10-Q 1 gnl331201910-q.htm 10-Q GNL 3.31.19 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, 2019
 
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
image3a23.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., 3rd Floor, New York, NY
 
 
 
10022
(Address of principal executive offices)
 
 
 
(Zip Code)
(212) 415-6500
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act:
Title of each class
 
Trading Symbols
 
Name of each exchange on which registered
Common Stock, $0.01 par value
 
GNL
 
New York Stock Exchange
7.25% Series A Cumulative Redeemable Preferred Stock, $0.01 par value
 
GNL PR A
 
New York Stock Exchange
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, every Interactive Data File required to be submitted 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 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 ¨
 
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 May 1, 2019, the registrant had 83,840,684 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,
2019
 
December 31,
2018
ASSETS
 
 
 
Real estate investments, at cost (Note 3):
 
 
 
Land
$
400,559

 
$
398,911

Buildings, fixtures and improvements
2,353,473

 
2,345,202

Construction in progress
12,495

 
1,235

Acquired intangible lease assets
647,678

 
675,551

Total real estate investments, at cost
3,414,205

 
3,420,899

Less accumulated depreciation and amortization
(467,657
)
 
(437,974
)
Total real estate investments, net
2,946,548

 
2,982,925

Assets held for sale
110,679

 
112,902

Cash and cash equivalents
95,267

 
100,324

Restricted cash
3,368

 
3,369

Derivative assets, at fair value (Note 7)
6,854

 
8,730

Unbilled straight-line rent
49,089

 
47,183

Prepaid expenses and other assets
81,026

 
22,245

Due from related parties
20

 
16

Deferred tax assets
3,281

 
3,293

Goodwill and other intangible assets, net
21,925

 
22,180

Deferred financing costs, net
5,704

 
6,311

     Total Assets
$
3,323,761

 
$
3,309,478

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Mortgage notes payable, net (Note 4)
$
1,131,072

 
$
1,129,807

Revolving credit facility (Note 5)
260,409

 
363,894

Term loan, net (Note 5)
273,414

 
278,727

Acquired intangible lease liabilities, net
32,885

 
35,757

Derivative liabilities, at fair value (Note 7)
5,908

 
3,886

Due to related parties
472

 
790

Accounts payable and accrued expenses
43,494

 
31,529

Prepaid rent
20,816

 
16,223

Deferred tax liability
14,960

 
15,227

Taxes payable
48

 
2,228

Dividends payable
2,721

 
2,664

Total Liabilities
1,786,199

 
1,880,732

Commitments and contingencies (Note 9)

 

Stockholders' Equity (Note 8):
 
 
 
7.25% Series A cumulative redeemable preferred stock, $0.01 par value, liquidation preference $25.00 per share, 13,409,650 shares authorized, 5,484,994 and 5,416,890 issued and outstanding as of March 31, 2019 and December 31, 2018, respectively
55

 
54

Common Stock, $0.01 par value, 150,000,000 shares authorized, 83,839,947 shares issued and outstanding as of March 31, 2019; 100,000,000 shares authorized, 76,080,625 shares issued and outstanding as of December 31, 2018
2,169

 
2,091

Additional paid-in capital
2,183,829

 
2,031,981

Accumulated other comprehensive income
214

 
6,810

Accumulated deficit
(653,956
)
 
(615,448
)
Total Stockholders' Equity
1,532,311

 
1,425,488

Non-controlling interest
5,251

 
3,258

 Total Equity
1,537,562

 
1,428,746

     Total Liabilities and Equity
$
3,323,761

 
$
3,309,478

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,
 
 
2019
 
2018
Revenue from tenants
 
$
75,468

 
$
68,086

 
 
 
 
 
 Expenses (income):
 
 
 
 
Property operating
 
7,359

 
7,470

Fire recovery
 

 
(79
)
Operating fees to related parties
 
8,043

 
6,831

Acquisition, transaction and other costs (Note 9)
 
262

 
1,325

General and administrative
 
3,206

 
2,051

Equity-based compensation
 
2,109

 
(832
)
Depreciation and amortization
 
31,303

 
29,496

Total expenses
 
52,282

 
46,262

Operating income before gain on dispositions of real estate investments
 
23,186

 
21,824

Gain on dispositions of real estate investments
 
892

 

Operating income
 
24,078

 
21,824

Other income (expense):
 
 
 
 
Interest expense
 
(15,162
)
 
(12,975
)
Gain (loss) on derivative instruments
 
240

 
(2,935
)
Unrealized income (loss) on undesignated foreign currency advances and other hedge ineffectiveness
 
76

 
(43
)
Other income
 
4

 
11

Total other expense, net
 
(14,842
)
 
(15,942
)
Net income before income tax
 
9,236

 
5,882

Income tax expense
 
(960
)
 
(1,070
)
Net income
 
8,276

 
4,812

Preferred Stock dividends
 
(2,485
)
 
(2,451
)
Net income attributable to common stockholders
 
$
5,791

 
$
2,361

 
 
 
 
 
Basic and Diluted Earnings Per Share:
 
 
 
 
Basic and diluted net income per share attributable to common stockholders
 
$
0.07

 
$
0.03

Weighted average shares outstanding:
 
 
 
 
Basic
 
81,474,615

 
67,287,231

Diluted
 
82,798,432

 
67,287,231

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

3

GLOBAL NET LEASE, INC.

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



 
 
Three Months Ended March 31,
 
 
2019
 
2018
Net income
 
$
8,276

 
$
4,812

 
 
 
 
 
Other comprehensive (loss) income
 
 
 
 
Cumulative translation adjustment
 
(1,323
)
 
10,800

Designated derivatives, fair value adjustments
 
(4,941
)
 
4,346

Other comprehensive (loss) income
 
(6,264
)
 
15,146

 
 
 
 
 
Comprehensive income
 
2,012

 
19,958

 
 
 
 
 
Preferred Stock dividends
 
(2,485
)
 
(2,451
)
 
 
 
 
 
Comprehensive (loss) income attributable to common stockholders
 
$
(473
)
 
$
17,507

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

4

GLOBAL NET LEASE, INC.

