$
3,133,122

 
$
3,038,595

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

2

GLOBAL NET LEASE, INC.

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

 
 
Three Months Ended March 31,
 
 
2018
 
2017
Revenues:
 
 
 
 
Rental income
 
$
63,792

 
$
58,492

Operating expense reimbursements
 
4,294

 
4,345

Total revenues
 
68,086

 
62,837

 
 
 
 
 
 Expenses (income):
 
 
 
 
Property operating
 
7,470

 
7,236

Fire recovery
 
(79
)
 

Operating fees to related parties
 
6,831

 
5,730

Acquisition and transaction related
 
1,325

 
696

General and administrative
 
2,051

 
1,770

Equity-based compensation
 
(832
)
 
16

Depreciation and amortization
 
29,496

 
27,114

Total expenses
 
46,262

 
42,562

Operating income
 
21,824

 
20,275

Other income (expense):
 
 
 
 
Interest expense
 
(12,975
)
 
(11,531
)
Gain on dispositions of real estate investments
 

 
957

Loss on derivative instruments
 
(2,935
)
 
(470
)
Unrealized loss on undesignated foreign currency advances and other hedge ineffectiveness
 
(43
)
 
(882
)
Other income
 
11

 
7

Total other expense, net
 
(15,942
)
 
(11,919
)
Net income before income tax
 
5,882

 
8,356

Income tax expense
 
(1,070
)
 
(906
)
Net income
 
4,812

 
7,450

Net income attributable to non-controlling interest
 

 
(21
)
Preferred Stock dividends
 
(2,451
)
 

Net income attributable to common stockholders
 
$
2,361

 
$
7,429

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

 
$
0.11

Basic and diluted weighted-average shares outstanding
 
67,287,231

 
66,271,008

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

3

GLOBAL NET LEASE, INC.

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



 
 
Three Months Ended March 31,
 
 
2018
 
2017
Net income
 
$
4,812

 
$
7,450

 
 
 
 
 
Other comprehensive income
 
 
 
 
Cumulative translation adjustment
 
10,800

 
1,703

Designated derivatives, fair value adjustments
 
4,346

 
1,611

Other comprehensive income
 
15,146

 
3,314

 
 
 
 
 
Comprehensive income
 
19,958

 
10,764

Amounts attributable to non-controlling interest
 
 
 
 
Net income
 

 
(21
)
Cumulative translation adjustment
 

 
(1
)
Designated derivatives, fair value adjustments
 

 
(6
)
Comprehensive income attributable to non-controlling interest
 

 
(28
)
 
 
 
 
 
Preferred Stock dividends
 
(2,451
)
 

 
 
 
 
 
Comprehensive income attributable to common stockholders
 
$
17,507

 
$
10,736

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

4

GLOBAL NET LEASE, INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(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 Income
 
Accumulated Deficit
 
Total Stockholders' Equity
 
Non-controlling interest
 
Total Equity
Balance, December 31, 2017
 
5,409,650

 
$
54

 
67,287,231

 
$
2,003

 
$
1,860,058

 
$
19,447

 
$
(468,396
)
 
$
1,413,166

 
$
1,077

 
$
1,414,243

Common Stock issuance costs
 

 

 

 

 
(13
)
 

 

 
(13
)
 

 
(13
)
Issuance of Preferred Stock, net
 
1,676

 

 

 

 
(419
)
 

 

 
(419
)
 

 
(419
)
Common Stock dividends declared
 

 

 

 

 

 

 
(35,833
)
 
(35,833
)
 

 
(35,833
)
Preferred Stock dividends declared
 

 

 

 

 

 

 
(2,451
)
 
(2,451
)
 

 
(2,451
)
Equity-based compensation
 

 

 

 

 
120

 

 

 
120

 
(952
)
 
(832
)
Distributions to non-controlling interest holders
 

 

 

 

 

 

 
(158
)
 
(158
)
 

 
(158
)
Net Income
 

 

 

 

 

 

 
4,812

 
4,812

 

 
4,812

Cumulative translation adjustment
 

 

 

 

 

 
10,800

 

 
10,800

 

 
10,800

Designated derivatives, fair value adjustments
 

 

 

 

 

 
4,346

 

 
4,346

 

 
4,346

Balance, March 31, 2018
 
5,411,326

 
$
54

 
67,287,231

 
$
2,003

 
$
1,859,746

 
$
34,593

 
$
(502,026
)

$
1,394,370

 
$
125

 
$
1,394,495

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

5

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


 
 
Three Months Ended March 31,
 
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net income
 
$
4,812

 
$
7,450

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 
Depreciation
 
15,850

 
14,280

Amortization of intangibles
 
13,646

 
12,834

Amortization of deferred financing costs
 
901

 
880

Amortization of mortgage discounts and premiums, net
 
267

 
136

Amortization of mezzanine discount
 

 
17

Amortization of below-market lease liabilities
 
(901
)
 
(826
)
Amortization of above-market lease assets
 
1,203

 
1,016

Amortization of above- and below- market ground lease assets
 
250

 
214

Bad debt expense
 
43

 
414

Unbilled straight-line rent
 
(1,503
)
 
(3,878
)
Equity-based compensation
 
(832
)
 
16

Unrealized loss on foreign currency transactions, derivatives, and other
 
2,550

 
1,792

Unrealized loss on undesignated foreign currency advances and other hedge ineffectiveness
 
43

 
882

Gains on disposition of real estate investments
 

 
(957
)
Changes in operating assets and liabilities, net:
 
 
 
 
Prepaid expenses and other assets
 
(1,493
)
 
(2,416
)
Deferred tax assets
 
(28
)
 
(13
)
Accounts payable and accrued expenses
 
4,034

 
(522
)
Prepaid rent
 
2,954

 
2,047

Deferred tax liability
 
408

 
929

Taxes payable
 
(1,527
)
 
(1,567
)
Net cash provided by operating activities
 
40,677

 
32,728

Cash flows from investing activities:
 
 
 
 
Investment in real estate and real estate related assets
 
(63,596
)
 
