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Section 1: 10-Q (10-Q GNL 9.30.18)

Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number: 001-37390
395680194_image3a17.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)

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 October 31, 2018, the registrant had 72,071,542 shares of common stock outstanding.


GLOBAL NET LEASE, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
GLOBAL NET LEASE, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)


 
September 30,
2018
 
December 31,
2017
ASSETS
 
 
 
Real estate investments, at cost (Note 3):
 
 
 
Land
$
411,339

 
$
402,318

Buildings, fixtures and improvements
2,289,697

 
2,138,405

Construction in progress
527

 
2,328

Acquired intangible lease assets
656,361

 
629,626

Total real estate investments, at cost
3,357,924

 
3,172,677

Less accumulated depreciation and amortization
(420,913
)
 
(339,931
)
Total real estate investments, net
2,937,011

 
2,832,746

Cash and cash equivalents
155,188

 
102,425

Restricted cash
3,491

 
5,302

Derivative assets, at fair value (Note 7)
10,442

 
2,176

Unbilled straight-line rent
46,227

 
42,739

Prepaid expenses and other assets
34,395

 
22,617

Due from related parties
16

 
16

Deferred tax assets
999

 
1,029

Goodwill and other intangible assets, net
22,357

 
22,771

Deferred financing costs, net
6,932

 
6,774

     Total Assets
$
3,217,058

 
$
3,038,595

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Mortgage notes payable, net (Note 4)
$
974,515

 
$
984,876

Revolving credit facility (Note 5)
455,556

 
298,909

Term loan, net (Note 5)
282,463

 
229,905

Acquired intangible lease liabilities, net
32,118

 
31,388

Derivative liabilities, at fair value (Note 7)
3,071

 
15,791

Due to related parties
782

 
829

Accounts payable and accrued expenses
26,369

 
23,227

Prepaid rent
17,258

 
18,535

Deferred tax liability
15,417

 
15,861

Taxes payable
925

 
2,475

Dividends payable
2,638

 
2,556

Total Liabilities
1,811,112

 
1,624,352

Commitments and contingencies (Note 9)

 

Stockholders' Equity (Note 8):
 
 
 
7.25% Series A cumulative redeemable preferred shares, $0.01 par value, liquidation preference $25.00 per share, 13,409,650 and 5,409,650 authorized, 5,416,890 and 5,409,650 issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
54

 
54

Common Stock, $0.01 par value, 100,000,000 shares authorized, 72,071,542 and 67,287,231 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
2,051

 
2,003

Additional paid-in capital
1,954,264

 
1,860,058

Accumulated other comprehensive income
17,102

 
19,447

Accumulated deficit
(569,448
)
 
(468,396
)
Total Stockholders' Equity
1,404,023

 
1,413,166

Non-controlling interest
1,923

 
1,077

 Total Equity
1,405,946

 
1,414,243

     Total Liabilities and Equity
$
3,217,058

 
$
3,038,595

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

2

GLOBAL NET LEASE, INC.

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

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
 
Rental income
 
$
68,661

 
$
61,270

 
$
198,015

 
$
179,976

Operating expense reimbursements
 
3,263

 
3,600

 
12,966

 
12,717

Total revenues
 
71,924

 
64,870

 
210,981

 
192,693

 
 
 
 
 
 
 
 
 
 Expenses (income):
 
 
 
 
 
 
 
 
Property operating
 
5,301

 
7,202

 
20,982

 
22,008

Fire loss (recovery)
 
31

 
(305
)
 
(49
)
 
195

Operating fees to related parties
 
6,956

 
6,390

 
20,925

 
17,833

Acquisition and transaction related
 
2,804

 
1,141

 
5,243

 
2,280

General and administrative
 
3,215

 
2,468

 
7,822

 
6,291

Equity-based compensation
 
2,053

 
(391
)
 
1,198

 
(2,610
)
Depreciation and amortization
 
30,195

 
29,879

 
89,504

 
84,490

Total expenses
 
50,555

 
46,384

 
145,625

 
130,487

Operating income
 
21,369

 
18,486

 
65,356

 
62,206

Other income (expense):
 
 
 
 
 
 
 
 
Interest expense
 
(15,104
)
 
(12,479
)
 
(42,494
)
 
(35,644
)
Loss on extinguishment of debt
 
(2,612
)
 

 
(3,897
)
 

(Loss) gain on dispositions of real estate investments
 
(1,933
)
 
275

 
(5,751
)
 
1,089

Gain (loss) on derivative instruments
 
1,290

 
(3,125
)
 
4,688

 
(6,585
)
Unrealized gain (loss) on undesignated foreign currency advances and other hedge ineffectiveness
 
108

 
88

 
18

 
(3,765
)
Other income
 
44

 
2

 
67

 
12

Total other expense, net
 
(18,207
)
 
(15,239
)
 
(47,369
)
 
(44,893
)
Net income before income tax
 
3,162

 
3,247

 
17,987

 
17,313

Income tax expense
 
(530
)
 
(760
)
 
(2,800
)
 
(2,176
)
Net income
 
2,632

 
2,487

 
15,187

 
15,137

Net income attributable to non-controlling interest
 

 

 

 
(21
)
Preferred Stock dividends
 
(2,455
)
 
(383
)
 
(7,361
)
 
(383
)
Net income attributable to common stockholders
 
$
177

 
$
2,104

 
$
7,826

 
$
14,733

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

 
$
0.03

 
$
0.11

 
$
0.21

Weighted average shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
69,441,639

 
67,286,615

 
68,014,855

 
66,739,723

Diluted
 
69,441,639

 
67,286,615

 
68,417,253

 
66,739,723

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

3

GLOBAL NET LEASE, INC.

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



 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
2,632

 
$
2,487

 
$
15,187

 
$
15,137

 
 
 
 
 
 
 
 
 
Other comprehensive income
 
 
 
 
 
 
 
 
Cumulative translation adjustment
 
(3,735
)
 
9,103

 
(9,813
)
 
19,903

Designated derivatives, fair value adjustments
 
1,721

 
2,710

 
7,468

 
5,939

Other comprehensive (loss) income
 
(2,014
)
 
11,813

 
(2,345
)
 
25,842

 
 
 
 
 
 
 
 
 
Comprehensive income
 
618

 
14,300

 
12,842

 
40,979

Amounts attributable to non-controlling interest
 
 
 
 
 
 
 
 
Net income
 

 

 

 
(21
)
Cumulative translation adjustment
 

 
(3
)
 

 
(18
)
Designated derivatives, fair value adjustments
 

 
(3
)
 

 
(11
)
Comprehensive income attributable to non-controlling interest
 

 
(6
)
 

 
(50
)
 
 
 
 
 
 
 
 
 
Preferred Stock dividends
 
(2,455
)
 
(383
)
 
(7,361
)
 
(383
)
 