CONSOLIDATED STATEMENTS 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, 2018
 
5,416,890

 
$
54

 
76,080,625

 
$
2,091

 
$
2,031,981

 
$
6,810

 
$
(615,448
)
 
$
1,425,488

 
$
3,258

 
$
1,428,746

Adoption of ASU 2017-12 (Note 2)
 

 

 

 

 

 
(332
)
 
332

 

 

 

Adoption of ASC 842 (Note 2)
 

 

 

 

 

 

 
(1,200
)
 
(1,200
)
 

 
(1,200
)
Issuance of Common Stock, net
 

 

 
7,759,322

 
78

 
150,120

 

 

 
150,198

 

 
150,198

Issuance of Preferred Stock, net
 
68,104

 
1

 

 

 
1,612

 

 

 
1,613

 

 
1,613

Dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Common stock, $0.53 per share
 

 

 

 

 

 

 
(43,297
)
 
(43,297
)
 

 
(43,297
)
   Preferred stock, $0.45 per share
 

 

 

 

 

 

 
(2,485
)
 
(2,485
)
 

 
(2,485
)
Equity-based compensation
 

 

 

 

 
116

 

 

 
116

 
1,993

 
2,109

Distributions to non-controlling interest holders
 

 

 

 

 

 

 
(134
)
 
(134
)
 

 
(134
)
Net Income
 

 

 

 

 

 

 
8,276

 
8,276

 

 
8,276

Cumulative translation adjustment
 

 

 

 

 

 
(1,323
)
 

 
(1,323
)
 

 
(1,323
)
Designated derivatives, fair value adjustments
 

 

 

 

 

 
(4,941
)
 

 
(4,941
)
 

 
(4,941
)
Balance, March 31, 2019
 
5,484,994

 
$
55

 
83,839,947

 
$
2,169

 
$
2,183,829

 
$
214

 
$
(653,956
)

$
1,532,311

 
$
5,251

 
$
1,537,562

 
 
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
)
Dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Common stock, $0.53 per share
 

 

 

 

 

 

 
(35,833
)
 
(35,833
)
 

 
(35,833
)
   Preferred stock, $0.45 per share
 

 

 

 

 

 

 
(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 these consolidated financial statements.

5

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


 
 
Three Months Ended March 31,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income
 
$
8,276

 
$
4,812

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

 
 
Depreciation
 
16,733

 
15,850

Amortization of intangibles
 
14,570

 
13,646

Amortization of deferred financing costs
 
1,742

 
901

Amortization of mortgage discounts and premiums, net
 
102

 
267

Amortization of below-market lease liabilities
 
(1,011
)
 
(901
)
Amortization of above-market lease assets
 
1,112

 
1,203

Amortization of above- and below- market ground lease assets
 
236

 
250

Bad debt expense
 
59

 
43

Unbilled straight-line rent
 
(1,626
)
 
(1,503
)
Equity-based compensation
 
2,109

 
(832
)
Unrealized loss on foreign currency transactions, derivatives, and other
 
452

 
2,550

Unrealized loss on undesignated foreign currency advances and other hedge ineffectiveness
 
76

 
43

Payments for settlement of derivatives
 
(719
)
 

Gain on disposition of real estate investments
 
(892
)
 

Changes in operating assets and liabilities, net:
 
 
 
 
Prepaid expenses and other assets
 
(6,230
)
 
(1,493
)
Deferred tax assets
 
12

 
(28
)
Accounts payable and accrued expenses
 
(12,396
)
 
4,034

Prepaid rent
 
4,593

 
2,954

Deferred tax liability
 
(267
)
 
408

Taxes payable
 
(2,180
)
 
(1,527
)
Net cash provided by operating activities
 
24,751

 
40,677

Cash flows from investing activities:
 
 
 
 
Investment in real estate and real estate related assets
 
(23,454
)
 
(63,596
)
Deposits for real estate acquisitions
 
(1,200
)
 
(6,750
)
Capital expenditures
 
(11,265
)
 
(108
)
Proceeds from dispositions of real estate investments
 
9,277

 

Payments for settlement of derivatives
 

 
(561
)
Net cash used in investing activities
 
(26,642
)
 
(71,015
)
Cash flows from financing activities:
 
 
 
 
Borrowings under revolving credit facilities
 
26,000

 
70,000

Repayments on revolving credit facilities
 
(130,000
)
 
(30,000
)
Proceeds from mortgage notes payable
 
84,228

 
32,750

Payments on mortgage notes payable
 
(82,636
)
 
(1,305
)
Deposits on mortgages
 
(300
)
 

Proceeds from issuance of common stock, net
 
150,198

 
(13
)
Proceeds from issuance of preferred stock, net
 
1,613

 
(419
)
Payments of financing costs
 
(857
)
 

Dividends paid on Common Stock
 
(43,270
)
 
(35,833
)
Dividends paid on Preferred Stock
 
(2,455
)
 
(2,451
)
Distributions to non-controlling interest holders
 
(134
)
 
(158
)
Net cash provided by financing activities
 
2,387

 
32,571

Net change in cash, cash equivalents and restricted cash
 
496

 
2,233

Effect of exchange rate changes on cash
 
(5,554
)
 
(537
)
Cash, cash equivalents and restricted cash, beginning of period
 
103,693

 
107,727

Cash, cash equivalents and restricted cash, end of period
 
$
98,635

 
$
109,423

 
 
 
 
 
Cash and cash equivalents, end of period
 
$
95,267

 
$
106,733

Restricted cash, end of period
 
3,368

 
2,690

Cash, cash equivalents and restricted cash, end of period
 
$
98,635

 
$
109,423





6

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


 
 
Three Months Ended March 31,
 
 
2019
 
2018
Supplemental Disclosures:
 
 
 
 
Cash paid for interest
 
$
15,535

 
$
11,528

Cash paid for income taxes
 
3,140

 
2,597


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

7

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(Unaudited)


Note 1 — Organization
Global Net Lease, Inc. (the "Company"), incorporated on July 13, 2011, is a Maryland corporation that elected 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's common stock, $0.01 par value per share ("Common Stock" is listed on the New York Stock Exchange under the symbol "GNL," and the Company's 7.25% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share ("Series A Preferred Stock"), is listed on the New York Stock Exchange under the symbol "GNL PR A."
The Company invests in commercial properties, with an emphasis on sale-leaseback transactions involving single tenant net-leased commercial properties. 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 Company's properties are managed and leased by Global Net Lease Properties, LLC (the "Property Manager"). The Advisor, and the Property Manager are under common control with AR Global Investments, LLC (the successor business to AR Capital LLC, "AR Global") and these related parties receive compensation and fees for various services provided to the Company.
As of March 31, 2019, the Company owned 343 properties consisting of 27.4 million rentable square feet, which were 99.5% leased, with a weighted-average remaining lease term of 8.1 years. Based on the percentage of annualized rental income on a straight-line basis as of March 31, 2019, 55.8% of the Company's properties are located in the U.S. and 44.2% 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, 2019, the Company did not own any first mortgage loans, mezzanine loans, preferred equity or securitized loans.
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, 2019 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, 2018, 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. Except for those required by new accounting pronouncements discussed below, there have been no significant changes to the Company's significant accounting policies during the three months ended March 31, 2019, 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 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.
Reclassifications
The Company has aggregated revenue from its lease components and non-lease components (tenant operating expense reimbursements) into one line (see additional information in the “Recently Issued Accounting Pronouncements” section below. The prior period has been reclassified to conform to this presentation.