(30,290
)
Deposits for real estate acquisitions
 
(6,750
)
 

Capital expenditures
 
(108
)
 
(388
)
Proceeds from dispositions of real estate investments
 

 
12,440

Payments for settlement of derivatives
 
(561
)
 

Net cash used in investing activities
 
(71,015
)
 
(18,238
)
Cash flows from financing activities:
 
 
 
 
Borrowings under revolving credit facilities
 
70,000

 
75,335

Repayments on revolving credit facilities
 
(30,000
)
 

Repayment of mezzanine facility
 

 
(56,537
)
Proceeds from mortgage notes payable
 
32,750

 

Payments on mortgage notes payable
 
(1,305
)
 
(206
)
Common stock issuance costs
 
(13
)
 

Issuance of preferred stock, net
 
(419
)
 

Payments of financing costs
 

 
(102
)
Dividends paid on Common Stock
 
(35,833
)
 
(35,293
)
Dividends paid on Preferred Stock
 
(2,451
)
 

Distributions to non-controlling interest holders
 
(158
)
 
(255
)
Advances/acquired related party receivable (Note 10)
 

 
1,713

Net cash used in financing activities
 
32,571

 
(15,345
)
Net change in cash, cash equivalents and restricted cash
 
2,233

 
(855
)
Effect of exchange rate changes on cash
 
(537
)
 
1,030

Cash, cash equivalents and restricted cash, beginning of period
 
107,727

 
77,328

Cash, cash equivalents and restricted cash, end of period
 
$
109,423

 
$
77,503

 
 
 
 
 
Cash and cash equivalents, end of period
 
$
106,733

 
$
72,354

Restricted cash, end of period
 
2,690

 
5,149

Cash, cash equivalents and restricted cash, end of period
 
$
109,423

 
$
77,503




6

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



 
 
Three Months Ended March 31,
 
 
2018
 
2017
Supplemental Disclosures:
 
 
 
 
Cash paid for interest
 
$
11,528

 
$
10,426

Cash paid for income taxes
 
2,597

 
2,473


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

7

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(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. The Company invests in commercial properties, with an emphasis on sale-leaseback transactions involving single tenant net-leased commercial properties. The Company was sponsored by AR Capital Global Holdings, LLC (the "Sponsor"). The Sponsor and its affiliates provide asset management services to the Company pursuant to advisory agreements.
As of March 31, 2018, the Company owned 327 properties consisting of 23.7 million rentable square feet, which were 99.5% leased, with a weighted-average remaining lease term of 8.6 years. Based on the percentage of annualized rental income on a straight-line basis, 49.1% of the Company's properties are located in the U.S. and 50.9% in Europe. The Company may also originate or acquire first mortgage loans, mezzanine loans, preferred equity or securitized loans (secured by real estate). As of March 31, 2018, 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 Global Net Lease Operating Partnership, L.P. (the "OP"), a Delaware limited partnership. 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 the parent of the Sponsor, as a result of which they are related parties. These related parties receive compensation and fees for various services provided to the Company.
The Advisor had a service provider agreement with Moor Park Capital Partners LLP (the "Service Provider"), pursuant to which the Service Provider provided, 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 January 16, 2018, the Company notified the Service Provider that it was being terminated effective as of March 17, 2018 (the "Effective Date"). Additionally, as a result of the Company’s termination of the Service Provider, the property management and leasing agreement among an affiliate of the Advisor and the Service Provider terminated by its own terms. As required under its existing advisory agreement with the Company (the "Advisory Agreement"), the Advisor and its affiliates will continue to manage the Company’s affairs on a day-to-day basis (including management and leasing of the Company’s properties) and will remain responsible for managing and providing other services with respect to the Company’s European investments. The Advisor, together with its service providers, assumed full management responsibility of the Company’s European real estate portfolio effective the Effective Date. Since the Effective Date, the Advisor has built a European-focused management team and engaged third-party service providers to assume certain duties previously performed by the Service Provider.
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company included herein were prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to this Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair statement of results for the interim periods. All intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three months ended March 31, 2018 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, 2017, 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, 2018. There have been no significant changes to the Company's significant accounting policies during the three months ended March 31, 2018, other than those relating to new accounting pronouncements (see "Recently Issued Accounting Pronouncements" section below).
The accompanying unaudited consolidated financial statements include the accounts of the Company, the OP and its subsidiaries. All intercompany 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

8

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited)

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.
Critical Accounting Policies
Judgments and Estimates
The Company regularly makes a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses in order to prepare its consolidated financial statements in conformity with GAAP. These estimates and assumptions are based on management's best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, such as the prevailing economic and business environment. The Company adjusts such estimates when facts and circumstances dictate. The most significant estimates the Company makes include recoverability of accounts receivable, allocation of property purchase price to tangible and intangible assets acquired and liabilities assumed, determination of impairment of long-lived assets, valuation of derivative financial instruments, valuation of compensation plans, and estimating the useful life of a long-lived asset. Actual results could differ materially from those estimated.
Investments in Real Estate
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful
life of the asset. Costs of repairs and maintenance are expensed as incurred.
The Company evaluates the inputs, processes and outputs of each asset acquired to determine if the transaction is a business combination or an asset acquisition. If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statements of operations. If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired assets.
In both a business combination and an asset acquisition, the Company allocates the purchase price of acquired properties to
tangible and identifiable intangible assets or liabilities based on their respective fair values. Tangible assets may include land, land improvements, buildings, fixtures and tenant improvements. Intangible assets or liabilities may include the value of in-place leases, above- and below- market leases and other identifiable assets or liabilities based on lease or property specific characteristics. In addition, any assumed mortgages receivable or payable and any assumed or issued non-controlling interests (in a business combination) are recorded at their estimated fair values. In allocating the fair value to assumed mortgages, amounts are recorded to debt premiums or discounts based on the present value of the estimated cash flows, which is calculated to account for either above or below-market interest rates. In a business combination, the difference between the purchase price and the fair value of identifiable net assets acquired is either recorded as goodwill or as a bargain purchase gain. In an asset acquisition, the difference between the acquisition price (including capitalized transaction costs) and the fair value of identifiable net assets acquired is allocated to the non-current assets. All acquisitions during the three months ended March 31, 2018 and the year ended December 31, 2017 were asset acquisitions.
Purchase Accounting and Acquisition of Real Estate
The Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets acquired, including those acquired in the Company's merger (the "Merger"), which closed in December 2016, with American Realty Capital Global Trust II, Inc. ("Global II"), which was sponsored and advised by affiliates of the Sponsor, based on their respective fair values. Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. The Company utilizes various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and fixtures are based on cost segregation studies performed by independent third parties or on the Company's analysis of comparable properties in the Company's portfolio. Identifiable intangible assets include amounts allocated to acquire leases for above- and below-market lease rates, the value of in-place leases, and the value of customer relationships, as applicable.
Factors considered in the analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at contract rates during the expected lease-up period, which typically ranges from 12 to 18 months. The Company also estimates costs to execute similar leases including leasing commissions, legal and other related expenses.
Above-market and below-market lease values for acquired properties are initially recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease, and (ii) management’s estimate of fair market lease rates for each corresponding in-