 
 
 
 
 
 
 
 
Comprehensive (loss) income attributable to common stockholders
 
$
(1,837
)
 
$
13,911

 
$
5,481

 
$
40,546

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

4

GLOBAL NET LEASE, INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(In thousands, except share data)
(Unaudited)

 
 
Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of
Shares
 
Par Value
 
Number of
Shares
 
Par Value
 
Additional Paid-in
Capital
 
Accumulated Other Comprehensive Income
 
Accumulated Deficit
 
Total Stockholders' Equity
 
Non-controlling interest
 
Total Equity
Balance, December 31, 2017
 
5,409,650

 
$
54

 
67,287,231

 
$
2,003

 
$
1,860,058

 
$
19,447

 
$
(468,396
)
 
$
1,413,166

 
$
1,077

 
$
1,414,243

Issuance of Common Stock, net
 

 

 
4,784,311

 
48

 
94,101

 

 

 
94,149

 

 
94,149

Issuance of Preferred Stock, net
 
7,240

 

 

 

 
(247
)
 

 

 
(247
)
 

 
(247
)
Common Stock dividends declared
 

 

 

 

 

 

 
(108,430
)
 
(108,430
)
 

 
(108,430
)
Preferred Stock dividends declared
 

 

 

 

 

 

 
(7,361
)
 
(7,361
)
 

 
(7,361
)
Equity-based compensation
 

 

 

 

 
352

 

 

 
352

 
846

 
1,198

Distributions to non-controlling interest holders
 

 

 

 

 

 

 
(448
)
 
(448
)
 

 
(448
)
Net Income
 

 

 

 

 

 

 
15,187

 
15,187

 

 
15,187

Cumulative translation adjustment
 

 

 

 

 

 
(9,813
)
 

 
(9,813
)
 

 
(9,813
)
Designated derivatives, fair value adjustments
 

 

 

 

 

 
7,468

 

 
7,468

 

 
7,468

Balance, September 30, 2018
 
5,416,890

 
$
54

 
72,071,542

 
$
2,051

 
$
1,954,264

 
$
17,102

 
$
(569,448
)

$
1,404,023

 
$
1,923

 
$
1,405,946

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

5

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


 
 
Nine Months Ended September 30,
 
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net income
 
$
15,187

 
$
15,137

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

 
 
Depreciation
 
48,153

 
44,065

Amortization of intangibles
 
41,351

 
40,425

Amortization of deferred financing costs
 
3,738

 
3,021

Amortization of mortgage discounts and premiums, net
 
1,131

 
548

Amortization of mezzanine discount
 

 
17

Amortization of below-market lease liabilities
 
(2,703
)
 
(2,510
)
Amortization of above-market lease assets
 
3,500

 
3,202

Amortization of above- and below- market ground lease assets
 
743

 
705

Bad debt expense
 
184

 
1,150

Unbilled straight-line rent
 
(4,828
)
 
(8,987
)
Equity-based compensation
 
1,198

 
(2,610
)
Unrealized (gain) loss on foreign currency transactions, derivatives, and other
 
(4,921
)
 
8,501

Unrealized loss on undesignated foreign currency advances and other hedge ineffectiveness
 
(18
)
 
3,765

Payments for settlement of derivatives
 

 
(1,547
)
Loss on extinguishment of debt
 
3,897

 

Loss (gain) on disposition of real estate investments
 
5,751

 
(1,089
)
Changes in operating assets and liabilities, net:
 
 
 
 
Prepaid expenses and other assets
 
(11,962
)
 
(3,819
)
Deferred tax assets
 
30

 
(96
)
Accounts payable and accrued expenses
 
6,237

 
1,276

Prepaid rent
 
(1,277
)
 
2,082

Deferred tax liability
 
(444
)
 
1,526

Taxes payable
 
(1,550
)
 
(2,262
)
Net cash provided by operating activities
 
103,397

 
102,500

Cash flows from investing activities:
 
 
 
 
Investment in real estate and real estate related assets
 
(267,379
)
 
(37,113
)
Deposits for real estate acquisitions
 
(3,775
)
 

Capital expenditures
 
(2,614
)
 
(1,203
)
Proceeds from dispositions of real estate investments
 
23,310

 
12,440

Payments for settlement of derivatives
 
(561
)
 
10,625

Net cash used in investing activities
 
(251,019
)
 
(15,251
)
Cash flows from financing activities:
 
 
 
 
Borrowings under revolving credit facilities
 
247,000

 
571,203

Repayments on revolving credit facilities
 
(87,375
)
 
(810,798
)
Repayment of mezzanine facility
 

 
(56,537
)
Proceeds from mortgage notes payable
 
332,424

 

Payments on mortgage notes payable
 
(317,595
)
 
(21,836
)
Deposits on mortgages
 
(200
)
 

Payments on early extinguishment of debt charges
 
(2,398
)
 

Issuance of common stock, net
 
94,149

 
18,542

Issuance of preferred stock, net
 
(247
)
 
96,348

Proceeds from term loan
 
60,706

 
225,000

Payments of financing costs
 
(6,200
)
 
(12,539
)
Dividends paid on Common Stock
 
(108,352
)
 
(106,593
)
Dividends paid on Preferred Stock
 
(7,357
)
 

Distributions to non-controlling interest holders
 
(448
)
 
(574
)
Advances/acquired related party receivable (Note 10)
 

 
5,138

Net cash provided by (used in) financing activities
 
204,107

 
(92,646
)
Net change in cash, cash equivalents and restricted cash
 
56,485

 
(5,397
)
Effect of exchange rate changes on cash
 
(5,533
)
 
4,684

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

 
77,328

Cash, cash equivalents and restricted cash, end of period
 
$
158,679

 
$
76,615


6

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


 
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
 
 
 
 
Cash and cash equivalents, end of period
 
$
155,188

 
$
71,301

Restricted cash, end of period
 
3,491

 
5,314

Cash, cash equivalents and restricted cash, end of period
 
$
158,679

 
$
76,615




 
 
Nine Months Ended September 30,
 
 
2018
 
2017
Supplemental Disclosures:
 
 
 
 
Cash paid for interest
 
$
37,766

 
$
32,380

Cash paid for income taxes
 
4,350

 
4,438

Non-Cash Financing Activity
 
 
 
 
Loss on extinguishment of debt
 
1,499

 


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

7

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)