8

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(Unaudited)

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. Management adjusts such estimates when facts and circumstances dictate. The most significant estimates management 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.
At the time an asset is acquired, the Company evaluates the inputs, processes and outputs of the 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 on an as if vacant basis. 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, 2019 and the year ended December 31, 2018 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 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-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.

9

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(Unaudited)

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 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
The Company evaluates goodwill for impairment at least annually, in the fourth quarter of each year, 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 was not impaired as of December 31, 2018.

10

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(Unaudited)

Revenue Recognition
The Company's revenues, which are derived primarily from lease contracts, which 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. As of March 31, 2019, these leases had an average remaining lease term of 8.1 years. 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 for, 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 modification 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's lease agreements generally require tenants to pay or reimburse the Company for all property operating expenses, in addition to base rent, however some limited property operating expenses that are not the responsibility of the tenant are absorbed by the Company. Operating expense reimbursements primarily reflect insurance costs and real estate taxes incurred by the Company and subsequently reimbursed by the tenant. Under ASC 842, the Company has elected to report combined lease and non-lease components in a single line “Revenue from tenants.” For comparative purposes, the Company has also elected to reflect prior revenue and reimbursements previously reported under ASC 840 on a single line as well. For expenses paid directly by the tenant, under both ASC 842 and 840, the Company has reflected them on a net basis.
The following tables present future base rent payments on a cash basis due to the Company over the periods indicated. These amounts exclude tenant reimbursements and 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.
As of March 31, 2019:
(In thousands)
 
Future  Base Rent Payments (1)
2019 (remainder)
 
$
207,860

2020
 
280,334

2021
 
281,327

2022
 
272,251

2023
 
248,870

2024
 
204,921

Thereafter
 
663,302

 
 
$
2,158,865

___________________________________________
(1) 
Assumes exchange rates of £1.00 to $1.30 for GBP and €1.00 to $1.12 for EUR as of March 31, 2019 for illustrative purposes, as applicable.
As of December 31, 2018:
(In thousands)
 
Future 
Base Rent Payments (1)
2019
 
$
275,118

2020
 
278,651

2021
 
279,630

2022
 
270,569

2023
 
247,237

Thereafter
 
856,838

Total
 
$
2,208,043

___________________________________________
(1) 
Assumes exchange rates of £1.00 to $1.27 for GBP and €1.00 to $1.14 for EUR as of December 31, 2018 for illustrative purposes, as applicable.
The Company continually 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

11

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(Unaudited)

which the tenant operates and economic conditions in the area in which the property is located. Under the new leasing standard (see the “Recently Issued Accounting Pronouncements” section below), the Company is required to assess, based on credit risk only, if it is probable that it will collect virtually all of the lease payments at lease commencement date and it must continue to reassess collectability periodically thereafter based on new facts and circumstances affecting the credit risk of the tenant. Partial reserves, or the ability to assume partial recovery are no longer permitted. If the Company determines that it is probable it will collect virtually all of the lease payments (rent and common area maintenance), the lease will continue to be accounted for on an accrual basis (i.e. straight-line). However, if the Company determines it is not probable that it will collect virtually all of the lease payments, the lease will be accounted for on a cash basis and a full reserve would be recorded on previously accrued amounts in cases where it was subsequently concluded that collection was not probable. Cost recoveries from tenants are included in Revenue from tenants on the accompanying consolidated statements of operations in the period the related costs are incurred, as applicable.
Under ASC 842, uncollectable amounts are reflected as reductions in revenue. Under ASC 840, the Company recorded such amounts as bad debt expense as part of property operating expenses. During the three month periods ended March 31, 2019 and 2018, such amounts were $0.1 million.
Income Taxes
The Company elected 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 and believes it has so qualified. 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. REITs are subject to a number of other organizational and operational requirements.
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 the Company's earnings and available cash. In addition, the Company's international assets and operations, including those owned through direct or indirect subsidiaries that are disregarded entities for U.S. federal income tax purposes, continue to be subject to taxation in the foreign jurisdictions where those assets are held or those operations are conducted.
Significant judgment is required in determining the Company's tax provision and in evaluating its tax positions. The Company establishes tax reserves based on a benefit recognition model, which the Company believes could result in a greater amount of benefit (and a lower amount of reserve) being initially recognized in certain circumstances. Provided that the tax position is deemed more likely than not of being sustained, the Company recognizes the largest amount of tax benefit that is greater than 50 percent likely of being ultimately realized upon settlement.
The Company derecognizes the tax position when the likelihood of the tax position being sustained is no longer more likely than not. The Company recognizes deferred income taxes in certain of its subsidiaries taxable in the U.S. or in foreign jurisdictions. Deferred income taxes are generally the result of temporary differences (items that are treated differently for tax purposes than for GAAP purposes). In addition, deferred tax assets arise from unutilized tax net operating losses, generated in prior years. The Company provides a valuation allowance against its deferred income tax assets when it believes that it is more likely than not that all or some portion of the deferred income tax asset may not be realized. Whenever a change in circumstances causes a change in the estimated realizability of the related deferred income tax asset, the resulting increase or decrease in the valuation allowance is included in deferred income tax expense (benefit).
The Company derives most of its REIT taxable income from its real estate operations in the U.S. and has historically distributed all of its REIT taxable income to its shareholders. As such, the Company's real estate operations are generally not subject to federal tax, and accordingly, no provision has been made for U.S. federal income taxes in the consolidated financial statements for these operations. These operations may be subject to certain state, local, and foreign taxes, as applicable. The Company's deferred tax assets and liabilities are primarily the result of temporary differences related to the following:
Basis differences between tax and GAAP for certain international real estate investments. For income tax purposes, in certain acquisitions, the Company assumes the seller’s basis, or the carry-over basis, in the acquired assets. The carry-over basis is typically lower than the purchase price, or the GAAP basis, resulting in a deferred tax liability with an offsetting increase to goodwill or the acquired tangible or intangible assets;
Timing differences generated by differences in the GAAP basis and the tax basis of assets such as those related to capitalized acquisition costs and depreciation expense; and

12

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(Unaudited)