9

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited)

place lease, measured over a period equal to the remaining term of the lease for above-market leases and the remaining initial term plus the term of any below-market fixed rate renewal options for below-market leases. The capitalized above-market lease values are amortized as a reduction of base rental revenue over the remaining terms of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases. If a tenant with a below market rent renewal does not renew, any remaining unamortized amount will be taken into income at that time.
The aggregate value of intangible assets related to customer relationship, as applicable, is measured based on the Company's evaluation of the specific characteristics of each tenant’s lease and the Company's overall relationship with the tenant. Characteristics considered by the Company in determining these values include the nature and extent of its existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals, among other factors.
In making estimates of fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. The Company also considers information obtained about each property as a result of the Company's pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
Derivative Instruments
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 of the Company's foreign operations expose the Company to fluctuations of foreign interest rates and exchange rates. These fluctuations may impact the value of the Company's cash receipts and payments in the Company's functional currency, the U.S. dollar ("USD"). 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 Company records all derivatives on the consolidated balance sheets at fair value. The accounting for changes in the fair
value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in
a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to
apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
The accounting for subsequent changes in the fair value of these derivatives depends on whether each has been designed and
qualifies for hedge accounting treatment. If the Company elects not to apply hedge accounting treatment (or for derivatives that
do not qualify as hedges), any changes in the fair value of these derivative instruments is recognized immediately in gains (losses) on derivative instruments in the consolidated statements of operations. If a derivative is designated and qualifies for cash flow hedge accounting treatment, the change in the estimated fair value of the derivative is recorded in other comprehensive income (loss) in the consolidated statements of comprehensive income (loss) to the extent that it is effective. Any ineffective portion of a change in derivative fair value is immediately recorded in earnings.
Impairment of Long Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net earnings.
Goodwill

10

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited)

The Company evaluates goodwill for impairment at least annually or upon the occurrence of a triggering event. A triggering event is an event or circumstance that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company performed a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. Based on our assessment we determined that the goodwill is not impaired as of March 31, 2018.
Revenue Recognition
The Company's revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease agreement and are reported on a straight-line basis over the initial term of the lease. Since many of the Company's leases provide for rental increases at specified intervals, straight-line basis accounting requires the Company to record a receivable, and include in revenues, unbilled rent receivables that the Company will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. For new leases after acquisition, the commencement date is considered to be the date the lease is executed. The Company defers the revenue related to lease payments received from tenants in advance of their due dates. When the Company acquires a property, the acquisition date is considered to be the commencement date for purposes of this calculation.
The Company reviews receivables related to rent and unbilled rent receivables and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, the Company records an increase in the Company's allowance for uncollectible accounts or records a direct write-off of the receivable in the Company's consolidated statements of operations.
Cost recoveries from tenants are included in operating expense reimbursement in the period the related costs are incurred, as applicable.
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.
The Company conducts business in various states and municipalities within the U.S. and Puerto Rico, the United Kingdom and Western 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.
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-

11

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited)

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.
Reportable Segments
The Company determined that it has one reportable segment, with activities related to investing in real estate. The Company’s investments in real estate generate rental revenue and other income through the leasing of properties, which comprise 100% of total consolidated revenues. Management evaluates the operating performance of the Company’s investments in real estate on an individual property level.
Out-of-Period Adjustments
During the three 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.
Also, during the year ended December 31, 2017, the Company identified certain historical errors in its current taxes payable as well as its statement of comprehensive income (loss), consolidated statement of changes in equity, and statement of cash flows since 2013 which impacted the quarterly financial statements and annual periods previously issued. Specifically, when recording its annual provision, the Company had adjusted its current taxes payable to the cumulative amount of taxes payable without consideration for cumulative payments. This adjustment was made with an offsetting amount in cumulative translation adjustments within other comprehensive income ("OCI") and accumulated other comprehensive income ("AOCI"). As of December 31, 2016, income taxes payable were overstated and AOCI was understated by $4.7 million. OCI was understated by $2.9 million, $1.9 million and overstated by $0.1 million for the years end December 31, 2016, 2015 and Pre-2015, respectively. We concluded that the errors noted above were not material to the current period or any historical periods presented and have adjusted the amounts on a cumulative basis in the year ended December 31, 2017.
Recently Issued Accounting Pronouncements
Adopted as of January 1, 2018:
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and has since issued several additional amendments thereto (collectively referred to herein as "ASC 606"). ASC 606 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 adopted this guidance effective January 1, 2018, for all future financial statements issued, under the modified retrospective approach and it did not have an impact on the Company's consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Also, in February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which updated guidance previously issued by ASU 2016-01. The guidance in ASU 2016-01 and 2018-01 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 adopted ASU 2016-01 and ASU 2018-03 effective January 1, 2018, using the modified retrospective transition method, and there was no material impact to the Company's consolidated financial statements.