Note 1 — Organization
Global Net Lease, Inc. (the "Company"), which incorporated on July 13, 2011, is a Maryland corporation that elected and qualified to be taxed as a real estate investment trust ("REIT") for United States ("U.S.") federal income tax purposes beginning with the taxable year ended December 31, 2013. The Company invests in commercial properties, with an emphasis on sale-leaseback transactions involving single tenant net-leased commercial properties. The Company was sponsored by an affiliate of AR Global Investments, LLC (the successor business to AR Capital LLC, "AR Global"). Affiliates of AR Global provide asset management services to the Company as described below.
As of September 30, 2018, the Company owned 336 properties consisting of 26.2 million rentable square feet, which were 99.5% leased, with a weighted-average remaining lease term of 8.6 years. Based on the percentage of annualized rental income on a straight-line basis as of September 30, 2018, 52.9% of the Company's properties are located in the U.S. and 47.1% 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 September 30, 2018, the Company did not own any first mortgage loans, mezzanine loans, preferred equity or securitized loans.
Substantially all of the Company's business is conducted through the Global Net Lease Operating Partnership, L.P. (the "OP"), a Delaware limited partnership. The Company has retained Global Net Lease Advisors, LLC (the "Advisor") to manage the Company's affairs on a day-to-day basis. The 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. These related parties receive compensation and fees for various services provided to the Company.
Following the termination of Moor Park Capital Partners LLP (the "Former Service Provider"), effective as of March 17, 2018, the Advisor, together with its service providers, assumed full management responsibility of the Company’s European real estate portfolio. Prior to the termination of the Former Service Provider, the Former Service Provider provided, subject to the Advisor's oversight and pursuant to a service provider agreement (the “Service Provider Agreement”), certain real estate related services, as well as sourcing and structuring of investment opportunities, performance of due diligence, and arranging debt financing and equity investment syndicates, solely with respect to investments in Europe. Since the termination of the Former Service Provider, the Advisor has built a European-focused management team and engaged third-party service providers to assume certain duties previously performed by the Former Service Provider. See Note 9 - Commitments and Contingencies for further details.
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 and nine months ended September 30, 2018 are not necessarily indicative of the results for the entire year or any subsequent interim period.
These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2017, which are included in the Company's Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the "SEC") on February 28, 2018. There have been no significant changes to the Company's significant accounting policies during the nine months ended September 30, 2018, other than those relating to new accounting pronouncements (see "Recently Issued Accounting Pronouncements" section below).
The accompanying unaudited consolidated financial statements include the accounts of the Company, the OP and its subsidiaries. All intercompany accounts and transactions are eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity ("VIE") for which the Company is the primary beneficiary. The Company has determined that the OP is a VIE of which the Company is the primary beneficiary. Substantially all of the Company's assets and liabilities are held by the OP.


8

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

Critical Accounting Policies
Judgments and Estimates
The Company regularly makes a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses in order to prepare its consolidated financial statements in conformity with GAAP. These estimates and assumptions are based on management's best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, such as the prevailing economic and business environment. The Company adjusts such estimates when facts and circumstances dictate. The most significant estimates the Company makes include recoverability of accounts receivable, allocation of property purchase price to tangible and intangible assets acquired and liabilities assumed, determination of impairment of long-lived assets, valuation of derivative financial instruments, valuation of compensation plans, and estimating the useful life of a long-lived asset. Actual results could differ materially from those estimated.
Investments in Real Estate
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful
life of the asset. Costs of repairs and maintenance are expensed as incurred.
The Company evaluates the inputs, processes and outputs of each asset acquired to determine if the transaction is a business combination or an asset acquisition. If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statements of operations. If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired assets.
In both a business combination and an asset acquisition, the Company allocates the purchase price of acquired properties to
tangible and identifiable intangible assets or liabilities based on their respective fair values. Tangible assets may include land, land improvements, buildings, fixtures and tenant improvements. Intangible assets or liabilities may include the value of in-place leases, above- and below- market leases and other identifiable assets or liabilities based on lease or property specific characteristics. In addition, any assumed mortgages receivable or payable and any assumed or issued non-controlling interests (in a business combination) are recorded at their estimated fair values. In allocating the fair value to assumed mortgages, amounts are recorded to debt premiums or discounts based on the present value of the estimated cash flows, which is calculated to account for either above or below-market interest rates. In a business combination, the difference between the purchase price and the fair value of identifiable net assets acquired is either recorded as goodwill or as a bargain purchase gain. In an asset acquisition, the difference between the acquisition price (including capitalized transaction costs) and the fair value of identifiable net assets acquired is allocated to the non-current assets. All acquisitions during the nine months ended September 30, 2018 and the year ended December 31, 2017 were asset acquisitions.
Purchase Accounting and Acquisition of Real Estate
The Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets acquired, including those acquired in the Company's merger (the "Merger"), which closed in December 2016, with American Realty Capital Global Trust II, Inc. ("Global II"), which was sponsored and advised by affiliates of AR Global, 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-

9

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

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

10

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

unit is less than its carrying value. Based on our assessment, we determined that the goodwill is not impaired as of September 30, 2018.
Revenue Recognition
The Company's revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease agreement and are reported on a straight-line basis over the initial term of the lease. Since many of the Company's leases provide for rental increases at specified intervals, straight-line basis accounting requires the Company to record a receivable, and include in revenues, unbilled rent receivables that the Company will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. For new leases after acquisition, the commencement date is considered to be the date the lease is executed. The Company defers the revenue related to lease payments received from tenants in advance of their due dates. When the Company acquires a property, the acquisition date is considered to be the commencement date for purposes of this calculation.
The Company reviews receivables related to rent and unbilled rent receivables and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, the Company records an increase in the Company's allowance for uncollectible accounts or records a direct write-off of the receivable in the Company's consolidated statements of operations.
Cost recoveries from tenants are included in operating expense reimbursement in the period the related costs are incurred, as applicable.
Income Taxes
The Company 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 has been organized and operated in such a manner as to qualify for taxation as a REIT under the Code. The Company intends to continue to operate in such a manner to continue to qualify for taxation as a REIT, but no assurance can be given that it will operate in a manner so as to remain qualified as a REIT. As a REIT, the Company generally will not be subject to federal corporate income tax to the extent it distributes annually all of its REIT taxable income.
The Company conducts business in various states and municipalities within the U.S. and Puerto Rico, the United Kingdom and Western Europe and, as a result, the Company or one of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and certain foreign jurisdictions. As a result, the Company may be subject to certain federal, state, local and foreign taxes on its income and assets, including alternative minimum taxes, taxes on any undistributed income and state, local or foreign income, franchise, property and transfer taxes. Any of these taxes decrease the Company's earnings and available cash.
Significant judgment is required in determining the Company's tax provision and in evaluating its tax positions. The Company establishes tax reserves based on a benefit recognition model, which the Company believes could result in a greater amount of benefit (and a lower amount of reserve) being initially recognized in certain circumstances. Provided that the tax position is deemed more likely than not of being sustained, the Company recognizes the largest amount of tax benefit that is greater than 50 percent likely of being ultimately realized upon settlement.
The Company derecognizes the tax position when the likelihood of the tax position being sustained is no longer more likely than not. The Company recognizes deferred income taxes in certain of its subsidiaries taxable in the U.S. or in foreign jurisdictions. Deferred income taxes are generally the result of temporary differences (items that are treated differently for tax purposes than for GAAP purposes). In addition, deferred tax assets arise from unutilized tax net operating losses, generated in prior years. The Company provides a valuation allowance against its deferred income tax assets when it believes that it is more likely than not that all or some portion of the deferred income tax asset may not be realized. Whenever a change in circumstances causes a change in the estimated realizability of the related deferred income tax asset, the resulting increase or decrease in the valuation allowance is included in deferred income tax expense (benefit).
The Company derives most of its REIT taxable income from its real estate operations in the U.S. and has historically distributed all of its REIT taxable income to its shareholders. As such, the Company's real estate operations are generally not subject to federal tax, and accordingly, no provision has been made for U.S. federal income taxes in the consolidated financial statements for these operations. These operations may be subject to certain state, local, and foreign taxes, as applicable. The Company's deferred tax assets and liabilities are primarily the result of temporary differences related to the following:
Basis differences between tax and GAAP for certain international real estate investments. For income tax purposes, in certain acquisitions, the Company assumes the seller’s basis, or the carry-over basis, in the acquired assets. The carry-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;