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.
Equity-Based Compensation
The Company has a stock-based incentive award plan for its directors, and awards thereunder which are accounted for under the guidance for employee share based payments. The cost of services received in exchange for a stock award is measured at the grant date fair value of the award and the expense for such awards is included in equity-based compensation on consolidated statements of operations and is recognized over the vesting period or when the requirements for exercise of the award have been met (see Note 12 — Equity-Based Compensation).
Multi-Year Outperformance Agreements
Concurrent with the Listing and modifications to the Fourth Amended and Restated Advisory Agreement (the "Advisory Agreement") by and among the Company, the OP and the Advisor, the Company entered into a multi-year outperformance agreement with the Advisor in June 2015 (the "2015 OPP"). Following the end of the performance period under the 2015 OPP on June 2, 2018, the Company entered into a new multi-year outperformance agreement with the Advisor in July 2018 (the "2018 OPP") (see Note 12 — Equity-Based Compensation). Under the 2015 OPP, the Company recorded equity-based compensation expense associated with the awards over the requisite service period on a graded basis. Under the 2018 OPP, effective June 2, 2018, we record equity-based compensation evenly over the requisite service period of approximately 2.8 years from the grant date. The equity-based compensation expense was adjusted each reporting period for changes in the estimated market-related performance. Under new accounting guidance adopted by the Company on January 1, 2019 total equity-based compensation expense calculated as of adoption of the new guidance will be fixed as of that date and will not be remeasured in subsequent periods. For additional information see Recently Issued Accounting Pronouncements section below.
Recently Issued Accounting Pronouncements
Adopted as of January 1, 2019:
ASU No. 2016-02 Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02") which provides new guidance related to the accounting for leases, as well as the related disclosures. For lessors of real estate, leases are accounted for using an approach substantially the same as previous accounting guidance for operating leases and direct financing leases. For lessees, the new standard requires the application of a dual lease classification approach, classifying leases as either operating or finance leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. Lease expense for operating leases is recognized on a straight-line basis over the term of the lease, while lease expense for finance leases is recognized based on an effective interest method over the term of the lease. Also, lessees must recognize a right-of-use asset (“ROU”) and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Further, certain transactions where at inception of the lease the buyer-lessor accounted for the transaction as a purchase of real estate and a new lease, may now be required to have symmetrical accounting to the seller-lessee if the transaction was not a qualified sale-leaseback and accounted for as a financing transaction.
Upon adoption, lessors were allowed a practical expedient, which the Company has elected, by class of underlying assets to account for lease and non-lease components (such as tenant reimbursements of property operating expenses) as a single lease component as an operating lease because (a) the non-lease components have the same timing and pattern of transfer as the associated lease component; and (b) the lease component, if accounted for separately, would be classified as an operating lease. Additionally, only incremental direct leasing costs may be capitalized under this new guidance, which is consistent with the Company’s existing policies. Also, upon adoption, companies were allowed a practical expedient package, which the Company has elected, that allowed the Company: (a) to not reassess whether any expired or existing contracts entered into prior to January 1, 2019 are or contain leases; (b) to not reassess the lease classification for any expired or existing leases entered into prior to January 1, 2019 (including assessing sale-leaseback transactions); and (c) to not reassess initial direct costs for any expired or existing leases entered into

13

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(Unaudited)

prior to January 1, 2019. As a result, all of the Company’s existing leases will continue to be classified as operating leases under the new standard. Further, any existing leases for which the property is leased to a tenant in a transaction that at inception was a sale-leaseback transaction will continue to be treated (absent a modification) as operating leases. The Company did not have any leases that would be considered financing leases as of January 1, 2019.
The Company assessed the impact of adoption from both a lessor and lessee perspective, which is discussed in more detail below, and adopted the new guidance prospectively on January 1, 2019, using a prospective transition approach under which the Company elected to apply the guidance effective January 1, 2019 and not adjust prior comparative reporting periods (except for the Company’s presentation of lease revenue discussed below).
Lessor Accounting
As discussed above, the Company was not required to re-assess the classification of its leases, which are considered operating leases under ASU 2016-02. The following is a summary of the most significant impacts to the Company of the new accounting guidance, as lessor:
Because the Company elected the practical expedient noted above to not separate non-lease component revenue from the associated lease component, the Company has aggregated revenue from its lease components and non-lease components (tenant operating expense reimbursements) into one line. The prior period has been conformed to this new presentation.
Changes in the Company’s assessment of receivables that result in bad debt expense is now required to be recorded as an adjustment to revenue, rather than a charge to bad debt expense. This new classification applies for the first quarter of 2019 and reclassification of prior period amounts is not permitted. At transition on January 1, 2019, after assessing its reserve balances at December 31, 2018 under the new guidance, the Company wrote off accounts receivable of $3.4 million, net of $2.2 million in bad debt reserves as an adjustment to the opening balance of accumulated deficit, and accordingly rent for these tenants is currently recorded on a cash basis.
Indirect leasing costs in connection with new or extended tenant leases, if any, are being expensed. Under prior accounting guidance, the recognition would have been deferred.
Lessee Accounting
The Company is a lessee under ground leases for seven properties as of January 1, 2019. The following is a summary of the most significant impacts to the Company of the new accounting guidance, as lessee:
Upon adoption of the new standard, the Company recorded ROU assets and lease liabilities equal to $24.0 million for the present value of the lease payments related to its ground leases. These amounts are included in prepaid expenses and other assets and accounts payable and accrued expenses on the consolidated balance sheet.
The Company also reclassified $27.0 million, net related to amounts previously reported as above and below market ground lease intangibles to the ROU assets. For additional information and disclosures related to these operating leases, see Note 9 — Commitments and Contingencies.
Other Recently Issued Accounting Pronouncements
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. The revised guidance became effective for the Company effective January 1, 2019 and it did not have an impact on the Company's consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"). 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. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018. The Company adopted ASU 2017-12 on January 1, 2019 using a modified

14

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(Unaudited)