12

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited)

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides 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 adopted the new guidance beginning in the first quarter of 2018, with reclassification of prior period amounts, where applicable, and it did not have a significant impact on its statement of cash flows.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which 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 early adopted the provisions of this guidance effective January 1, 2017. 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 of the Company's acquisitions during 2018 and 2017 have been classified as asset acquisitions.
In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Assets Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which provides 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 adopted this guidance effective January 1, 2018 using the modified transition method. 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): Scope of Modification Accounting, which provides 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 adopted this guidance effective January 1, 2018 using the modified retrospective transition method. 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.
Pending Adoption as of March 31, 2018:
In February 2018, the FASB issued ASU 2018-02, Income Statement- Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The new guidance addresses the impact of Tax Cuts and Jobs Act signed into law on December 22, 2017, (“Tax Cuts and Jobs Act”) on items within accumulated other comprehensive income which do not reflect the appropriate tax rate. ASU 2018-02 allows the Company to retrospectively reclassify the income tax effects on items in Accumulated Other Comprehensive Income (“AOCI”) to retained earnings for all periods in which the effect of the change in the U.S. federal corporate income tax rate was recognized. In addition, all companies are required to disclose whether the company has elected to reclassify the income tax effects of the Tax Cuts and Jobs Act to retained earnings and disclose information about any other income tax effects that are reclassified from AOCI by the Company. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Companies are required to apply the proposed amendments either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company is currently evaluating the impact of this new guidance.
ASU 2016-02, Leases (Topic 842) ("ASC 842") originally stated that companies would be required to bifurcate certain lease revenues between lease and non-lease components, however, the FASB issued an exposure draft in January 2018 (2018 Exposure Draft) which, if adopted as written, would allow lessors a practical expedient by class of underlying assets to account for lease and non-lease components as a single lease component if certain criteria are met. Additionally, only incremental direct leasing costs may be capitalized under this new guidance, which is consistent with the Company’s existing policies. ASU 2016-02 originally

13

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited)

required a modified retrospective method of adoption, however, the 2018 Exposure Draft indicates that companies may be permitted to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The pronouncement allows some optional practical expedients. The Company does not expect this guidance to impact its existing lessor revenue recognition pattern. The Company expects to adopt this new guidance on January 1, 2019 and will continue to evaluate the impact of this guidance until it becomes effective.
The Company is a lessee for some properties in which it has ground leases as of December 31, 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.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes how entities measure credit losses for financial assets carried at amortized cost. The update eliminates the requirement that a credit loss must be probable before it can be recognized and instead requires an entity to recognize the current estimate of all expected credit losses. Additionally, the update requires credit losses on available-for-sale debt securities to be carried as an allowance rather than as a direct write-down of the asset. The amendments become effective for reporting periods beginning after December 15, 2019. Early adoption is permitted for reporting periods beginning after December 15, 2018. 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.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): 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 — Real Estate Investments, Net
Property Acquisitions
The following table presents the allocation of the assets acquired and liabilities assumed during the three months ended March 31, 2018 and 2017, based on the exchange rate at the time of purchase. All acquisitions in both periods were considered asset acquisitions for accounting purposes.

14

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited)

 
 
Three Months Ended March 31,
(Dollar amounts in thousands)
 
2018
 
2017
Real estate investments, at cost:
 
 
 
 
Land
 
$
10,729

 
$
5,443

Buildings, fixtures and improvements
 
44,772

 
22,131

Total tangible assets
 
55,501

 
27,574

Acquired intangible lease assets:
 
 
 
 
In-place leases
 
8,893

 
4,003

Above-market lease assets
 

 
47

Below-market lease liabilities
 
(798
)
 
(1,334
)
Cash paid for acquired real estate investments
 
$
63,596

 
$
30,290

Number of properties purchased
 
6

 
3

Acquired Intangible Lease Assets
We allocate a portion of the fair value of real estate acquired to identified intangible assets and liabilities, consisting of the value of origination costs (tenant improvements, leasing commissions, and legal and marketing costs), the value of above-market and below-market leases, and the value of tenant relationships, if applicable, based in each case on their relative fair values. The Company periodically assesses whether there are any indicators that the value of the intangible assets may be impaired by performing a net present value analysis of future cash flows, discounted for the inherent risk associated with each investment. For the three months ended March 31, 2018, we did not record any impairment charges for the intangible assets associated with our real estate investments.
Dispositions
As of March 31, 2018 and December 31, 2017, 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 March 31, 2018. During the three months ended March 31, 2017, the Company sold its property located in Fort Washington, Pennsylvania for a total contract sales price of $13.0 million, resulting in net proceeds of $12.4 million and a gain of $0.4 million, which is reflected in gains on dispositions of real estate investments in the accompanying consolidated statements of operations for the three months ended March 31, 2017. Also included in gains on dispositions of real estate investments is approximately $0.6 million reduction in the Gain Fee payable to the Advisor as a result of reinvestments during the three months ended March 31, 2017 (see Note 10 — Related Party Transactions for details).

15

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited)

Future Minimum Rents
The following table presents future minimum base rental cash payments due to the Company over the next five calendar years and thereafter as of March 31, 2018. 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)
2018 (remainder)
 
$
193,051

2019
 
260,420

2020
 
263,576

2021
 
261,787

2022
 
252,279

2023
 
228,099

Thereafter
 
702,272

 
 
$
2,161,484

___________________________________________
(1) 
Assumes exchange rates of £1.00 to $1.40 for GBP and €1.00 to $1.23 for EUR as of March 31, 2018 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 March 31, 2018 and December 31, 2017.
The following table lists the country 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 March 31, 2018 and December 31, 2017.
Country, State or Territory
 
March 31,
2018
 
December 31,
2017
United Kingdom
 
22.1%
 
22.1%
United States
 
49.1%
 
48.9%
___________________________________________
*
Annualized rental income on a straight-line basis was not 10% or greater of total annualized rental income as of the period specified. There is no State in the United States that exceeded the 10.0% threshold.