11

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

Timing differences generated by differences in the GAAP basis and the tax basis of assets such as those related to capitalized acquisition costs and depreciation expense; and
Tax net operating losses in certain subsidiaries, including those domiciled in foreign jurisdictions that may be realized in future periods if the respective subsidiary generates sufficient taxable income.
The Company recognizes current income tax expense for state and local income taxes and taxes incurred in its foreign jurisdictions. The Company's current income tax expense fluctuates from period to period based primarily on the timing of its taxable income.
Reportable Segments
The Company determined that it has one reportable segment, with activities related to investing in real estate. The Company’s investments in real estate generate rental revenue and other income through the leasing of properties, which comprise 100% of total consolidated revenues. Management evaluates the operating performance of the Company’s investments in real estate on an individual property level.
Out-of-Period Adjustments
During the nine months ended September 30, 2017, the Company recorded $0.5 million of additional rental income and unbilled straight-line rent due to an error in the calculation of straight-line rent for one of the Company's properties acquired during 2014. The Company concluded that this adjustment was not material to the financial position or results of operations for the current period or any prior period.
Also, during the year ended December 31, 2017, the Company identified certain historical errors in its current taxes payable as well as its statement of comprehensive income (loss), consolidated statement of changes in equity, and statement of cash flows since 2013 which impacted the quarterly financial statements and annual periods previously issued. Specifically, when recording its annual provision, the Company had adjusted its current taxes payable to the cumulative amount of taxes payable without consideration for cumulative payments. This adjustment was made with an offsetting amount in cumulative translation adjustments within other comprehensive income ("OCI") and accumulated other comprehensive income ("AOCI"). As of December 31, 2016, income taxes payable were overstated and AOCI was understated by $4.7 million. OCI was understated by $2.9 million, $1.9 million and overstated by $0.1 million for the years ended December 31, 2016, 2015 and Pre-2015, respectively. We concluded that the errors noted above were not material to the current period or any historical periods presented and have adjusted the amounts on a cumulative basis in the year ended December 31, 2017.
Recently Issued Accounting Pronouncements
Adopted as of January 1, 2018:
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and has since issued several additional amendments thereto (collectively referred to herein as "ASC 606"). ASC 606 establishes a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Under ASC 606, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. A reporting entity may apply the amendments in ASC 606 using either a modified retrospective approach, by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or a full retrospective approach. The Company adopted this guidance effective January 1, 2018, for all future financial statements issued, under the modified retrospective approach and it did not have an impact on the Company's consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Also, in February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which updated guidance previously issued by ASU 2016-01. The guidance in ASU 2016-01 and 2018-01 amends the recognition and measurement of financial instruments. The new guidance significantly revises an entity’s accounting related to equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. Among other things, it also amends the presentation and disclosure requirements associated with the fair value of financial instruments. The Company adopted ASU 2016-01 and ASU 2018-03 effective January 1, 2018, using the modified retrospective transition method, and there was no material impact to the Company's consolidated financial statements.

12

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides guidance on how certain transactions should be classified and presented in the statement of cash flows as either operating, investing or financing activities. Among other things, the update provides specific guidance on where to classify debt prepayment and extinguishment costs, payments for contingent consideration made after a business combination and distributions received from equity method investments. The Company adopted the new guidance beginning in the first quarter of 2018, with reclassification of prior period amounts, where applicable, and it did not have a significant impact on its statement of cash flows.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which revises the definition of a business. Amongst other things, this new guidance is applicable when evaluating whether an acquisition (disposal) should be treated as either a business acquisition (disposal) or an asset acquisition (disposal). Under the revised guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset or group of similar assets, the assets acquired would not be considered a business. The revised guidance is effective for reporting periods beginning after December 15, 2017, and the amendments will be applied prospectively. The Company early adopted the provisions of this guidance effective January 1, 2017. While the Company's acquisitions have historically been classified as either business combinations or asset acquisitions, certain acquisitions that were classified as business combinations by the Company likely would have been considered asset acquisitions under the new standard. As a result, future transaction costs are more likely to be capitalized since the Company expects most of its future acquisitions to be classified as asset acquisitions under this new standard. All of the Company's acquisitions during 2018 and 2017 have been classified as asset acquisitions.
In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Assets Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which provides guidance related to partial sales of non-financial assets, eliminates rules specifically addressing the sales of real estate, clarifies the definition of in substance non-financial assets, removes exception to the financial asset derecognition model and clarifies the accounting for contributions of non-financial assets to joint ventures. The Company adopted this guidance effective January 1, 2018 using the modified transition method. The Company expects that any future sales of real estate in which the Company retains a non-controlling interest in the property would result in the full gain amount being recognized at the time of the partial sale. Historically, the Company has not retained any interest in properties it has sold.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance that clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The update states that modification accounting should be used unless the fair value of the award, the vesting terms of the award, and the classification of the award as either equity or liability, all do not change as a result of the modification. The Company adopted this guidance effective January 1, 2018 using the modified retrospective transition method. The Company expects that any future modifications to the Company's issued share-based awards will be accounted for using modification accounting, unless the modification meets all of the exception criteria noted above. As a result, the modification would be treated as an exchange of the original award for a new award, with any incremental fair value being treated as additional compensation cost.
Pending Adoption as of September 30, 2018:
ASU 2016-02, Leases (Topic 842) ("ASC 842") originally stated that companies would be required to bifurcate certain lease revenues between lease and non-lease components, however, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, in July 2018 ("ASU 2018-11"), which allows lessors a practical expedient by class of underlying assets to account for lease and non-lease components as a single lease component if certain criteria are met. Additionally, only incremental direct leasing costs may be capitalized under this new guidance, which is consistent with the Company’s existing policies. ASC 842 originally required a modified retrospective method of adoption, however, ASU 2018-11 indicates that companies may be permitted to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The pronouncement allows some optional practical expedients. The Company does not expect this guidance to impact its existing lessor revenue recognition pattern.
The Company is a lessee for some properties in which it has ground leases as of September 30, 2018. For these leases, the Company will be required to record a right-of-use asset and lease liability equal to the present value of the remaining lease payments upon adoption of this update. The new standard requires lessees to apply a dual lease classification approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted

13

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

for similar to existing guidance for operating leases today. The Company intends to take the practical expedients allowed under ASU 2018-11 and adopt the new provisions of ASC 842 prospectively on January 1, 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.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-Controlling Interests with a Scope Exception guidance that changes the method to determine the classification of certain financial instruments with a down round feature as liabilities or equity instruments and clarify existing disclosure requirements for equity-classified instruments. A down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. As a result, a freestanding equity-linked financial instrument no longer would be accounted for as a derivative liability, rather, an entity that presents earnings per share is required to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features. The revised guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. Adoption should be applied retrospectively to outstanding financial instruments with a down round feature with a cumulative-effect adjustment to the statement of financial position. The Company is currently evaluating the impact of this new guidance.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. The transition guidance provides companies with the option of early adopting the new standard using a modified retrospective transition method in any interim period after issuance of the update, or alternatively requires adoption for fiscal years beginning after December 15, 2018. This adoption method will require the Company to recognize the cumulative effect of initially applying the ASU as an adjustment to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that the Company adopts the update. While the Company continues to assess all potential impacts of the standard, the Company currently expects adoption to have an immaterial impact on the Company's consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement- Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The new guidance addresses the impact of Tax Cuts and Jobs Act signed into law on December 22, 2017, (“Tax Cuts and Jobs Act”) on items within accumulated other comprehensive income which do not reflect the appropriate tax rate. ASU 2018-02 allows the Company to retrospectively reclassify the income tax effects on items in Accumulated Other Comprehensive Income (“AOCI”) to retained earnings for all periods in which the effect of the change in the U.S. federal corporate income tax rate was recognized. In addition, all companies are required to disclose whether the company has elected to reclassify the income tax effects of the Tax Cuts and Jobs Act to retained earnings and disclose information about any other income tax effects that are reclassified from AOCI by the Company. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Companies are required to apply the proposed amendments either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company is currently evaluating the impact of this new guidance.
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

14

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

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 expects this amendment to impact the award made to the Advisor pursuant to the new multi-year outperformance agreement entered into with the Advisor in July 2018 (the "2018 OPP"). See Note 12 — Share-Based Compensation for additional information on the awards to the Advisor pursuant to the 2018 OPP and the Company's previous multi-year outperformance agreement with the Advisor (the "2015 OPP").
Note 3 — Real Estate Investments, Net
Property Acquisitions
As of September 30, 2018, included in other assets is $3.8 million in deposits primarily related to a pending acquisition with an aggregate acquisition price of $126.6 million. The following table presents the allocation of the assets acquired and liabilities assumed during the nine months ended September 30, 2018 and 2017, based on the exchange rate at the time of purchase. All acquisitions in both periods were considered asset acquisitions for accounting purposes.
 
 
Nine Months Ended September 30,
(Dollar amounts in thousands)
 
2018
 
2017
Real estate investments, at cost:
 
 
 
 
Land
 
$
24,269

 
$
6,359

Buildings, fixtures and improvements
 
205,990

 
27,220

Total tangible assets
 
230,259

 
33,579

Acquired intangible lease assets:
 
 
 
 
In-place leases
 
42,031

 
4,859

Above-market lease assets
 
48

 
47

Below-market lease liabilities
 
(4,959
)
 
(1,372
)
Cash paid for acquired real estate investments
 
$
267,379

 
$
37,113

Number of properties purchased
 
17

 
4

Acquired Intangible Lease Assets
We allocate a portion of the fair value of real estate acquired to identified intangible assets and liabilities, consisting of the value of origination costs (tenant improvements, leasing commissions, and legal and marketing costs), the value of above-market and below-market leases, and the value of tenant relationships, if applicable, based in each case on their relative fair values. The Company periodically assesses whether there are any indicators that the value of the intangible assets may be impaired by performing a net present value analysis of future cash flows, discounted for the inherent risk associated with each investment. For the three and nine months ended September 30, 2018, we did not record any impairment charges for the intangible assets associated with our real estate investments.
Dispositions
As of September 30, 2018 and December 31, 2017, the Company did not have any properties that were classified as assets held for sale. The Company sold one real estate asset during the three months ended September 30, 2018, located in Vandalia, Ohio for a total contract sales price of $5.0 million. Prior to the sale, the Company agreed to terminate the lease with the existing tenant and received a termination fee of $3.0 million in accordance with the terms of the lease, which is recorded in rental income in the accompanying consolidated statements of operations for the three months ended September 30, 2018. At closing, the Company paid approximately $3.0 million in excess of proceeds received for the repayment of mortgage debt and recorded a loss of $1.9 million, which is reflected in loss on dispositions on real estate investments in the accompanying consolidated statements of operations for the three months ended September 30, 2018.

15

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

In addition to the sale of the real estate asset located in Vandalia, Ohio, the Company sold one other real estate asset, located in San Jose, California, during the nine months ended September 30, 2018. This property was sold for a contract sales price of $20.3 million, resulting in net proceeds of $1.3 million after repayment of mortgage debt and a loss of $3.8 million, which is reflected in loss on dispositions of real estate investments in the accompanying consolidated statements of operations for the nine months ended September 30, 2018. The total contract sales price for these two real estate assets was $25.3 million and, at closing, the Company paid approximately $1.7 million, net, in excess of proceeds received from the sales for the repayment of mortgage debt and a recorded a loss of $5.8 million, net.
During the nine months ended September 30, 2017, the Company sold a property located in Fort Washington, Pennsylvania for a total contract sales price of $13.0 million, resulting in net proceeds of $12.4 million and a gain of $0.4 million, which is reflected in gains on dispositions of real estate investments in the accompanying consolidated statements of operations for the nine months ended September 30, 2017. Also included in gains on dispositions of real estate investments for the three and nine months ended September 30, 2017 is a $0.3 million and $0.8 million reduction in the Gain Fee, respectively, payable to the Advisor as a result of reinvestments during the nine months ended September 30, 2017 (see Note 10 — Related Party Transactions for details) and a $0.1 million reduction to gain on disposition associated with a property sold in 2016 related to post-closing settlement for deferred rent.
Future Minimum Rents
The following table presents future minimum base rental cash payments due to the Company over the next five calendar years and thereafter as of September 30, 2018. These amounts exclude contingent rent payments, as applicable, that may be collected from certain tenants based on provisions related to sales thresholds and increases in annual rent based on exceeding certain economic indexes among other items.
(In thousands)
 
