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Global Net Lease, Inc. - Quarter Report: 2015 September (Form 10-Q)

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, 2015
 
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
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., 14th Floor, New York, NY
 
10022
(Address of principal executive offices)
 
(Zip Code)
(212) 415-6500
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2
of the Exchange Act.
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer x
(Do not check if a smaller reporting company)
Smaller reporting company 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, 2015, the registrant had 168,936,633 shares of common stock outstanding.

GLOBAL NET LEASE, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


 
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)


 
September 30,
2015
 
December 31,
2014
 
(Unaudited)
 
 
ASSETS
 
 
 
Real estate investments, at cost:
 
 
 
Land
$
344,767

 
$
326,696

Buildings, fixtures and improvements
1,702,345

 
1,519,558

Construction in progress
28

 
9,706

Acquired intangible lease assets
524,264

 
484,079

Total real estate investments, at cost
2,571,404

 
2,340,039

Less accumulated depreciation and amortization
(109,922
)
 
(42,568
)
Total real estate investments, net
2,461,482

 
2,297,471

Cash and cash equivalents
32,080

 
64,684

Restricted cash
4,076

 
6,104

Derivatives, at fair value (Note 8)
5,451

 
13,638

Investment securities, at fair value
—

 
490

Prepaid expenses and other assets
39,016

 
24,873

Due from affiliates
53

 
500

Deferred tax assets
2,905

 
2,102

Goodwill and other intangible assets, net
3,390

 
3,665

Deferred financing costs, net
13,785

 
15,270

Total assets
$
2,562,238

 
$
2,428,797

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Mortgage notes payable
$
509,427

 
$
281,186

Mortgage premium, net
798

 
1,165

Credit facility
735,357

 
659,268

Below-market lease liability, net
28,878

 
21,676

Derivatives, at fair value (Note 8)
7,256

 
6,115

Listing note, at fair value (Note 6)
3,380

 
—

Due to affiliates
943

 
400

Accounts payable and accrued expenses
22,698

 
19,357

Prepaid rent
12,890

 
12,252

Current taxes payable
3,166

 
—

Dividends payable
249

 
10,709

Total liabilities
1,325,042

 
1,012,128

Commitments and contingencies (Note 9)


 


Equity:
 
 
 
Preferred stock, $0.01 par value, 50,000,000 authorized, none issued and outstanding
—

 
—

Common stock, $0.01 par value, 300,000,000 shares authorized, 168,936,633 and 177,933,175 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively.
1,692

 
1,782

Additional paid-in capital
1,479,879

 
1,575,592

Accumulated other comprehensive loss
(4,277
)
 
(5,589
)
Accumulated deficit
(255,460
)
 
(155,116
)
Total stockholders' equity
1,221,834

 
1,416,669

Non-controlling interest
15,362

 
—

 Total equity
1,237,196

 
1,416,669

Total liabilities and equity
$
2,562,238

 
$
2,428,797

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

2
GLOBAL NET LEASE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share and per share data)
(Unaudited)

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
 
Rental income
 
47,836

 
25,400

 
142,502

 
$
45,938

Operating expense reimbursements
 
2,416

 
502

 
6,787

 
1,139

Total revenues
 
50,252

 
25,902

 
149,289

 
47,077

 
 
 
 
 
 
 
 
 
 Expenses:
 
 
 
 
 
 
 
 
Property operating
 
3,355

 
1,428

 
10,791

 
2,447

Operating fees to affiliates
 
4,902

 
219

 
10,211

 
421

Acquisition and transaction related
 
4,680

 
29,124

 
5,977

 
53,883

Listing fees
 
—

 
—

 
18,503

 
—

Vesting of Class B units
 
—

 
—

 
14,480

 
—

Change in fair value of listing note
 
(1,050
)
 
—

 
3,380

 
—

General and administrative
 
2,014

 
740

 
5,638

 
2,127

Equity based compensation
 
1,917

 
72

 
2,435

 
98

Depreciation and amortization
 
22,949

 
15,126

 
66,152

 
27,120

Total expenses
 
38,767

 
46,709

 
137,567

 
86,096

Operating income (loss)
 
11,485

 
(20,807
)
 
11,722

 
(39,019
)
Other income (expense):
 
 
 
 
 
 
 
 
Interest expense
 
(9,041
)
 
(4,081
)
 
(24,799
)
 
(8,385
)
Income from investments
 
8

 
—

 
15

 
—

Losses on foreign currency
 
—

 
(737
)
 
—

 
(756
)
Realized losses on investment securities
 
(66
)
 
—

 
(66
)
 
—

Gains on derivative instruments
 
2,310

 
849

 
2,785

 
599

Gains on hedges and derivatives deemed ineffective
 
1,505

 
—

 
2,445

 
—

Unrealized losses on non-functional foreign currency advances not designated as net investment hedges
 
—

 
—

 
(2,935
)
 
—

Other (expense) income
 
(10
)
 
148

 
15

 
203

Total other expense, net
 
(5,294
)
 
(3,821
)
 
(22,540
)
 