16

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited)

Note 4 —Mortgage Notes Payable, Net
Mortgage notes payable, net as of March 31, 2018 and December 31, 2017 consisted of the following:
 
 
 
 
Encumbered Properties
 
Outstanding Loan Amount (1)
 
Effective Interest Rate
 
Interest Rate
 
 
Country
 
Portfolio
 
 
March 31,
2018
 
December 31,
2017
 
 
 
Maturity
 
 
 
 
 
 
(In thousands)
 
(In thousands)
 
 
 
 
 
 
Finland:
 
Finnair
 
4
 
$
34,999

 
$
34,022

 
2.2%
(2) 
Fixed
 
Sep. 2020
 
 
Tokmanni
 
1
 
35,708

 
34,711

 
2.4%
(2) 
Fixed
 
Oct. 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
France:
 
Auchan
 
1
 
10,229

 
9,943

 
1.7%
(2) 
Fixed
 
Dec. 2019
 
 
Pole Emploi
 
1
 
7,148

 
6,948

 
1.7%
(2) 
Fixed
 
Dec. 2019
 
 
Sagemcom
 
1
 
44,242

 
43,006

 
1.7%
(2) 
Fixed
 
Dec. 2019
 
 
Worldline
 
1
 
6,162

 
5,990

 
1.9%
(2) 
Fixed
 
Jul. 2020
 
 
DCNS
 
1
 
11,708

 
11,381

 
1.5%
(2) 
Fixed
 
Dec. 2020
 
 
ID Logistics II
 
2
 
12,940

 
12,578

 
1.3%
 
Fixed
 
Jun. 2021
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Germany
 
Rheinmetall
 
1
 
13,063

 
12,698

 
2.6%
(2) 
Fixed
 
Jan. 2019
 
 
OBI DIY
 
1
 
5,546

 
5,391

 
2.4%
 
Fixed
 
Jan. 2019
 
 
RWE AG
 
3
 
77,023

 
74,872

 
1.6%
(2) 
Fixed
 
Oct. 2019
 
 
Rexam
 
1
 
6,328

 
6,301

 
1.8%
(2) 
Fixed
 
Oct. 2019
 
 
Metro Tonic
 
1
 
32,658

 
31,746

 
1.7%
(2) 
Fixed
 
Dec. 2019
 
 
ID Logistics I 
 
1
 
4,929

 
4,792

 
1.0%
 
Fixed
 
Oct. 2021
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Luxembourg:
 
DB Luxembourg
 
1
 
44,365

 
43,126

 
1.4%
(2) 
Fixed
 
May 2020
The Netherlands:
 
ING Amsterdam
 
1
 
54,224

 
52,710

 
1.7%
(2) 
Fixed
 
Jun. 2020
 
 
Total EUR denominated
 
22
 
401,272

 
390,215

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United Kingdom:
 
McDonald's
 
 

 
1,025

 
4.1%
(2) 
Fixed
 
Feb. 2018
 
 
Wickes Building Supplies I
 
1
 
2,764

 
2,226

 
3.7%
(2) 
Fixed
 
May 2018
 
 
Everything Everywhere
 
1
 
5,605

 
5,397

 
4.0%
(2) 
Fixed
 
Jun. 2018
 
 
Thames Water
 
1
 
8,408

 
8,096

 
4.1%
(2) 
Fixed
 
Jul. 2018
 
 
Wickes Building Supplies II
 
1
 
2,626

 
2,626

 
4.2%
(2) 
Fixed
 
Jul. 2018
 
 
Northern Rock
 
2
 
7,357

 
7,084

 
4.4%
(2) 
Fixed
 
Sep. 2018
 
 
Wickes Building Supplies III
 
1
 
2,313

 
2,564

 
4.3%
(2) 
Fixed
 
Nov. 2018
 
 
Provident Financial
 
1
 
17,866

 
17,203

 
4.1%
(2) 
Fixed
 
Feb. 2019
 
 
Crown Crest
 
1
 
26,975

 
25,973

 
4.2%
(2) 
Fixed
 
Feb. 2019
 
 
Aviva
 
1
 
22,000

 
21,183

 
3.8%
(2) 
Fixed
 
Mar. 2019
 
 
Bradford & Bingley
 
1
 
10,594

 
10,200

 
3.5%
(2) 
Fixed
 
May 2020
 
 
Intier Automotive Interiors
 
1
 
6,621

 
6,375

 
3.5%
(2) 
Fixed
 
May 2020
 
 
Capgemini
 
1
 
6,628

 
6,381

 
3.2%
(2) 
Fixed
 
Jun. 2020
 
 
Fujitsu
 
3
 
34,724

 
33,435

 
3.2%
(2) 
Fixed
 
Jun. 2020
 
 
Amcor Packaging
 
7
 
4,380

 
4,218

 
3.5%
(2) 
Fixed
 
Jul. 2020
 
 
Fife Council
 
1
 
2,570

 
2,474

 
3.5%
(2) 
Fixed
 
Jul. 2020
 
 
Malthrust
 
3
 
4,484

 
4,318

 
3.5%
(2) 
Fixed
 
Jul. 2020
 
 
Talk Talk
 
1
 
5,360

 
5,161

 
3.5%
(2) 
Fixed
 
Jul. 2020
 
 
HBOS
 
3
 
7,553

 
7,272

 
3.5%
(2) 
Fixed
 
Jul. 2020
 
 
DFS Trading
 
5
 
14,208

 
13,680

 
3.4%
(2) 
Fixed
 
Aug. 2020
 
 
DFS Trading
 
2
 
3,326

 
3,203

 
3.4%
(2) 
Fixed
 
Aug. 2020
 
 
HP Enterprise Services
 
1
 
13,014

 
12,531

 
3.4%
(2) 
Fixed
 
Aug. 2020

17

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited)

 
 
 
 
Encumbered Properties
 
Outstanding Loan Amount (1)
 
Effective Interest Rate
 
Interest Rate
 
 
Country
 
Portfolio
 
 
March 31,
2018
 
December 31,
2017
 
 
 