Future Minimum
Base Rent Payments (1)
2018 (remainder)
 
$
65,414

2019
 
264,029

2020
 
267,518

2021
 
268,287

2022
 
258,975

2023
 
234,943

Thereafter
 
777,237

 
 
$
2,136,403

___________________________________________
(1) 
Assumes exchange rates of £1.00 to $1.30 for GBP and €1.00 to $1.16 for EUR as of September 30, 2018 for illustrative purposes, as applicable.
There were no tenants whose annualized rental income on a straight-line basis represented 10.0% or greater of consolidated annualized rental income on a straight-line basis as of September 30, 2018 and December 31, 2017.
The following table lists the country where the Company has concentrations of properties where annualized rental income on a straight-line basis represented 10.0% or greater of consolidated annualized rental income on a straight-line basis as of September 30, 2018 and December 31, 2017.
Country, State or Territory
 
September 30,
2018
 
December 31,
2017
United States*
 
52.9%
 
48.9%
United Kingdom
 
20.3%
 
22.1%
___________________________________________
* There is no state in the United States that exceeded the 10.0% threshold.

16

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

Note 4 —Mortgage Notes Payable, Net
Mortgage notes payable, net as of September 30, 2018 and December 31, 2017 consisted of the following:
 
 
 
 
Encumbered Properties
 
Outstanding Loan Amount (1)
 
Effective Interest Rate
 
Interest Rate
 
 
Country
 
Portfolio
 
 
September 30,
2018
 
December 31,
2017
 
 
 
Maturity
 
 
 
 
 
 
(In thousands)
 
(In thousands)
 
 
 
 
 
 
Finland:
 
Finnair
 
4
 
$
32,957

 
$
34,022

 
2.2%
(2) 
Fixed
 
Sep. 2020
 
 
Tokmanni
 
1
 
33,625

 
34,711

 
2.4%
(2) 
Fixed
 
Oct. 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
France:
 
Auchan
 
1
 
9,632

 
9,943

 
1.7%
(2) 
Fixed
 
Dec. 2019
 
 
Pole Emploi
 
1
 
6,731

 
6,948

 
1.7%
(2) 
Fixed
 
Dec. 2019
 
 
Sagemcom
 
1
 
41,661

 
43,006

 
1.7%
(2) 
Fixed
 
Dec. 2019
 
 
Worldline
 
1
 
5,802

 
5,990

 
1.9%
(2) 
Fixed
 
Jul. 2020
 
 
DCNS
 
1
 
11,024

 
11,381

 
1.5%
(2) 
Fixed
 
Dec. 2020
 
 
ID Logistics II
 
2
 
12,185

 
12,578

 
1.3%
 
Fixed
 
Jun. 2021
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Germany
 
Rheinmetall
 
1
 
12,301

 
12,698

 
2.6%
(2) 
Fixed
 
Jan. 2019
 
 
OBI DIY
 
1
 
5,222

 
5,391

 
2.4%
 
Fixed
 
Jan. 2019
 
 
RWE AG
 
3
 
72,529

 
74,872

 
1.6%
(2) 
Fixed
 
Oct. 2019
 
 
Rexam
 
1
 
5,959

 
6,301

 
1.8%
(2) 
Fixed
 
Aug. 2019
 
 
Metro Tonic
 
1
 
30,752

 
31,746

 
1.7%
(2) 
Fixed
 
Dec. 2019
 
 
ID Logistics I 
 
1
 
4,642

 
4,792

 
1.0%
 
Fixed
 
Oct. 2021
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Luxembourg:
 
DB Luxembourg
 
1
 
41,777

 
43,126

 
1.4%
(2) 
Fixed
 
May 2020
The Netherlands:
 
ING Amsterdam
 
1
 
51,061

 
52,710

 
1.7%
(2) 
Fixed
 
Jun. 2020
 
 
Total EUR denominated
 
22
 
377,860

 
390,215

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United Kingdom:
 
McDonald's
 
 

 
1,025

 
—%
 
 
 
 
Wickes Building Supplies I
 
 

 
2,226

 
—%
 
 
 
 
Everything Everywhere
 
 

 
5,397

 
—%
 
 
 
 
Thames Water
 
 

 
8,096

 
—%
 
 
 
 
Wickes Building Supplies II
 
 

 
2,626

 
—%
 
 
 
 
Northern Rock
 
 

 
7,084

 
—%
 
 
 
 
Wickes Building Supplies III
 
 

 
2,564

 
—%
 
 
 
 
Provident Financial
 
 

 
17,203

 
—%
 
 
 
 
Crown Crest
 
 

 
25,973

 
—%
 
 
 
 
Aviva
 
 

 
21,183

 
—%
 
 
 
 
Bradford & Bingley
 
 

 
10,200

 
—%
 
 
 
 
Intier Automotive Interiors
 
 

 
6,375

 
—%
 
 

17

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

 
 
 
 
Encumbered Properties
 
Outstanding Loan Amount (1)
 
Effective Interest Rate
 
Interest Rate
 
 
Country
 
Portfolio
 
 
September 30,
2018
 
December 31,
2017
 
 
 
Maturity
 
 
Capgemini
 
 

 
6,381

 
—%
 
 
 
 
Fujitsu
 
 

 
33,435

 
—%
 
 
 
 
Amcor Packaging
 
 

 
4,218

 
—%
 
 
 
 
Fife Council
 
 

 
2,474

 
—%
 
 
 
 
Malthrust
 
 

 
4,318

 
—%
 
 
 
 
Talk Talk
 
 

 
5,161

 
—%
 
 
 
 
HBOS
 
 

 
7,272

 
—%
 
 
 
 
DFS Trading
 
 

 
13,680

 
—%
 
 
 
 
DFS Trading
 
 

 
3,203

 
—%
 
 
 
 
HP Enterprise Services
 
 

 
12,531

 
—%

 
 
 
Foster Wheeler
 
 

 
53,026

 
—%
 
 
 
 
Harper Collins
 
 

 
37,880

 
—%
 
 
 
 
NCR Dundee
 
 

 
7,610

 
—%
 
 
 
 
UK Multi-Property Cross Collateralized Loan
 
43
 
299,674

 

 
3.2%
(3) 
Fixed
 
Aug. 2023
 
 
Total GBP denominated
 
43
 
299,674

 
301,141

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States:
 
Quest Diagnostics
 
1
 
52,800

 
52,800

 
4.2%
(4) 
Variable
 
Sep. 2019
 
 
Western Digital
 
 

 
17,363

 
—%
(5) 
 
 
 
AT&T Services
 
1
 
33,550

 
33,550

 
2.0%
(6) 
Variable
 
Dec. 2020
 
 
FedEx Freight
 
 