(8,339
)
Net income (loss) before income taxes
 
6,191

 
(24,628
)
 
(10,818
)
 
(47,358
)
Income taxes (expense) benefit
 
(703
)
 
70

 
(3,646
)
 
(1,028
)
Net income (loss)
 
5,488

 
(24,558
)
 
(14,464
)
 
(48,386
)
Non-controlling interest
 
(56
)
 
—

 
87

 
—

Net income (loss) attributable to stockholders
 
$
5,432

 
$
(24,558
)
 
$
(14,377
)
 
$
(48,386
)
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Cumulative translation adjustment
 
836

 
(7,269
)
 
(4,651
)
 
(2,535
)
Designated derivatives, fair value adjustments
 
(6,149
)
 
6,639

 
5,753

 
1,768

Other Comprehensive income (loss)
 
(5,313
)
 
(630
)
 
1,102

 
(767
)
Comprehensive income (loss)
 
175

 
(25,188
)
 
(13,362
)
 
(49,153
)
Non-controlling interest
 
40

 
—

 
297

 
—

Comprehensive income (loss) attributable to stockholders
 
215

 
(25,188
)
 
(13,065
)
 
(49,153
)
 
 
 
 
 
 
 
 
 
Basic and Diluted Earnings Per Share:
 
 
 
 
 
 
 
 
Basic and diluted net income (loss) per share attributable to stockholders
 
$
0.03

 
$
(0.14
)
 
$
(0.08
)
 
$
(0.44
)
Basic and diluted weighted average shares outstanding
 
168,948,345

 
175,401,867

 
176,124,355

 
108,779,593

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

3
GLOBAL NET LEASE, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2015
(In thousands, except share data)
(Unaudited)

 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of
Shares
 
Par Value
 
Additional Paid-in
Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Accumulated Deficit
 
Total Stockholders' Equity
 
Non-controlling interest
 
Total Equity
Balance, December 31, 2014
 
177,933,175

 
$
1,782

 
$
1,575,592

 
$
(5,589
)
 
$
(155,116
)
 
$
1,416,669

 
$
—

 
$
1,416,669

Issuance of common stock
 
37,407

 
—

 
420

 
—

 
—

 
420

 
—

 
420

Common stock offering costs, commissions and dealer manager fees
 

 
—

 
49

 
—

 
—

 
49

 
—

 
49

Common stock repurchases, inclusive of fees
 
(12,039,885
)
 
(120
)
 
(126,202
)
 
—

 
—

 
(126,322
)
 
—

 
(126,322
)
Common stock issued through dividend reinvestment plan
 
3,005,936

 
30

 
28,548

 
—

 
—

 
28,578

 
—

 
28,578

Dividends declared (per share $0.51)
 
—

 
—

 
—

 
—

 
(85,967
)
 
(85,967
)
 
—

 
(85,967
)
Issuance of operating partnership units
 
—

 
—

 
—

 
—

 
—

 
—

 
750

 
750

Vesting of Class B units
 
—

 
—

 
—

 
—

 
—

 
—

 
14,480

 
14,480

Equity-based compensation
 
—

 
—

 
92

 
—

 
—

 
92

 
2,343

 
2,435

Dividends to non-controlling interest holders
 
—

 
—

 
—

 
—

 
—

 
—

 
(534
)
 
(534
)
Net loss
 
—

 
—

 
—

 
—

 
(14,377
)
 
(14,377
)
 
(87
)
 
(14,464
)
Cumulative translation adjustment
 
—

 
—

 
—

 
(4,362
)
 
—

 
(4,362
)
 
(289
)
 
(4,651
)
Designated derivatives, fair value adjustments
 
—

 
—

 
—

 
5,674

 
—

 
5,674

 
79

 
5,753

Rebalancing of ownership percentage
 
—

 
—

 
1,380

 
—

 
—

 
1,380

 
(1,380
)
 
—

Balance, September 30, 2015
 
168,936,633

 
$
1,692

 
$
1,479,879

 
$
(4,277
)
 
$
(255,460
)

$
1,221,834

 
$
15,362

 
$
1,237,196


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

4
GLOBAL NET LEASE, INC.
  
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


 
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
 
 
 
(Revised)
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(14,464
)
 
$
(48,386
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 

 
 
Depreciation
 
34,901

 
15,636

Amortization of intangibles
 
31,251

 
11,484

Amortization of deferred financing costs
 
6,056

 
2,032

Amortization of mortgage premium
 
(367
)
 
(373
)
Amortization of below-market lease liabilities
 
(1,506
)
 
806

Amortization of above-market lease assets
 
1,741

 
—

Amortization of above- and below- market ground lease asset
 
69

 
—

Straight line rent
 
(11,573
)
 
(3,116
)
Vesting of Class B units
 
14,480

 
—

Equity based compensation
 
2,435

 
98

Net realized and unrealized marked-to-market transactions
 
(3,867
)
 
(599
)
Change in fair value of listing note
 
3,380

 
—

Loss on sale of investment in securities
 
27

 
—

Changes in operating assets and liabilities, net:
 
 
 