retrospective transition method, as required, and recognized the cumulative effect of the change on the opening balance of each affected component of equity as of the date of adoption. The opening balance sheet adjustment specifically related to the elimination of the requirement for separate measurement of hedge ineffectiveness and resulted in a credit, or decrease, to accumulated deficit of $0.3 million, with a corresponding debit, or decrease, to accumulated other comprehensive income.
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 (loss) income ("AOCI") which do not reflect the appropriate tax rate. ASU 2018-02 allows the Company to retrospectively reclassify the income tax effects on items in 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 revised guidance became effective for the Company effective January 1, 2019 and it did not have an impact on the Company's consolidated financial statements.
In July 2018, the FASB issued ASU 2018-07, Compensation- Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07") as an amendment and update expanding the scope of Topic 718. The amendment specifies that Topic 718 now applies to all share-based payment transactions, even non-employee awards, in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. Under the new guidance, awards to nonemployees are measured on the grant date, rather than on the earlier of the performance commitment date or the date at which the nonemployee’s performance is complete. Also, the awards would be measured by estimating the fair value of the equity instruments to be issued, rather than the fair value of the goods or services received or the fair value of the equity instruments issued, whichever can be measured more reliably. In addition, entities may use the expected term to measure nonemployee awards or elect to use the contractual term as the expected term, on an award-by-award basis. The new guidance is effective for the Company in annual periods beginning after December 15, 2018, and interim periods within those annual periods, with early adoption permitted. The Company adopted the new guidance on January 1, 2019 and began applying the new rules to its non-employee award made to the Advisor pursuant to the 2018 OPP. As a result, total equity-based compensation expense calculated as of adoption of the new guidance will be fixed as of that date and will not be remeasured in subsequent periods (unless modified). In addition, the expense is being recorded over the requisite service period of approximately 2.8 years from the grant date. See Note 12 — Equity-Based Compensation for additional information on the awards to the Advisor pursuant to the 2018 OPP and the 2015 OPP.
Pending Adoption as of March 31, 2019:
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. On July 25, 2018, the FASB proposed an amendment to ASU 2016-13 to clarify that operating lease receivables recorded by lessors (including unbilled straight-line rent) are explicitly excluded from the scope of ASU 2016-13. Early adoption is permitted for reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact of this new guidance.

15

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(Unaudited)

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, 2019 and 2018, and, in the case of assets located outside of the United States, based on the exchange rate at the time of purchase. All acquisitions in both periods were considered asset acquisitions for accounting purposes.
 
 
Three Months Ended March 31,
(Dollar amounts in thousands)
 
2019
 
2018
Real estate investments, at cost:
 
 
 
 
Land
 
$
2,442

 
$
10,729

Buildings, fixtures and improvements
 
17,349

 
44,772

Total tangible assets
 
19,791

 
55,501

Acquired intangible lease assets:
 
 
 
 
In-place leases
 
3,846

 
8,893

Above-market lease assets
 
64

 

Below-market lease liabilities
 
(247
)
 
(798
)
Cash paid for acquired real estate investments
 
$
23,454

 
$
63,596

Number of properties purchased
 
2

 
6

Acquired Intangible Lease Assets
The Company allocates 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, 2019 and 2018, the Company did not record any impairment charges for the intangible assets associated with the Company's real estate investments.
Dispositions
When the Company sells a property, any gains or losses from the sale are reflected within Gain on dispositions of real estate investments in the consolidated statements of operations.
During the three months ended March 31, 2019, the Company sold a property located in Madison, Indiana for a total contract sales price of $9.5 million, resulting in net proceeds of $9.3 million and a gain of $0.9 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, 2019.
The Company did not sell any real estate assets during the three months ended March 31, 2018.
Assets Held for Sale
When assets are identified by management as held for sale, the Company stops recognizing depreciation and amortization expense on the identified assets and estimates the sales price, net of costs to sell, of those assets. If the carrying amount of the assets classified as held for sale exceeds the estimated net sales price, the Company records an impairment charge equal to the amount by which the carrying amount of the assets exceeds the Company’s estimate of the net sales price of the assets.
As of March 31, 2019 and December 31, 2018, the Company had three properties which were not considered discontinued operations and therefore are recorded and classified as held for sale. During the quarter ended March 31, 2019 and the year ended December 31, 2018, these three properties were the only properties classified as held for sale. Accordingly, the operating results of these properties remain classified within continuing operations for all periods presented.

16

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(Unaudited)

Significant Tenants
There were no tenants whose annualized rental income on a straight-line basis represented 10.0% or greater of consolidated annualized rental income on a straight-line basis for all properties as of March 31, 2019 and December 31, 2018. The termination, delinquency or non-renewal of leases by any major tenant may have a material adverse effect on revenues.
Geographic Concentration
The following table lists the countries and U.S. states where the Company has concentrations of properties where annualized rental income on a straight-line basis represented greater than 10.0% of consolidated annualized rental income on a straight-line basis as of March 31, 2019 and December 31, 2018.
Country / U.S. State
 
March 31,
2019
 
December 31,
2018
United States
 
55.8%
 
55.7%
      Michigan
 
13.7%
 
13.7%
United Kingdom
 
19.4%
 
19.0%


17

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(Unaudited)

Note 4 —Mortgage Notes Payable, Net
Mortgage notes payable, net as of March 31, 2019 and December 31, 2018 consisted of the following:
 
 
 
 
Encumbered Properties
 
Outstanding Loan Amount (1)
 
Effective Interest Rate
 
Interest Rate
 
 
Country
 
Portfolio
 
 
March 31,
2019
 
December 31,
2018
 
 
 
Maturity
 
 
 
 
 
 
(In thousands)
 
(In thousands)
 
 
 
 
 
 
Finland:
 
Finnair (9)
 
 
$

 
$
32,501

 
—%
 

 

 
 
Tokmanni (9)
 
 

 
33,159

 
—%
 

 

 
 
Finland
 
5
 
83,018

 

 
1.7%
(2) 
Fixed/Variable
 
Feb. 2024
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
France:
 
Auchan
 
1
 
9,311

 
9,498

 
1.7%
(3) 
Fixed
 
Dec. 2019
 
 
Pole Emploi
 
1
 
6,507

 
6,637

 
1.7%
(3) 
Fixed
 
Dec. 2019
 
 
Sagemcom
 
1
 
40,275

 
41,083

 
1.7%
(3) 
Fixed
 
Dec. 2019
 
 
Worldline
 
1
 
5,609

 
5,722

 
1.9%
(3) 
Fixed
 
Jul. 2020
 
 
DCNS
 
1
 
10,658

 
10,872

 
1.5%
(3) 
Fixed
 
Dec. 2020
 
 
ID Logistics II
 
2
 
11,779

 
12,016

 
1.3%
 
Fixed
 
Jun. 2021
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Germany
 
Rheinmetall (10)
 
 

 
12,130

 
—%


 

 
 
OBI DIY (10)
 
 

 
5,150

 
—%
 

 

 
 
RWE AG
 
3
 
70,116

 
71,524

 
1.6%
(3) 
Fixed
 
Oct. 2019
 
 
Rexam
 
1
 
5,761

 
5,876

 
1.8%
(3) 
Fixed
 
Aug. 2019
 
 
Metro Tonic
 
1
 
29,729

 
30,326

 
1.7%
(3) 
Fixed
 
Dec. 2019
 
 
ID Logistics I 
 
1
 
4,487

 
4,578

 
1.0%
 
Fixed
 
Oct. 2021
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Luxembourg:
 
DB Luxembourg
 
1
 
40,387

 
41,198

 
1.4%
(3) 
Fixed
 
May 2020
The Netherlands:
 