 
6,165

 
—%
 
 
 
 
Veolia Water
 
 

 
4,110

 
—%
 
 
 
 
Multi-Tenant Mortgage Loan I
 
12
 
187,000

 
187,000

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

 

 
4.4%
 
Fixed
 
Feb. 2028
 
 
Total USD denominated
 
22
 
306,100

 
300,988

 
 
 
 
 
 
 
 
Gross mortgage notes payable
 
87
 
983,634

 
992,344

 
2.9%
 
 
 
 
 
 
Mortgage discount
 
 
 
(696
)
 
(1,927
)
 
 
 
 
 
 
 
Deferred financing costs, net of accumulated amortization
 
 
 
(8,423
)
 
(5,541
)
 
 
 
 
 
 
 
Mortgage notes payable, net
 
87
 
$
974,515

 
$
984,876

 
2.9%
 
 
 
 
_______________________________
(1) 
Amounts borrowed in local currency and translated at the spot rate in effect at the applicable reporting date.
(2) 
Fixed as a result of an interest rate swap agreement.
(3) 
80% fixed as a result of an interest rate swap agreement and 20% variable. Variable portion is at LIBOR rate in effect at September 30, 2018.
(4) 
The interest rate is 2.0% plus 1-month LIBOR. LIBOR rate in effect is as of September 30, 2018.
(5) 
The debt prepayment costs associated with the sale of Western Digital were $1.3 million.
(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 September 30, 2018.





18

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

The following table presents future scheduled aggregate principal payments on the Company's gross mortgage notes payable over the next five calendar years and thereafter as of September 30, 2018:
(In thousands)
 
Future Principal Payments (1)
2018 (remainder)
 
$

2019
 
237,587

2020
 
209,796

2021
 
16,827

2022
 

2023
 
299,674

Thereafter
 
219,750

Total
 
$
983,634

_________________________
(1) 
Assumes exchange rates of £1.00 to $1.30 for GBP and €1.00 to $1.16 for EUR as of September 30, 2018 for illustrative purposes, as applicable.
The Company's mortgage notes payable agreements require compliance with certain property-level financial covenants including debt service coverage ratios. As of September 30, 2018, the Company was in compliance with all financial covenants under its mortgage notes payable agreements.
As of September 30, 2018, the unencumbered balance of the portfolio was $1.4 billion, of which approximately $1.3 billion of this amount was included in the unencumbered asset pool comprising the borrowing base under the Revolving Credit Facility and therefore is not available to serve as collateral for future borrowings.
As of December 31, 2017, the Company was in breach of a loan-to-vacant possession financial covenant on one mortgage note payable agreement, which had an outstanding principal balance of $37.9 million (£28.1 million) as of December 31, 2017. During the fourth quarter of 2017, the Company repaid £0.8 million and in January 2018 the Company repaid €0.1 million of principal on two separate mortgage note payable agreements in order to cure these loan-to-value financial covenant breaches which did not result in events of default. The Company was in compliance with the remaining covenants under its mortgage notes payable agreements as of December 31, 2017.
Multi-Tenant Mortgage Loan I
On October 27, 2017, 12 wholly owned subsidiaries (the “Borrowers”) of the OP closed on a loan agreement (the “Loan Agreement”) with Column Financial, Inc. and Citi Real Estate Funding Inc. (collectively, the “Lenders”). The Multi-Tenant Mortgage Loan requires monthly interest-only payments, with the principal balance due on the maturity date and is secured by, among other things, the Borrowers’ interests in 12 single tenant net leased office and industrial properties. The Borrowers’ 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.
Multi-Tenant Mortgage Loan II
On January 26, 2018, the Company entered into a multi-tenant mortgage loan, yielding gross proceeds of $32.8 million with a fixed interest rate of 4.32% and a 10-year maturity in February 2028. The multi-tenant mortgage loan is secured by eight properties in six states, totaling approximately 627,500 square feet. Proceeds were used to pay down approximately $30.0 million of outstanding indebtedness under the Revolving Credit Facility (as defined in Note 5 — Credit Facilities) and for general corporate purposes and future acquisitions.
United Kingdom Multi-Property Loan
On August 13, 2018, the Company entered into a multi-tenant mortgage loan, yielding gross proceeds of £230.0 million and bearing interest at a rate of 1.975% + 3-month GBP LIBOR, maturing in August 2023 (the "UK Loan"). With respect to the interest, 80% of the principal amount is fixed by a swap agreement, while the remaining 20% of the principal remains variable. The UK Loan is secured by all 43 of the Company's properties located in the United Kingdom. At closing, £209.0 million of the net proceeds were used to repay all outstanding mortgage indebtedness encumbering 38 of the 43 properties. The other five properties were unencumbered prior to the loan.

19

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

Note 5 — Credit Facilities
The table below details the outstanding balances as of September 30, 2018 and December 31, 2017 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 ($286.8 million U.S. Dollar ("USD") based on prevailing exchange rates as of August 16, 2018) senior unsecured term loan facility (the “Term Loan” and, together with the Revolving Credit Facility, the “Credit Facility”).
 
 
September 30, 2018
 
December 31, 2017
(In thousands)
 
TOTAL USD (1)
 
 
USD
 
GBP
 
EUR
 
TOTAL USD (2)
 
 
USD
 
GBP
 
EUR
Revolving Credit Facility
 
$
455,556

 
 
$
368,625

 
£
40,000

 
30,000

 
$
298,909

 
 
$
209,000

 
£
40,000

 
30,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Term Loan
 
286,033

 
 

 

 
246,481

 
233,165

 
 

 

 
194,637

Deferred financing costs
 
(3,570
)
 
 

 

 

 
(3,260
)
 
 

 

 

Term Loan, Net
 
282,463

 
 

 

 
246,481

 
229,905

 
 

 

 
194,637

Total Credit Facility
 
$
738,019

 
 
$
368,625

 
£
40,000

 
276,481

 
$
528,814

 
 
$
209,000

 
£
40,000

 
224,637

(1) 
Assumes exchange rates of £1.00 to $1.30 for GBP and €1.00 to $1.16 for EUR as of September 30, 2018 for illustrative purposes, as applicable.
(2) 
Assumes exchange rates of £1.00 to $1.35 for GBP and €1.00 to $1.20 for EUR as of December 31, 2017 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 $60.2 million 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 September 30, 2018, the Credit Facility had a weighted-average effective interest rate of 3.0% 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 September 30, 2018, approximately $7.0 million was available for future borrowings under the Revolving Credit Facility.
Any future borrowings may, at the option of the Company, be denominated in USD, EUR, Canadian Dollars, British Pounds Sterling ("GBP") or Swiss Francs. Amounts borrowed may not, however, be converted to, or repaid in, another currency once borrowed.