 
Prepaid expenses and other assets
 
(3,495
)
 
(395
)
Deferred tax assets
 
(803
)
 
—

Accounts payable and accrued expenses
 
4,332

 
6,922

Prepaid rent
 
638

 
6,243

Current taxes payable
 
3,166

 
—

Net cash provided by (used in) operating activities
 
66,401

 
(9,648
)
Cash flows from investing activities:
 
 
 
 
Investment in real estate and real estate related assets
 
(223,074
)
 
(1,080,523
)
Deposits for real estate acquisitions
 
773

 
(8,998
)
Proceeds from termination of derivatives
 
10,055

 
—

Capital expenditures
 
(10,242
)
 
—

Proceeds from redemption of investment securities
 
463

 
—

Net cash used in investing activities
 
(222,025
)
 
(1,089,521
)
Cash flows from financing activities:
 
 
 
 
Borrowings under credit facility
 
476,208

 
19,766

Repayments on credit facility
 
(370,617
)
 
(19,570
)
Proceeds from notes payable
 
—

 
12,505

Payments on notes payable
 
—

 
(12,505
)
Proceeds from mortgage notes payable
 
207,914

 
—

Payments on mortgage notes payable
 
(535
)
 
(505
)
Proceeds from issuance of common stock
 
420

 
1,569,328

Proceeds from issuance of operating partnership units
 
750

 
—

Payments of offering costs
 
49

 
(167,626
)
Payments of deferred financing costs
 
(4,612
)
 
(10,143
)
Dividends paid
 
(68,062
)
 
(21,635
)
Distributions to non-controlling interest holders
 
(321
)
 
—

Payments on common stock repurchases, inclusive of fees
 
(2,313
)
 
—

Payments on share repurchases related to Tender Offer
 
(125,000
)
 
—

Advances from affiliates, net
 
990

 
459

Restricted cash
 
2,028

 
(6,455
)
Net cash provided by financing activities
 
116,899

 
1,363,619

Net change in cash and cash equivalents
 
(38,725
)
 
264,450

Effect of exchange rate changes on cash
 
6,121

 
(12,002
)
Cash and cash equivalents, beginning of period
 
64,684

 
11,500

Cash and cash equivalents, end of period
 
$
32,080

 
$
263,948


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


 
 
Nine Months Ended September 30,
 
 
2015
 
2014
Supplemental Disclosures:
 
 
 
 
Cash paid for interest
 
$
16,122

 
$
5,031

Cash paid for income taxes
 
3,081

 
277

Non-Cash Investing and Financing Activities:
 
 
 
 
Mortgage notes payable assumed or used to acquire investments in real estate
 
$
31,933

 
$
96,620

Borrowings under credit facility to acquire real estate
 
—

 
309,096

Common stock issued through dividend reinvestment plan
 
28,578

 
27,343


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

6
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)


Note 1 — Organization
Global Net Lease, Inc. (the "Company"), formerly known as American Realty Capital Global Trust, Inc., incorporated on July 13, 2011, is a Maryland corporation that elected and qualified to be taxed as a real estate investment trust ("REIT") for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2013.
On June 30, 2014, the Company completed its initial public offering ("IPO") after selling 172.3 million shares of common stock, $0.01 par value per share ("Common Stock"), at a price of $10.00 per share, subject to certain volume and other discounts. In addition, the Company issued an additional 1.1 million shares pursuant to its dividend reinvestment program (the "DRIP"). On April 7, 2015, in anticipation of the listing of the Common Stock (the "Listing") on the New York Stock Exchange (the "NYSE"), the Company announced the suspension of the DRIP. On May 7, 2015, the Company filed a post-effective amendment to its registration statement on Form S-11 (File No. 001-37390) (as amended, the "Registration Statement") to deregister the unsold shares registered under the Registration Statement.
The Company operated as a non-traded REIT through June 1, 2015. On June 2, 2015 (the "Listing Date"), the Company listed its Common Stock on the NYSE under the symbol "GNL". In connection with the Listing, the Company offered to purchase up to 11.9 million shares of its Common Stock at a price of $10.50 per share (the “Tender Offer”). As a result of the Tender Offer, on July 6, 2015, the Company purchased approximately 11.9 million shares of its Common Stock at a price of $10.50 per share, for an aggregate amount of $125.0 million, excluding fees and expenses relating to the Tender Offer and including fractional shares repurchased thereafter.
The Company was formed to primarily acquire a diversified portfolio of commercial properties, with an emphasis on sale-leaseback transactions involving single tenant net-leased commercial properties. The Company may also originate or acquire first mortgage loans secured by real estate. The Company's primary geographic target is the United States, although up to 40% of its portfolio may consist of properties purchased in Europe with an additional 10% allocation to properties purchased elsewhere internationally. As of September 30, 2015, the Company owned 329 properties consisting of 18.7 million rentable square feet, which were 100.0% leased, with weighted average remaining lease term of 11.5 years. 60.4% of the Company's properties are located in U.S. and 39.6% are located in Europe.
Substantially all of the Company's business is conducted through Global Net Lease Operating Partnership, L.P. (the "OP"), a Delaware limited partnership. As of September 30, 2015, the OP had issued 1,809,678 units of limited partnership interests (" OP Units") to limited partners other than the Company, of which 1,461,753 OP Units were issued to Global Net Lease Advisors, LLC (the "Advisor"), 347,903 OP Units were issued to Moor Park Capital Partners LLP (the "Service Provider"), and 22 OP Units were issued to Global Net Lease Special Limited Partner, LLC (the "Special Limited Partner") (see Note 11 — Related Party Transactions). In accordance with the limited partnership agreement of the OP, a holder of OP Units has the right to convert OP Units, at the Company's option, for a corresponding number of shares of the Company's Common Stock or the cash value of those corresponding shares. The remaining rights of the limited partner interests are limited and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP's assets.
The Company has no direct employees. The Company has retained the Advisor to manage the Company's affairs on a day-to-day basis. The properties are managed and leased by Global Net Lease Properties, LLC (the "Property Manager"). Realty Capital Securities, LLC (the "Legacy Dealer Manager") served as the dealer manager of the IPO. The Advisor, Property Manager and Legacy Dealer Manager are affiliates of AR Capital Global Holdings, LLC ("the Sponsor") and the Special Limited Partner as a result of which they are related parties. These related parties receive compensation and fees for various services provided to the Company. The Advisor has entered into a service provider agreement with an affiliate of the Service Provider. Pursuant to the service provider agreement, the affiliate of the Service Provider provides, subject to the Advisor's oversight, certain real estate related services, as well as sourcing and structuring of investment opportunities, performance of due diligence, and arranging debt financing and equity investment syndicates, solely with respect to investments in Europe. Pursuant to the service provider agreement, a portion of the fees payable by the Company to the Advisor and a percentage of the fees paid to the Property Manager are paid or assigned to the Service Provider, solely with respect to the Company's foreign investment strategy in Europe. In the case fees are directly paid to the affiliate of the Service Provider, the Company deducts such fees from those due to the Advisor.