ING Amsterdam
 
1
 
49,362

 
50,353

 
1.7%
(3) 
Fixed
 
Jun. 2020
 
 
Total EUR denominated
 
20
 
366,999

 
372,623

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United Kingdom:
 
UK Multi-Property Cross Collateralized Loan
 
43
 
299,739

 
292,890

 
3.2%
(4) 
Fixed/Variable
 
Aug. 2023
 
 
Total GBP denominated
 
43
 
299,739

 
292,890

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States:
 
Quest Diagnostics
 
1
 
52,800

 
52,800

 
4.5%
(5) 
Variable
 
Sep. 2019
 
 
AT&T Services
 
1
 
33,550

 
33,550

 
2.0%
(6) 
Variable
 
Dec. 2020
 
 
Penske Logistics (7)
 
1
 
70,000

 
70,000

 
4.7%
 
Fixed
 
Nov. 2028
 
 
Multi-Tenant Mortgage Loan I (7)
 
12
 
187,000

 
187,000

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

 
32,750

 
4.4%
 
Fixed
 
Feb. 2028
 
 
Multi-Tenant Mortgage Loan III
 
7
 
98,500

 
98,500

 
4.9%
 
Fixed
 
Dec. 2028
 
 
Total USD denominated
 
30
 
474,600

 
474,600

 
 
 
 
 
 
 
 
Gross mortgage notes payable
 
93
 
1,141,338

 
1,140,113

 
3.2%
 
 
 
 
 
 
Mortgage discount
 
 
 
(458
)
 
(569
)
 
 
 
 
 
 
 
 
Deferred financing costs, net of accumulated amortization (8)
 
 
 
(9,808
)
 
(9,737
)
 
 
 
 
 
 
 
 
Mortgage notes payable, net
 
93
 
$
1,131,072

 
$
1,129,807

 
3.2%
 
 
 
 
_______________________________
(1) 
Amounts borrowed in local currency and translated at the spot rate in effect at the applicable reporting date.

18

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(Unaudited)

(2) 
80% fixed as a result of a "pay-fixed" interest rate swap agreement and 20% variable. Variable portion is approximately 1.4% plus 3-month Euribor. Euribor rate in effect as of March 31, 2019.
(3) 
Fixed as a result of a "pay-fixed" interest rate swap agreement.
(4) 
80% fixed as a result of a "pay-fixed" interest rate swap agreement and 20% variable. Variable portion is approximately 2.0% plus 3-month GBP LIBOR. LIBOR rate in effect as of March 31, 2019.
(5) 
The interest rate is 2.0% plus 1-month LIBOR. LIBOR rate in effect is as of March 31, 2019.
(6) 
The interest rate is 2.0% plus 1-month Adjusted LIBOR as defined in the mortgage agreement. LIBOR rate in effect is as of March 31, 2019.
(7) 
The borrower's (wholly owned subsidiaries of the Company) financial statements are included within the Company's consolidated financial statements, however, the borrowers' assets and credit are only available to pay the debts of the borrowers and their liabilities constitute obligations of the borrowers.
(8) 
Deferred financing costs represent commitment fees, legal fees, and other costs associated with obtaining commitments for financing. These costs are amortized over the terms of the respective financing agreements using the effective interest method. Unamortized deferred financing costs are expensed when the associated debt is refinanced or paid down before maturity. Costs incurred in seeking financial transactions that do not close are expensed in the period in which it is determined that the financing will not close.
(9) 
These loans were refinanced in February 2019 as part of the Finland Properties Refinancing (see below for further details).
(10) 
These loans were repaid in full upon maturity in January 2019.
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, 2019:
(In thousands)
 
Future Principal Payments (1)
2019 (remainder)
 
$
214,499

2020
 
142,144

2021
 
28,890

2022
 
19,548

2023
 
258,140

2024
 
83,017

Thereafter
 
395,100

Total
 
$
1,141,338

_________________________
(1) 
Assumes exchange rates of £1.00 to $1.30 for GBP and €1.00 to $1.12 for EUR as of March 31, 2019 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, 2019, the Company was in compliance with all financial covenants under its mortgage notes payable agreements.
The total gross carrying value of unencumbered assets as of March 31, 2019 was $1.4 billion, of which approximately $1.2 billion of this amount was included in the unencumbered asset pool comprising the borrowing base under the Revolving Credit Facility (as defined in Note 5 — Credit Facilities) and therefore is not available to serve as collateral for future borrowings.
In April 2019, the Company, through certain wholly owned subsidiaries, entered into a new loan agreement with Column Financial, Inc. and Société Générale Financial Corporation secured by 16 of the Company’s single tenant net leased office and industrial properties located in 12 states that were simultaneously removed from the borrowing base under the Revolving Credit Facility. For additional information, see Note 14 — Subsequent Events.
Finland Properties Refinancing
On February 6, 2019, the Company borrowed an aggregate of €74.0 million ($84.2 million based on the prevailing exchange rate on that date) secured by mortgages of its five properties in Finland. The maturity date of this loan is February 1, 2024, and it bears interest at a rate of 3-month Euribor plus 1.4% per year, with the interest rate for approximately €59.2 million ($67.4 million based on the prevailing exchange rate on that date) fixed by an interest rate swap agreement. The amount fixed by swap agreement represents 80% of the principal amount of the loan and is fixed at 1.8% per year. The loan is interest-only with the principal due at maturity. At the closing of the loan, €57.4 million ($65.3 million based on the prevailing exchange rate on that date) was used to repay all outstanding indebtedness encumbering the five properties, with the remaining proceeds, after costs and fees related to the loan, available for working capital and general corporate purposes.
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% per year and a 10-year maturity in February 2028. The multi-tenant mortgage loan is interest only

19

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(Unaudited)

with the principal due at maturity and 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, 2019 and December 31, 2018 under the credit agreement with KeyBank National Association (“KeyBank”), as agent, and the other lender parties thereto, which provides for a $632.0 million senior unsecured multi-currency revolving credit facility (the “Revolving Credit Facility”) and a €246.5 million ($276.5 million U.S. Dollar ("USD") based on the prevailing exchange rate as of March 31, 2019) senior unsecured term loan facility (the “Term Loan” and, together with the Revolving Credit Facility, the “Credit Facility”).
 