20

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

The Company, through the OP, may reduce the amount committed under the Revolving Credit Facility and repay outstanding borrowings under the Credit Facility, in whole or in part, at any time without premium or penalty, other than customary “breakage” costs payable on LIBOR borrowings. In the event of a default, the lender has the right to terminate its obligations under the Credit Facility agreement and to accelerate the payment on any unpaid principal amount of all outstanding loans. The Credit Facility also imposes certain affirmative and negative covenants on the OP, the Company and certain of its subsidiaries including restrictive covenants with respect to, among other things, liens, indebtedness, investments, distributions, mergers and asset sales, as well as financial covenants requiring the OP to maintain, among other things, ratios related to leverage, secured leverage, fixed charge coverage and unencumbered debt services, as well as a minimum consolidated tangible net worth.
The Company and certain of its subsidiaries have guaranteed the OP's obligations under the Credit Facility pursuant to a guarantee and a related contribution agreement which governs contribution rights of the guarantors in the event any amounts become payable under the guaranty.
Prior Credit Facility - Terms
On July 24, 2017, the Company terminated a credit facility (as amended from time to time, the "Prior Credit Facility") that provided for borrowings of up to $740.0 million (subject to borrowing base availability). Under the Prior Credit Facility, the Company had the option, to have draws under the Prior Credit Facility priced at either the Alternate Base Rate (as described below) plus, depending upon the Company's consolidated leverage ratio, 0.60% to 1.20% or at Adjusted LIBOR (as described below) plus, depending upon the Company's consolidated leverage ratio, 1.60% to 2.20%. The Alternate Base Rate was defined in the Prior Credit Facility as a rate per annum equal to the greatest of (a) the fluctuating annual rate of interest announced from time to time by the lender as its “prime rate” in effect on such day, (b) the federal funds effective rate in effect on such day plus half of 1%, and (c) the Adjusted LIBOR for a one-month interest period on such day plus 1%. Adjusted LIBOR was defined as LIBOR multiplied by the statutory reserve rate, as determined by the Federal Reserve System of the United States. The Prior Credit Facility agreement required the Company to pay an unused fee per annum of 0.25% if the unused balance of the Prior Credit Facility exceeded or was equal to 50% of the available facility or a fee per annum of 0.15% if the unused balance of the Prior Credit Facility is less than 50% of the available facility.
Mezzanine Facility
In the fourth quarter of 2016, in connection with the Merger, the Company assumed a mezzanine loan agreement (the "Mezzanine Facility") with an estimated aggregate fair value of $107.0 million. The Mezzanine Facility provided for aggregate borrowings of up to €128.0 million, subject to certain conditions. The Mezzanine Facility bore interest at a rate of 8.25% per annum, payable quarterly, and was scheduled to mature on August 13, 2017. On March 30, 2017, the Company terminated the Mezzanine Facility agreement and repaid in full the outstanding balance of $56.5 million (or €52.7 million).
Note 6 — Fair Value of Financial Instruments
The Company determines fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. This alternative approach also reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The guidance defines three levels of inputs that may be used to measure fair value:
Level 1 — Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability and those inputs are significant.
Level 3 — Unobservable inputs that reflect the entity's own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between levels will be rare.

21

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with those derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of September 30, 2018 and December 31, 2017, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of the Company's derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The valuation of derivative instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and implied volatilities. In addition, credit valuation adjustments are incorporated into the fair values to account for the Company's potential nonperformance risk and the performance risk of the counterparties.
Financial Instruments Measured at Fair Value on a Recurring Basis
The following table presents information about the Company's assets and liabilities (including derivatives that are presented net) measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017, aggregated by the level in the fair value hierarchy within which those instruments fall.
(In thousands)
 
Quoted Prices in Active Markets
Level 1
 
Significant Other Observable Inputs
Level 2
 
Significant Unobservable Inputs
Level 3
 
Total
September 30, 2018
 
 
 
 
 
 
 
 
Cross currency swaps, net (GBP & EUR)
 
$

 
$
1,170

 
$

 
$
1,170

Foreign currency forwards, net (GBP & EUR)
 
$

 
$
2,797

 
$

 
$
2,797

Interest rate swaps, net (GBP & EUR)
 
$

 
$
3,369

 
$

 
$
3,369

Put options (GBP & EUR)
 
$

 
$
34

 
$

 
$
34

2018 OPP (see Note 12)
 
$

 
$

 
$
27,600

 
$
27,600

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

 
$
(4,511
)
 
$

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

 
$
(2,737
)
 
$

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

 
$
(6,450
)
 
$

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

 
$
63

 
$

 
$
63

2015 OPP (see Note 12)
 
$

 
$

 
$
(1,600
)
 
$
(1,600
)
The valuation of the 2018 OPP and 2015 OPP were determined using a Monte Carlo simulation. This analysis reflected the contractual terms of the 2018 OPP and 2015 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 and 2015 OPP valuations in their entireties were classified in Level 3 of the fair value hierarchy.
A review of the fair value hierarchy classification is conducted on a quarterly basis. Changes in the type of inputs may result in a reclassification for certain assets. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2018.
Level 3 Valuations
The following is a reconciliation of the beginning and ending balances for the changes in the instrument with Level 3 inputs in the fair value hierarchy for the nine months ended September 30, 2018:
(In thousands)
 
2018 OPP
 
2015 OPP
Beginning Balance as of December 31, 2017
 
$

 
$
1,600

   Fair value adjustment
 
27,600

 
(1,600
)
Ending balance as of September 30, 2018
 
$
27,600

 
$


22

GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)

The following discussion provides a description of the impact on a fair value measurement of a change in each unobservable input in isolation. For the relationship described below, the inverse relationship would also generally apply.
Expected volatility is a measure of the variability in possible returns for an instrument, parameter or market index given how much the particular instrument, parameter or index changes in value over time. Generally, the higher the expected volatility of the underlying instrument, parameter or market index, the wider the range of potential future returns. An increase in expected volatility, in isolation, would generally result in an increase in the fair value measurement of an instrument.
Financial Instruments not Measured at Fair Value on a Recurring Basis
The Company is required to disclose the fair value of financial instruments for which it is practicable to estimate value. The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, due to/from related parties, prepaid expenses and other assets, accounts payable, deferred rent and dividends payable approximate their carrying value on the consolidated balance sheets due to their short-term nature. The fair values of the Company's remaining financial instruments that are not reported at fair value on the consolidated balance sheets are reported below.
 
 
 
 
September 30, 2018
 
December 31, 2017
(In thousands)
 
Level
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Mortgage notes payable (1) (2) (3)
 
3
 
$
983,634

 
$
982,535

 
$
988,490

 
$
963,751

Revolving Credit Facility (4)
 
3
 
$
455,556

 
$
457,538

 
$
298,909

 
$
297,890

Term Loan (4)
 
3
 
$