7
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

Note 2 — Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements of the Company included herein were prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to this Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation 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, 2015 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, 2014, which are included in the Company's Annual Report on Form 10-K filed with the SEC on April 3, 2015. There have been no significant changes to the Company's significant accounting policies during the nine months ended September 30, 2015, other than the updates described below and the subsequent notes.
Reclassifications
Certain reclassifications have been made to the 2014 consolidated financial statements to conform to the current period presentation.
Out-of-period adjustments
During the first and second quarter of 2015, the Company recorded (i) additional rental income and accrued rent of $0.3 million related to the straight-line rent effect of correctly including termination payments required under leases with cancellation clauses that were considered probable when assessing the lease term and (ii) additional taxes of $0.9 million representing current foreign taxes payable of $1.2 million and a deferred tax asset of $0.3 million, both relating to 2014. The Company concluded that these adjustments were not material to the financial position or results of operations for the current period or any of the prior periods, accordingly, the Company recorded the related adjustments during the prior two quarters.
In addition, the Company identified errors in accounting for certain cross currency derivatives that were no longer designated as hedges subsequent to their restructuring on February 4, 2015 (see Note 8 — Derivatives and Hedging Activities). Gains that should have been included in net income (loss) were instead included in other comprehensive income (loss) of approximately $0.5 million and $0.6 million during the three month periods ended March 31, 2015 and June 30, 2015, respectively. The Company has concluded that these adjustments are not material to the financial position or results of operations for the current period or any of the respective prior periods, accordingly, the Company recorded the additional gains on these non-designated derivative instruments of $1.1 million during the three months ended September 30, 2015.
Revisions to historical cash flow statements
During the year ended December 31, 2014, the Company identified certain historical errors in the preparation of its statement of cash flows. Specifically, the Company had been (i) reflecting rent credits in connection with purchased real estate as deferred rent at closing which was then reflected as a cash inflow from operations rather than as part of the purchase price in investing activity and (ii) reflecting certain advances on its credit line (for which it did not take constructive receipt) used to acquire investments in real estate as cash inflows from financing activities and cash outflows from investing activities rather than as non-cash investing and financing activities. The Company concluded that the errors noted above were significant but not material to its cash flows for any historical periods presented. However, the Company determined that it is useful for the reader of the financial statements to view these adjustments in the period in which they originated and, as such, has revised the cash flow statement for the nine months ended September 30, 2014. The effects of these revisions are summarized below:
Nine months ended September 30, 2014
 
As originally reported
 
Revisions
 
As
revised
 
 
Item 1
 
Item 2
 
Net Cash provided by (used in) Operating Activities
 
$
352

 
$
(10,000
)
 
$
—

 
$
(9,648
)
Net Cash provided by (used in) Investing Activities
 
$
(1,408,617
)
 
$
10,000

 
$
309,096

 
$
(1,089,521
)
Net Cash provided by (used in) Financing Activities
 
$
1,672,715

 
$
—

 
$
(309,096
)
 
$
1,363,619

 
 
 
 
 
 
 
 