 
March 31, 2019
 
December 31, 2018
(In thousands)
 
TOTAL USD (1)
 
 
USD
 
GBP
 
EUR
 
TOTAL USD (2)
 
 
USD
 
GBP
 
EUR
Revolving Credit Facility
 
$
260,409

 
 
$
174,625

 
£
40,000

 
30,000

 
$
363,894

 
 
$
278,625

 
£
40,000

 
30,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Term Loan
 
276,517

 
 

 

 
246,481

 
282,069

 
 

 

 
246,481

Deferred financing costs
 
(3,103
)
 
 

 

 

 
(3,342
)
 
 

 

 

Term Loan, Net
 
273,414

 
 

 

 
246,481

 
278,727

 
 

 

 
246,481

Total Credit Facility
 
$
533,823

 
 
$
174,625

 
£
40,000

 
276,481

 
$
642,621

 
 
$
278,625

 
£
40,000

 
276,481

(1) 
Assumes exchange rates of £1.00 to $1.30 for GBP and €1.00 to $1.12 for EUR as of March 31, 2019 for illustrative purposes, as applicable.
(2) 
Assumes exchange rates of £1.00 to $1.27 for GBP and €1.00 to $1.14 for EUR as of December 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. Based on USD equivalents at closing, the aggregate total commitments under the Credit Facility were $725.0 million. On July 2, 2018, upon the Company's request, the lenders under the Credit Facility increased the aggregate total commitments from $722.2 million to $914.4 million, based on prevailing exchange rates on that date, with approximately $132.0 million of the increase allocated to the Revolving Credit Facility and approximately €51.8 million ($60.2 million based on the prevailing exchange rate on that date) allocated to the Term Loan. The Company used all the proceeds from the increased borrowings under the Term Loan to repay amounts outstanding under the Revolving Credit Facility. Upon the Company's request, subject in all respects to the consent of the lenders in their sole discretion, the aggregate total commitments under the Credit Facility may be increased up to an aggregate additional amount of $35.6 million, allocated to either or 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 Loan. 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 Loan 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, 2019, the Credit Facility had a weighted-average effective interest rate of 2.6% 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, 2019, approximately $149.2 million was available for future borrowings under the Revolving Credit Facility. Any future borrowings

20

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(Unaudited)

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.
In April 2019, the Company, through certain wholly owned subsidiaries, entered into a new loan agreement with Column Financial, Inc. and Société Générale Financial Corporation secured by 16 of the Company’s single tenant net leased office and industrial properties located in 12 states that were simultaneously removed from the borrowing base under the Revolving Credit Facility. For additional information, see Note 14 — Subsequent Events.
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 lenders have the right to terminate their obligations under the Credit Facility agreement and to accelerate the payment on any unpaid principal amount of all outstanding loans. The Credit Facility 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 (see additional information below), 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.
Under the terms of the Credit Facility, the Company may not pay distributions, including cash dividends payable with respect to Common Stock, Series A Preferred Stock, or any other classes or series of preferred stock that the Company may issue in a future offering, or redeem or otherwise repurchase shares of the Company's capital stock, Common Stock, Series A Preferred Stock, or any other classes or series of preferred stock the Company may issue in a future offering, that exceed 95% of the Company's Adjusted FFO as defined in the Credit Facility for any period of four consecutive fiscal quarters, except in limited circumstances, including that for one fiscal quarter in each calendar year, the Company may pay cash distributions, make redemptions and make repurchases in an aggregate amount equal to no more than 100% of its Adjusted FFO. The Company used the exception to pay dividends that were between 95% of Adjusted FFO to 100% of Adjusted FFO during the quarter ended on March 31, 2019.
The Company’s ability to comply with the restrictions on the payment of distributions in the Credit Facility depends on its ability to generate sufficient cash flows from its existing properties and through acquisitions or otherwise such that its cash flows in the applicable periods exceed the level of Adjusted FFO required by these restrictions. Among other things, there can be no assurance the Company will complete acquisitions and other investments on a timely basis or on acceptable terms and conditions, if at all. If the Company is not able to increase the amount of cash it has available to pay dividends, including through additional cash flows the Company expects to generate from completing acquisitions, the Company may have to reduce dividend payments or identify other financing sources to fund the payment of dividends at their current levels. Alternatively, the Company could elect to pay a portion of its dividends in shares if approved by the Company's board of directors.
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.
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.

21

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(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, 2019 and December 31, 2018, 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, 2019 and December 31, 2018, 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, 2019
 
 
 
 
 
 
 
 
Foreign currency forwards, net (GBP & EUR)
 
$

 
$
5,102

 
$

 
$
5,102

Interest rate swaps, net (GBP & EUR)
 
$

 
$
(4,156
)
 
$

 
$
(4,156
)
December 31, 2018
 
 
 
 
 
 
 
 
Foreign currency forwards, net (GBP & EUR)
 
$

 
$
5,472

 
$

 
$
5,472

Interest rate swaps, net (GBP & EUR)
 
$

 
$
(628
)
 
$

 
$
(628
)
2018 OPP (1)
 
$

 
$

 
$
(18,804
)
 
$
(18,804
)
(1) Effective with the adoption of ASU 2018-07 on January 1, 2019, the 2018 OPP is no longer measured at fair market value on a recurring basis (see Note 2 — Summary of Significant Accounting PoliciesRecently Issued Accounting Pronouncements and see Note 12 — Equity-Based Compensation for additional information).
The valuation of the 2018 OPP was determined using a Monte Carlo simulation. This analysis reflected the contractual terms of the 2018 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 determined that the 2018 OPP valuation in its entirety was classified in Level 3 of the fair value hierarchy as of December 31, 2018.
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, 2019.
Level 3 Valuations
As discussed above, the 2018 OPP is no longer measured at fair value on a recurring basis and according with newly adopted accounting rules is being amortized on a straight-line basis beginning on January 1, 2019 (see Note 2 — Summary of Significant Accounting PoliciesRecently Issued Accounting Pronouncements and see Note 12 — Equity-Based Compensation for additional information).

22

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(Unaudited)

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, 2019
 
December 31, 2018
(In thousands)
 
Level
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Mortgage notes payable (1) (2)
 
3
 
$
1,131,072

 
$
1,166,319

 
$
1,129,807

 
$
1,157,710

Revolving Credit Facility (3)
 
3
 
$
260,409

 
$
261,532

 
$
363,894

 
$
365,591

Term Loan (3) (4)
 
3
 
$
273,414

 
$
278,271

 
$
278,727

 
$
283,558

__________________________________________________________
(1) 
Carrying value includes $1.1 billion gross mortgage notes payable less $0.5 million of mortgage discounts and $9.8 million of deferred financing costs as of March 31, 2019.
(2) 
Carrying value includes $1.1 billion gross mortgage notes payable less $0.6 million of mortgage discounts and $9.7 million of deferred financing costs as of December 31, 2018.
(3) 
Both the Revolving Credit Facility and the Term Loan are part of the Credit Facility (see Note 5 — Credit Facilities for more information).
(4) 
Carrying value includes $276.5 million and $282.1 million gross Term Loan payable less $3.1 million and $3.3 million of deferred financing costs as of March 31, 2019 and December 31, 2018, respectively.
The fair value of the gross mortgage notes payable, the Revolving Credit Facility and the Term Loan 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.
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.