Maturity
 
 
Foster Wheeler
 
1
 
55,071

 
53,026

 
2.6%
(2) 
Fixed
 
Oct. 2018
 
 
Harper Collins
 
1
 
39,341

 
37,880

 
3.4%
(2) 
Fixed
 
Oct. 2019
 
 
NCR Dundee
 
1
 
7,903

 
7,610

 
2.9%
(2) 
Fixed
 
Apr. 2020
 
 
Total GBP denominated
 
42
 
311,691

 
301,141

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States:
 
Quest Diagnostics
 
1
 
52,800

 
52,800

 
2.8%
(3) 
Variable
 
Sep. 2018
 
 
Western Digital
 
1
 
17,277

 
17,363

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

 
33,550

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

 
6,165

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

 
4,110

 
4.5%
 
Fixed
 
Jun. 2021
 
 
Multi-Tenant Mortgage Loan I
 
12
 
187,000

 
187,000

 
4.4%
 
Fixed
 
Nov. 2027
 
 
Multi-Tenant Mortgage Loan II
 
8
 
32,750

 

 
4.4%
 
Fixed
 
Feb. 2028
 
 
Total USD denominated
 
25
 
333,652

 
300,988

 
 
 
 
 
 
 
 
Gross mortgage notes payable
 
89
 
1,046,615

 
992,344

 
2.8%
 
 
 
 
 
 
Mortgage discount
 
 
(1,715
)
 
(1,927
)
 
 
 
 
 
 
 
Deferred financing costs, net of accumulated amortization
 
 
(6,006
)
 
(5,541
)
 
 
 
 
 
 
 
Mortgage notes payable, net
 
89
 
$
1,038,894

 
$
984,876

 
2.8%
 
 
 
 
_______________________________
(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.
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 March 31, 2018:
(In thousands)
 
Future Principal Payments (1)
2018 (remainder)
 
$
136,944

2019
 
302,419

2020
 
342,081

2021
 
45,421

2022
 

2023
 

Thereafter
 
219,750

Total
 
$
1,046,615

_________________________
(1) 
Assumes exchange rates of £1.00 to $1.40 for GBP and €1.00 to $1.23 for EUR as of March 31, 2018 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 March 31, 2018, the Company was in compliance with all financial covenants under its mortgage notes payable agreements.
As of December 31, 2017, the Company was in breach of a loan-to-vacant possession financial covenant on one mortgage note payable agreement, which had an outstanding principal balance of $37.9 million (£28.1 million) as of December 31, 2017. During the fourth quarter of 2017, the Company repaid £0.8 million and in January 2018 the Company repaid €0.1 million of principal on two separate mortgage note payable agreements in order to cure loan to value financial covenant breaches which did not result in events of default. The Company was in compliance with the remaining covenants under its mortgage notes payable agreements as of December 31, 2017.

18

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited)

Multi-Tenant Mortgage Loan II
On January 26, 2018, the Company entered into a multi-tenant mortgage loan, yielding gross proceeds of $32.8 million with a fixed interest rate of 4.32% and a 10-year maturity in February 2028. The multi-tenant mortgage loan is secured by eight properties in six states totaling approximately 627,500 square feet. Proceeds were used to pay down approximately $30.0 million of outstanding indebtedness under the Revolving Credit Facility and for general corporate purposes and future acquisitions.
Note 5 — Credit Facilities
The table below details the outstanding balances as of March 31, 2018 and December 31, 2017 under the 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”).
 
 
March 31, 2018
 
December 31, 2017
(In thousands)
 
TOTAL USD
 
 
USD
 
GBP
 
EUR
 
TOTAL USD
 
 
USD
 
GBP
 
EUR
Revolving Credit Facilities
 
$
342,023

 
 
$
249,000

 
£
40,000

 
30,000

 
$
298,909

 
 
$
209,000

 
£
40,000

 
30,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Term Loan
 
239,864

 
 

 

 
194,637

 
233,165

 
 

 

 
194,637

Deferred financing costs
 
(3,081
)
 
 

 

 

 
(3,260
)
 
 

 

 

Term Loan, Net
 
236,783

 
 

 

 
194,637

 
229,905

 
 

 

 
194,637

Total Credit Facility(1)
 
$
578,806

 
 
$
249,000

 
£
40,000

 
224,637

 
$
528,814

 
 
$
209,000

 
£
40,000

 
224,637

(1) 
Assumes exchange rates of £1.00 to $1.40 for GBP and €1.00 to $1.23 for EUR as of March 31, 2018 for illustrative purposes, as applicable.
Credit Facility - Terms
On July 24, 2017, the Company, through the OP, entered into a credit agreement with KeyBank. 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.
The Credit Facility consists of two components, a Revolving Credit Facility and a Term Facility. 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 portion of the Credit 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 range of applicable interest rate margins is 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 March 31, 2018, the Credit Facility had a weighted-average effective interest rate of 2.9% 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.
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 March 31, 2018, approximately $60.4 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.

19

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited)

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.
Prior Credit Facility - Terms
On July 24, 2017, the Company terminated a credit facility (as amended from time to time, the "Prior Credit Facility") that provided for borrowings of up to $740.0 million (subject to borrowing base availability). Under the Prior Credit Facility, the Company had the option, to have draws under the Prior Credit Facility priced at either the Alternate Base Rate (as described below) plus, depending upon the Company's consolidated leverage ratio, 0.60% to 1.20% or at Adjusted LIBOR (as described below) plus, depending upon the Company's consolidated leverage ratio, 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.
Mezzanine Facility
In the fourth quarter of 2016, 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).
Note 6 — Fair Value of Financial Instruments
The Company determines fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. This alternative approach also reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The guidance defines three levels of inputs that may be used to measure fair value:
Level 1 — Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability and those inputs are significant.
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.