 
Additional non-cash financing activities:
 
 
 
 
 
 
 
 
Line of credit draws used directly to acquire investments in real estate
 
$
—

 
$
—

 
$
309,096

 
$
309,096


8
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

Listing Note
Concurrent with the Listing, the Company, as the general partner of the OP, caused the OP, subject to the terms of the Second Amended and Restated Agreement of Limited Partnership, to evidence the OP's obligation to distribute certain amounts to the Special Limited Partner ("the Listing Note"). The amount of the Listing Note is determined, in part, based on the average market value of the Company’s outstanding shares of Common Stock for the period of 30 consecutive trading days, commencing on the180th calendar day following the Listing. Until the principal amount of the Listing Note is determined, the Listing Note is treated as a liability and the Company estimates the contingent consideration using a valuation model and records the fair value of the Listing Note on the consolidated balance sheets. Changes in the fair value of the Listing Note are recorded in the consolidated statements of operations and comprehensive income (loss).
Multi-Year Outperformance Agreement
Concurrent with the Listing and modifications to the Advisor agreement, the Company entered into a Multi-Year Outperformance Agreement (the “OPP”) with the OP and the Advisor (see Note 13 — Share-Based Compensation). The Company records equity based compensation expense associated with the awards over the requisite service period of five years. The cumulative equity-based compensation expense is adjusted each reporting period for changes in the estimated market-related performance.
Recently Issued Accounting Pronouncements (Pending Adoption)
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Under the revised guidance, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance allows entities to apply either a full retrospective or modified retrospective transition method upon adoption. In July 2015, the FASB finalized a one-year delay of the revised guidance, although entities will be allowed to early adopt the guidance as of the original effective date. The new guidance will be effective in the Company's 2018 fiscal year. The Company is currently evaluating the impact of the revised guidance on the consolidated financial statements and has not yet determined the method by which the Company will adopt the standard.
In February 2015, the FASB issued ASU 2015-02 Consolidation (Topic 810) - Amendments to the Consolidation Analysis. The new guidance applies to entities in all industries and provides a new scope exception to registered money market funds and similar unregistered money market funds. It makes targeted amendments to the current consolidation guidance and ends the deferral granted to investment companies from applying the variable interest entity (VIE) guidance. The standard does not add or remove any of the characteristics that determine if an entity is a VIE. However, when decision-making over the entity’s most significant activities has been outsourced, the standard changes how a reporting entity assesses if the equity holders at risk lack decision making rights. Previously, the reporting entity would be required to determine if there is a single equity holder that is able to remove the outsourced decision maker that has a variable interest. The new standard requires that the reporting entity first consider the rights of all of the equity holders at risk. If the equity holders have certain rights that are deemed to give them the power to direct the entity’s most significant activities, then the entity does not have this VIE characteristic. The new standard also introduces a separate analysis specific to limited partnerships and similar entities for assessing if the equity holders at risk lack decision making rights. Limited partnerships and similar entities will be VIEs unless the limited partners hold substantive kick-out rights or participating rights. In order for such rights to be substantive, they must be exercisable by a simple majority vote (or less) of all of the partners (exclusive of the general partner and its related parties). A right to liquidate an entity is viewed as akin to a kick-out right. The guidance for limited partnerships under the voting model has been eliminated in conjunction with the introduction of this separate analysis, including the rebuttable presumption that a general partner unilaterally controls a limited partnership and should therefore consolidate it. A limited partner with a controlling financial interest obtained through substantive kick out rights would consolidate a limited partnership. The standard eliminates certain of the criteria that must be met for an outsourced decision maker or service provider’s fee arrangement to not be a variable interest. Under current guidance, a reporting entity first assesses whether it meets power and economics tests based solely on its own variable interests in the entity to determine if it is the primary beneficiary required to consolidate the VIE. Under the new standard, a reporting entity that meets the power test will also include indirect interests held through related parties on a proportionate basis to determine whether it meets the economics test and is the primary beneficiary on a standalone basis. The standard is effective for annual periods beginning after December 15, 2015. Early adoption is allowed, including in any interim period. The Company will adopt the new guidance in fiscal 2016 and believes the guidance will not have a material impact on its consolidated financial position, results of operations or cash flows.

9
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

In April 2015, the FASB issued ASU 2015-03 Interest-Imputation of Interest (Subtopic 835-30). The guidance changes the presentation of debt issuance costs on the balance sheet. The amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted for financial statements that have not previously been issued. If the Company decides to early adopt the revised guidance in an interim period, any adjustments will be reflected as of the beginning of the fiscal year that includes the interim period. The Company will adopt the new guidance in fiscal 2016 and believes the guidance will not have a material impact on its consolidated financial position, results of operations or cash flows.
In September 2015, the FASB issued ASU 2015-16 Business Combination (Topic 805). The guidance eliminates the requirement to adjust provisional amounts from a business combination and the related impact on earnings by restating prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of measurement period adjustments on current and prior periods, including the prior period impact on depreciation, amortization and other income statement items and their related tax effects, shall be recognized in the period the adjustment amount is determined. The cumulative adjustment would be reflected within the respective financial statement line items affected. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company will adopt the new guidance in fiscal 2016 and believes the guidance will not have a material impact on its consolidated financial position, results of operations or cash flows.
Note 3 — Real Estate Investments
The following table reflects the number and related base purchase prices of properties acquired as of December 31, 2014 and during the nine months ended September 30, 2015:
 