23

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(Unaudited)

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, 2019 and December 31, 2018:
(In thousands)
 
Balance Sheet Location
 
March 31,
2019
 
December 31,
2018
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Interest rate "pay-fixed" swaps (USD)
 
Derivative assets, at fair value
 
$
1,752

 
$
3,258

Interest rate "pay-fixed" swaps (GBP)
 
Derivative liabilities, at fair value
 
(3,621
)
 
(1,157
)
Interest rate "pay-fixed" swaps (EUR)
 
Derivative liabilities, at fair value
 
(1,209
)
 
(1,443
)
Total
 
 
 
$
(3,078
)
 
$
658

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Foreign currency forwards (GBP-USD)
 
Derivative assets, at fair value
 
$
1,990

 
$
3,247

Foreign currency forwards (EUR-USD)
 
Derivative assets, at fair value
 
3,112

 
2,225

Interest rate swaps (EUR)
 
Derivative liabilities, at fair value
 
(1,078
)
 
(1,286
)
Total
 
 
 
$
4,024

 
$
4,186

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.
Effective January 1, 2019, all of the changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income (loss) and are subsequently reclassified into earnings in the period that the hedged forecasted transaction impacts earnings. Prior to January 1, 2019, the ineffective portion of the change in fair value of the derivatives was recognized directly in earnings. During the three months ended March 31, 2019, such derivatives were used to hedge the variable cash flows associated with variable-rate debt.
Additionally, during the three months ended March 31, 2019 and 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 losses of $26,600 and $23,030 for the three months ended March 31, 2019 and 2018, respectively. 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 12 months, the Company estimates that an additional $1.8 million will be reclassified from other comprehensive income as an increase to interest expense.
As of March 31, 2019 and December 31, 2018, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
 
 
March 31, 2019
 
December 31, 2018
Derivatives
 
Number of
Instruments
 
Notional Amount
 
Number of
Instruments
 
Notional Amount
 
 
 
 
(In thousands)
 
 
 
(In thousands)
Interest rate "pay-fixed" swaps (GBP)
 
48
 
$
239,792

 
48
 
$
234,312

Interest rate "pay-fixed" swaps (EUR)
 
12
 
198,232

 
13
 
212,255

Interest rate "pay-fixed" swaps (USD)
 
3
 
150,000

 
3
 
150,000

Total
 
63
 
$
588,024

 
64
 
$
596,567

In connection with a multi-property loan which refinanced all of the Company's mortgage notes payable secured by its properties located in Finland during the first quarter of 2019, the Company terminated five interest rate swaps with an aggregate notional amount of €57.4 million for a payment of approximately $0.8 million. Following these termination, $0.7 million was recorded in AOCI and is being recorded as an adjustment to interest expense over the term of the original EUR hedges and respective borrowings. Of the amount recorded in AOCI following these terminations, $0.1 million was recorded as an increase to interest expense for the three months ended March 31, 2019 and approximately $0.6 million remained in AOCI as of March 31, 2019.

24

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(Unaudited)

In connection with a multi-property loan which refinanced all of the Company's mortgage notes payable denominated in GBP, the Company terminated 15 interest rate swaps with an aggregate notional amount of £208.8 million and one floor with a notional amount of £28.1 million. Following these terminations, the amount relating to GBP borrowings still outstanding of approximately $1.2 million was recorded in AOCI and is being recorded as an adjustment to interest expense over the term of the original GBP hedges and respective borrowings. Of the amount recorded in AOCI following these terminations, $0.2 million was recorded as an increase to interest expense for the three months ended March 31, 2019 and approximately $0.5 million remained in AOCI as of March 31, 2019.
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, 2019 and 2018.
 
 
Three Months Ended March 31,
(In thousands)
 
2019
 
2018
Amount of loss recognized in accumulated other comprehensive income (loss) from derivatives (effective portion)
 
$
(4,954
)
 
$
(551
)
Amount of loss reclassified from accumulated other comprehensive income (loss) into income as interest expense (effective portion)
 
$
(556
)
 
$
(1,311
)
Total interest expense recorded in the consolidated statement of operations
 
$
15,162

 
$
12,975

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. Through the third quarter of 2018, the Company used 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.
Effective January 1, 2019, for derivatives designated as net investment hedges, all of the changes in the fair value of the derivatives are reported in AOCI (outside of earnings) as part of the cumulative translation adjustment. Prior to January 1, 2019, the ineffective portion of the change in fair value of the derivatives, if any, was recognized directly in earnings. Amounts are reclassified out of AOCI into earnings when the hedged net investment is either sold or substantially liquidated.
As of March 31, 2019 and December 31, 2018 the Company did not have foreign currency derivatives that were designated as net investment hedges used to hedge its net investments in foreign operation.
Non-designated Derivatives
The Company is exposed to fluctuations in the exchange rates of its functional currency, the USD, against the GBP and the EUR. The Company uses foreign currency derivatives, including options, currency forward and cross currency swap agreements to manage its exposure to fluctuations in GBP-USD and EUR-USD exchange rates. While these derivatives are economically hedging the fluctuations in foreign currencies, they do not meet the strict hedge accounting requirements to be classified as hedging instruments. Changes in the fair value of derivatives not designated as hedges under qualifying hedging relationships are recorded directly in net income (loss). The Company recorded a gain of $0.3 million and a loss of $2.9 million on the non-designated hedges for the three months ended March 31, 2019 and 2018, respectively.

25

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(Unaudited)

As of March 31, 2019 and December 31, 2018, the Company had the following outstanding derivatives that were not designated as hedges under qualifying hedging relationships.
 
 
March 31, 2019
 
December 31, 2018
Derivatives
 
Number of
Instruments
 
Notional Amount
 
Number of
Instruments
 
Notional Amount
 
 
 
 
(In thousands)
 
 
 
(In thousands)
Foreign currency forwards (GBP-USD)
 
45
 
$
38,000

 
50
 
$
43,000

Foreign currency forwards (EUR-USD)
 
34
 
34,250

 
38
 
39,500

Interest rate swaps (EUR)
 
5
 
135,896

 
5
 
138,625

Total
 
84
 
$
208,146

 
93
 
$
221,125

Offsetting Derivatives
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company's derivatives as of March 31, 2019 and December 31, 2018. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the accompanying consolidated balance sheets.
 
 
 
 
 
 
 
 
 
 
Gross Amounts Not Offset on the Balance Sheet
 
 

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