20

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited)

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with those derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of March 31, 2018 and December 31, 2017, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of the Company's derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The valuation of derivative instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and implied volatilities. In addition, credit valuation adjustments are incorporated into the fair values to account for the Company's potential nonperformance risk and the performance risk of the counterparties.
Financial Instruments Measured at Fair Value on a Recurring Basis
The following table presents information about the Company's assets and liabilities (including derivatives that are presented net) measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017, aggregated by the level in the fair value hierarchy within which those instruments fall.
(In thousands)
 
Quoted Prices in Active Markets
Level 1
 
Significant Other Observable Inputs
Level 2
 
Significant Unobservable Inputs
Level 3
 
Total
March 31, 2018
 
 
 
 
 
 
 
 
Cross currency swaps, net (GBP & EUR)
 
$

 
$
(8,325
)
 
$

 
$
(8,325
)
Foreign currency forwards, net (GBP & EUR)
 
$

 
$
(4,795
)
 
$

 
$
(4,795
)
Interest rate swaps, net (GBP & EUR)
 
$

 
$
(2,123
)
 
$

 
$
(2,123
)
Put options (GBP & EUR)
 
$

 
$
17

 
$

 
$
17

Multi-year outperformance agreement (see Note 12)
 
$

 
$

 
$
(170
)
 
$
(170
)
December 31, 2017
 
 
 
 
 
 
 
 
Cross currency swaps, net (GBP & EUR)
 
$

 
$
(4,511
)
 
$

 
$
(4,511
)
Foreign currency forwards, net (GBP & EUR)
 
$

 
$
(2,737
)
 
$

 
$
(2,737
)
Interest rate swaps, net (GBP & EUR)
 
$

 
$
(6,450
)
 
$

 
$
(6,450
)
Put options (GBP & EUR)
 
$

 
$
63

 
$

 
$
63

Multi-year outperformance agreement (see Note 12)
 
$

 
$

 
$
(1,600
)
 
$
(1,600
)
The valuation of the Company's multi-year outperformance agreement with the Advisor (the "OPP") is determined using a Monte Carlo simulation. This analysis reflects the contractual terms of the OPP, including the performance periods and total return hurdles, as well as observable market-based inputs, including interest rate curves, and unobservable inputs, such as expected volatility. As a result, the Company has determined that its OPP valuation in its entirety is classified in Level 3 of the fair value hierarchy.
A review of the fair value hierarchy classification is conducted on a quarterly basis. Changes in the type of inputs may result in a reclassification for certain assets. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2018.

21

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited)

Level 3 Valuations
The following is a reconciliation of the beginning and ending balances for the changes in the instrument with Level 3 inputs in the fair value hierarchy for the three months ended March 31, 2018:
(In thousands)
 
OPP
Beginning Balance as of December 31, 2017
 
$
1,600

   Fair value adjustment
 
(1,430
)
Ending balance as of March 31, 2018
 
$
170

The following table provides quantitative information about the significant Level 3 input used:
Financial Instrument
 
Fair Value at March 31, 2018
 
Principal Valuation Technique
 
Unobservable Inputs
 
Input Value
 
 
(In thousands)
 
 
 
 
 
 
OPP
 
$
170

 
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.
 
 
 
 
March 31, 2018
 
December 31, 2017
(In thousands)
 
Level
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Mortgage notes payable (1) (2) (3)
 
3
 
$
1,046,615

 
$
1,045,012

 
$
988,490

 
$
963,751

Revolving Credit Facility (4)
 
3
 
$
342,023

 
$
340,979

 
$
298,909

 
$
297,890

Term Facility (4)
 
3
 
$
236,783

 
$
240,587

 
$
229,905

 
$
233,916

__________________________________________________________
(1) 
Carrying value includes $1.0 billion gross mortgage notes payable and $1.7 million mortgage discounts, net as of March 31, 2018.
(2) 
Carrying value includes $1.0 billion gross mortgage notes payable and $1.9 million mortgage discounts, net as of December 31, 2017.
(3) 
Mortgage notes payable are presented net of deferred financing costs of $6.0 million and $5.5 million as of March 31, 2018 and December 31, 2017, respectively.
(4) 
Both facilities are part of the Company's Credit Facility (see Note 5 — Credit Facilities for more information).
The fair value of the gross Mortgage notes payable, the Revolving Credit Facility and the Term Facility are estimated using a discounted cash flow analysis, based on the Advisor's experience with similar types of borrowing arrangements.
Note 7Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
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 of the Company's foreign operations expose the Company to fluctuations of 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.

22

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited)

The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company's operating and financial structure as well as to hedge specific anticipated transactions. The Company does not intend to utilize derivatives for speculative or other purposes other than interest rate and currency risk management. The use of derivative financial instruments carries certain risks, including the risk that any counterparty to a contractual arrangement may not be able to perform under the agreement. To mitigate this risk, the Company only enters into a derivative financial instrument with a counterparty with a high credit rating with a major financial institution which the Company and its affiliates may also have other financial relationships with. The Company does not anticipate that any such counterparty will fail to meet its obligations.
The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the consolidated balance sheets as of March 31, 2018 and December 31, 2017:
(In thousands)
 
Balance Sheet Location
 
March 31,
2018
 
December 31,
2017
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign currency forwards (EUR-USD)
 
Derivative liabilities, at fair value
 
$

 
$
(304
)
Cross currency swaps (EUR)
 
Derivative liabilities, at fair value
 
(4,365
)
 
(3,328
)
Cross currency swaps (GBP)
 
Derivative liabilities, at fair value
 
(3,960
)
 
(1,183
)
Interest rate swaps (USD)
 
Derivative assets, at fair value
 
4,470

 
2,093

Interest rate swaps (GBP)
 
Derivative assets, at fair value
 
25

 

Interest rate swaps (GBP)
 
Derivative liabilities, at fair value
 
(2,130
)
 
(3,713
)
Interest rate swaps (EUR)
 
Derivative liabilities, at fair value
 
(2,349
)
 
(2,446
)
Total
 
 
 
$
(8,309
)
 
$
(8,881
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Foreign currency forwards (GBP-USD)
 
Derivative assets, at fair value
 
$

 
$
20

Foreign currency forwards (GBP-USD)
 
Derivative liabilities, at fair value
 
(2,540
)
 
(1,175
)
Foreign currency forwards (EUR-USD)
 
Derivative liabilities, at fair value
 
(2,255
)
 
(1,258
)
Put options (EUR)
 