 
Number of Properties
 
Base Purchase Price(1)
 
 
 
 
(In thousands)
As of December 31, 2014
 
307
 
$
2,378,554

Nine Months Ended September 30, 2015
 
22
 
255,007

Portfolio as of September 30, 2015
 
329
 
$
2,633,561

________________________________________________
(1) 
Contract purchase price, excluding acquisition related costs, based on the exchange rate at the date of purchase, where applicable.
The following table presents the allocation of the assets acquired and liabilities assumed during the nine months ended September 30, 2015 and 2014 based on contract purchase price, excluding acquisition related costs, based on the exchange rate at the time of purchase.
 
 
Nine Months Ended September 30,
(Dollar amounts in thousands)
 
2015
 
2014
Real estate investments, at cost:
 
 
 
 
Land
 
$
23,831

 
$
205,129

Buildings, fixtures and improvements
 
190,314

 
912,355

Total tangible assets
 
214,145

 
1,117,484

Intangibles acquired:
 
 
 
 
In-place leases
 
45,736

 
350,626

Above market lease asset
 
1,002

 
31,584

Below market lease liability
 
(7,181
)
 
(3,455
)
Below market ground lease assets
 
3,409

 
—

Above market ground lease liabilities
 
(2,104
)
 
—

Total assets acquired, net
 
255,007

 
1,496,239

Mortgage notes payable used to acquire real estate investments
 
(31,933
)
 
(96,620
)
Cash paid for acquired real estate investments
 
$
223,074

 
$
1,399,619

Number of properties purchased
 
22

 
209


10
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

The allocations in the table above from land, buildings and fixtures and improvements, in place leases, ground lease assets and liabilities, and above and below market lease assets and liabilities, have been provisionally assigned to each class of assets and liabilities, pending final confirmation from the third party specialist for certain acquisitions purchased during the three months ended September 30, 2015.
The following table presents unaudited pro forma information as if acquisitions completed during the three and nine months ended September 30, 2015, had been consummated on January 1, 2014. Additionally, the unaudited pro forma net income (loss) was adjusted to exclude acquisition and transaction related expenses of $4.7 million and $6.0 million from the three and nine months ended September 30, 2015, respectively. Such acquisition and transaction related expenses have been reflected in the three and nine months ended September 30, 2014 as if such acquisitions costs had been consummated on January 1, 2014.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2015
 
2014
 
2015
 
2014
Pro forma revenues
 
$
53,727

 
$
39,641

 
$
161,841

 
$
108,494

Pro forma net income (loss)
 
$
11,635

 
$
(1,823
)
 
$
3,474

 
$
6,864

Pro forma basic and diluted net income (loss) per share
 
$
0.07

 
$
(0.01
)
 
$
0.02

 
$
0.06

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, 2015. 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 indices among other items.
(In thousands)
 
Future Minimum
Base Rent Payments
2015 (remainder)
 
$
49,091

2016
 
197,782

2017
 
201,295

2018
 
203,848

2019
 
206,358

2020
 
208,565

Thereafter
 
1,165,462

 
 
$
2,232,401

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 portfolio properties as of September 30, 2015 and 2014.
The following table lists the countries and states where the Company has concentrations of properties where annualized rental income on a straight-line basis represented greater than 10% of consolidated annualized rental income on a straight-line basis as of September 30, 2015 and 2014.
 
 
September 30,
Country
 
2015
 
2014
United Kingdom
 
19.6%
 
29.8%
United States:
 
 
 

Texas
 
11.4%
 
12.1%
Michigan
 
*
 
10.3%
____________________________
*
Geography's annualized rental income on a straight-line basis was less than 10% of consolidated annualized rental income for all portfolio properties for the period specified.
The Company did not own properties in any other countries and states that in total represented 10.0% or greater of consolidated annualized rental income on a straight-line basis as of September 30, 2015 and 2014.

11
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

Note 4 — Revolving Credit Facility
On July 25, 2013, the Company, through the OP, entered into a credit facility (the "Credit Facility") that provided for aggregate revolving loan borrowings of up to $50.0 million (subject to borrowing base availability). The Credit Facility has been amended at various times, and maximum borrowings have increased to $740.0 million, with the most recent increase being on August 24, 2015. The Company had $735.4 million and $659.3 million outstanding under the Credit Facility as of September 30, 2015 and December 31, 2014, respectively.
Availability of borrowings is based on a pool of eligible unencumbered real estate assets. The initial maturity date of the facility is July 25, 2016 with two one-year extension options, subject to certain conditions.
The Company has the option, based upon its consolidated leverage ratio, to have draws under the facility priced at either the Alternate Base Rate (as described below) plus 0.60% to 1.20% or at adjusted LIBOR plus 1.60% to 2.20%. The Alternate Base Rate is defined in the Credit Facility as a rate per annum equal to the greatest of (a) the fluctuating annual rate of interest announced from time to time by the lender as its “prime rate” in effect on such day, (b) the federal funds effective rate in effect on such day plus 0.5% of 1% and (c) the Adjusted LIBOR for a one-month interest period on such day plus 1%. Adjusted LIBOR refers to LIBOR multiplied by the statutory reserve rate, as determined by the Federal Reserve System of the United States. The Credit Facility agreement requires the Company to pay an unused fee per annum of 0.25% if the unused balance of the Credit Facility exceeds or is equal to 50% of the available facility or a fee per annum of 0.15% if the unused balance of the Credit Facility is less than 50% of the available facility. As of September 30, 2015, the Credit Facility reflected variable-rate borrowings with a carrying value of $735.4 million and a fair value of $747.2 million, and a weighted average effective interest rate of 2.1% after considering interest rate swaps in place. The unused borrowing capacity under the Credit Facility as of September 30, 2015 and December 31, 2014 was $4.6 million and $20.7 million, respectively.
The Credit Facility agreement provides for quarterly interest payments for each Alternate Base Rate loan and periodic payments for each Adjusted LIBOR Rate loan, based upon the applicable LIBOR loan period, with all principal outstanding being due on the maturity date in July 2016. The Credit Facility agreement also contains two one-year extension options, subject to certain conditions. The Credit Facility agreement may be prepaid at any time, in whole or in part, without premium or penalty, subject to prior notice to the lender. In the event of a default, the lender has 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 requires the Company to meet certain financial covenants, including the maintenance of certain financial ratios (such as specified debt to equity and debt service coverage ratios) as well as the maintenance of a minimum net worth. As of September 30, 2015, the Company was in compliance with the financial covenants under the Credit Facility.
Foreign currency draws under the Credit Facility are designated as net investment hedges of the Company's investments during the periods reflected in the statement of operations (See Note 8 — Derivatives and Hedging Activities).

12
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

Note 5 — Mortgage Notes Payable
Mortgage notes payable as of September 30, 2015 and December 31, 2014 consisted of the following:
 
 
 
 
Encumbered Properties
 
Outstanding Loan Amount (1)
 
Effective Interest Rate
 
Interest Rate
 
 
Country
 
Portfolio
 
 
September 30, 2015
 
December 31, 2014
 
 
 
Maturity
 
 
 
 
 
 
(In thousands)
 
(In thousands)
 
 
 
 
 
 
Finland:
 
Finnair
 
4
 
$
31,934

 
$
—

 
2.2%
(2) 
Fixed
 
Sep. 2020
 
 
Tokmanni
 
1
 
32,579

 
—

 
2.4%
(2) 
Fixed
 
Oct. 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Germany:
 
Rheinmetall
 
1
 
11,919

 
12,884

 
2.6%
(2) 
Fixed
 
Jan. 2019
 
 
OBI DIY
 
1
 
5,060

 
5,470

 
2.4%
 
Fixed
 
Jan. 2019
 
 
RWE AG
 
3
 
70,275

 
75,969

 
1.6%
(2) 
Fixed
 
Oct. 2019
 
 
Rexam
 
1
 
5,914

 
6,394

 
1.8%
(2) 
Fixed
 
Oct. 2019
 
 
Metro Tonic
 
1
 
29,797

 
32,211

 
1.7%
(2) 
Fixed
 
Dec. 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United Kingdom:
 