Derivative assets, at fair value
 
17

 
63

Interest rate swaps (EUR)
 
Derivative liabilities, at fair value
 
(2,139
)
 
(2,384
)
Total
 
 
 
$
(6,917
)
 
$
(4,734
)
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives 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.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction impacts earnings. During 2018, such derivatives were used to hedge the variable cash flows associated with variable-rate debt. During the three months ended March 31, 2018 and 2017, the Company recorded losses of approximately $43,131 and $36,000, respectively, of ineffectiveness in earnings. Additionally, during the three months ended March 31, 2018, the Company accelerated the reclassification of amounts in other comprehensive income to earnings as a result of the hedged forecasted transactions becoming probable not to occur.  The accelerated amounts were a loss of $23,030.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $2.3 million will be reclassified from other comprehensive income as an increase to interest expense.
As of March 31, 2018 and December 31, 2017, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:

23

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited)

 
 
March 31, 2018
 
December 31, 2017
Derivatives
 
Number of
Instruments
 
Notional Amount
 
Number of
Instruments
 
Notional Amount
 
 
 
 
(In thousands)
 
 
 
(In thousands)
Interest rate swaps (GBP)
 
19
 
$
312,049

 
19
 
$
301,155

Interest rate swaps (EUR)
 
13
 
228,574

 
13
 
222,190

Interest rate swaps (USD)
 
3
 
150,000

 
3
 
150,000

Total
 
35
 
$
690,623

 
35
 
$
673,345

In connection with the July 24, 2017 refinancing of the Prior Credit Facility, the Company terminated an interest rate swap with notional amount of £160.0 million for a payment of $2.6 million. This swap was designated as a cash flow hedge on the Company's GBP borrowings which were partially paid off. As a result of the termination, the Company accelerated the reclassification of amounts in other comprehensive income to earnings as a result of the hedged forecasted transactions becoming probable not to occur. The portion of the termination payment relating to the GBP borrowings that were paid off resulted in a charge to earnings of $1.1 million, included in loss on derivative instruments in the third quarter of 2017. The remaining amount relating to GBP borrowings still outstanding will remain in AOCI and be recorded as an adjustment to interest expense over the term of the related GBP borrowings.
In connection with the July 24, 2017 refinancing of the Prior Credit Facility, the Company novated an interest rate swap with a notional amount of €224.0 million. Subsequent to the novation, the swap no longer qualified for hedge accounting. The interest swap liability of $0.7 million at that date will stay in AOCI and be recorded as an adjustment to interest expense over the term of the related LIBOR borrowings. Subsequent changes in the value of the swap will be reflected in earnings.
The table below details the location in the consolidated financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the three months ended March 31, 2018 and 2017.
 
 
Three Months Ended March 31,
(In thousands)
 
2018
 
2017
Amount of loss recognized in accumulated other comprehensive income (loss) from derivatives (effective portion)
 
$
(551
)
 
$
(1,983
)
Amount of loss reclassified from accumulated other comprehensive income (loss) into income as interest expense (effective portion)
 
$
(1,311
)
 
$
(1,472
)
Amount of (loss) gain recognized in income on derivative instruments (ineffective portion, reclassifications of missed forecasted transactions and amounts excluded from effectiveness testing)
 
$
(66
)
 
$
36

Net Investment Hedges
The Company is exposed to fluctuations in foreign currency exchange rates on property investments in foreign countries which pay rental income, incur property related expenses and hold debt instruments in currencies other than its functional currency, the USD. The Company uses foreign currency derivatives including cross currency swaps to hedge its exposure to changes in foreign exchange rates on certain of its foreign investments. Cross currency swaps involve fixing the applicable exchange rate for delivery of a specified amount of foreign currency on specified dates.
For derivatives designated as net investment hedges, the effective portion of changes in the fair value of the derivatives are reported in Accumulated Other Comprehensive Income (outside of earnings) as part of the cumulative translation adjustment. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. Amounts are reclassified out of accumulated other comprehensive income into earnings when the hedged net investment is either sold or substantially liquidated.
As of March 31, 2018 and December 31, 2017, the Company had the following outstanding foreign currency derivatives that were designated as net investment hedges used to hedge its net investments in foreign operations:

24

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited)

 
 
March 31, 2018
 
December 31, 2017
Derivatives
 
Number of
Instruments
 
Notional Amount
 
Number of
Instruments
 
Notional Amount
 
 
 
 
(In thousands)
 
 
 
(In thousands)
Cross currency swaps (EUR - USD)
 
3
 
$
44,464

 
3
 
$
43,222

Cross currency swaps (GBP - USD)
 
1
 
68,917

 
1
 
66,282

Foreign currency forwards (EUR-USD)
 
 

 
1
 
12,099

Total
 
4
 
$
113,381

 
5
 
$
121,603

Foreign Denominated Debt Designated as Net Investment Hedges
Effective May 17, 2015, all foreign currency draws under the Prior Credit Facility were designated as net investment hedges. As such, the effective portion of changes in value due to currency fluctuations are reported in accumulated other comprehensive income (loss) (outside of earnings) as part of the cumulative translation adjustment. The undesignated portion of the change in fair value of the derivatives is recognized directly in earnings. Amounts are reclassified out of accumulated other comprehensive income (loss) into earnings when the hedged net investment is either sold or substantially liquidated, or if the Company should no longer possess a controlling interest.
As of March 31, 2018, total foreign currency advances under the Credit Facility were approximately $333.0 million, which reflects advances of £40 million ($56.1 million based upon an exchange rate of £1.00 to $1.40, as of March 31, 2018) and advances of €224.6 million ($276.8 million based upon an exchange rate of €1.00 to $1.23, as of March 31, 2018).
The Company designates its net investment hedge position on the first day of each quarterly period. The table below presents the currency draws designated as net investment hedges and the related net investments in real estate designated in foreign currency.
 
 
January 1, 2018
(In thousands)
 
GBP
 
EUR
Currency draws (1)
 
£
40,000

 
224,637

Net Investments in Real Estate Denominated in Foreign Currency (2)
 
£
103,458

 
335,861