McDonald's
 
1
 
1,153

 
1,180

 
4.1%
(2) 
Fixed
 
Oct. 2017
 
 
Wickes Building Supplies I
 
1
 
2,952

 
3,024

 
3.7%
(2) 
Fixed
 
May 2018
 
 
Everything Everywhere
 
1
 
6,066

 
6,213

 
4.0%
(2) 
Fixed
 
Jun. 2018
 
 
Thames Water
 
1
 
9,100

 
9,319

 
4.1%
(2) 
Fixed
 
Jul. 2018
 
 
Wickes Building Supplies II
 
1
 
2,502

 
2,563

 
4.2%
(2) 
Fixed
 
Jul. 2018
 
 
Northern Rock
 
2
 
7,962

 
8,155

 
4.5%
(2) 
Fixed
 
Sep. 2018
 
 
Wickes Building Supplies III
 
1
 
2,882

 
2,951

 
4.4%
(2) 
Fixed
 
Nov. 2018
 
 
Provident Financial
 
1
 
19,337

 
19,804

 
4.1%
(2) 
Fixed
 
Feb. 2019
 
 
Crown Crest
 
1
 
29,195

 
29,901

 
4.3%
(2) 
Fixed
 
Feb. 2019
 
 
Aviva
 
1
 
23,811

 
24,387

 
3.8%
(2) 
Fixed
 
Mar. 2019
 
 
Bradford & Bingley
 
1
 
11,465

 
—

 
3.5%
(2) 
Fixed
 
May 2020
 
 
Intier Automotive Interiors
 
1
 
7,166

 
—

 
3.5%
(2) 
Fixed
 
May 2020
 
 
Capgemini
 
1
 
8,341

 
—

 
3.2%
(2) 
Fixed
 
Jun. 2020
 
 
Fujitisu
 
3
 
37,581

 
—

 
3.2%
(2) 
Fixed
 
Jun. 2020
 
 
Amcor Packaging
 
7
 
4,741

 
—

 
3.6%
(2) 
Fixed
 
Jul. 2020
 
 
Fife Council
 
1
 
2,781

 
—

 
3.6%
(2) 
Fixed
 
Jul. 2020
 
 
Malthrust
 
3
 
4,853

 
—

 
3.6%
(2) 
Fixed
 
Jul. 2020
 
 
Talk Talk
 
1
 
5,801

 
—

 
3.6%
(2) 
Fixed
 
Jul. 2020
 
 
HBOS
 
3
 
8,174

 
—

 
3.6%
(2) 
Fixed
 
Jul. 2020
 
 
DFS Trading
 
5
 
15,377

 
—

 
3.4%
(2) 
Fixed
 
Aug. 2020
 
 
DFS Trading
 
2
 
3,600

 
—

 
3.4%
(2) 
Fixed
 
Aug. 2020
 
 
HP Enterprise Services
 
1
 
14,085

 
—

 
3.4%
(2) 
Fixed
 
Aug. 2020
United States:
 
Quest Diagnostics
 
1
 
52,800

 
—

 
2.0%
(3) 
Variable
 
Sep. 2018
 
 
Western Digital
 
1
 
18,055

 
18,269

 
5.3%
 
Fixed
 
Jul. 2021
Puerto Rico:
 
Encanto Restaurants
 
18
 
22,169

 
22,492

 
6.3%
 
Fixed
 
Jun. 2017
 
 
Total
 
72
 
$
509,427

 
$
281,186

 
3.1%
 
 
 
 
___________________________________________________________
(1) 
Movement in principal balances are related to changes in exchange rates.
(2) 
Fixed as a result of an interest rate swap agreement.
(3) 
The interest rate is 2.0% plus 1-month LIBOR.

13
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

During the three months ended September 30, 2015, the Company mortgaged 23 U.K. properties for which the Company received net proceeds of $59.4 million (£39.2 million based upon an exchange rate of $1.52 to £1.00 as of September 30, 2015), one Finnish property for which the Company received net proceeds of $32.6 million (€29.0 million based upon an exchange rate of $1.12 to €1.00 as of September 30, 2015) and one U.S. property for which the Company received net proceeds of $52.8 million.
The total carrying value of unencumbered assets as of September 30, 2015 was $1.4 billion.
The following table presents future scheduled aggregate principal payments on the mortgage notes payable over the next five calendar years and thereafter as of September 30, 2015:
(In thousands)
 
Future Principal Payments
2015 (remainder)
 
$
186

2016
 
758

2017
 
23,071

2018
 
84,601

2019
 
195,661

2020
 
188,850

Thereafter
 
16,300

 
 
$
509,427

The Company's mortgage notes payable agreements require compliance with certain property-level financial covenants including debt service coverage ratios. As of September 30, 2015 and December 31, 2014, the Company was in compliance with financial covenants under its mortgage notes payable agreements.
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.
Level 3 — Unobservable inputs that reflect the entity's own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between levels will be rare.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with those derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of September 30, 2015 and December 31, 2014, 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.

14
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

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.
Investment Securities
On September 3, 2015, the Company redeemed its investment in the AR Capital Global Real Estate Income Fund, a real estate income fund traded in an active market with an aggregate fair value of $0.5 million as of the redemption date. The real estate income fund is managed by an affiliate of the Sponsor (see Note 11 — Related Party Transactions). The redemption resulted in a recognized loss of approximately $0.1 million for the three and nine months ended September 30, 2015.
As of December 31, 2014, the investment had an aggregate fair value of $0.5 million and an unrealized loss of $24,000. Unrealized losses were considered temporary and therefore no impairment was recorded for the year ended December 31, 2014.
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, 2015 and December 31, 2014, 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, 2015
 
 
 
 
 
 
 
 
Foreign currency swaps, net (GBP & EUR)
 
$
—

 
$
3,192

 
$
—

 
$
3,192

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

 
$
2,254

 
$
—

 
$
2,254

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

 
$
(7,251
)
 
$
—

 
$
(7,251
)
Listing Note (see Note 7)
 
$
—

 
$
—

 
$
(3,380
)
 
$
(3,380
)
December 31, 2014
 
 
 
 
 
 
 
 
Foreign currency swaps, net (GBP & EUR)
 
$
—

 
$
11,289

 
$
—

 
$
11,289

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

 
$
1,884

 
$
—

 
$
1,884

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

 
$
(5,650
)
 
$
—

 
$
(5,650
)
Investment securities
 
$
490

 
$
—

 
$
—

 
$
490

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, 2015.
Level 3 Valuations
The following is a reconciliation of the beginning and ending balance for the changes in the instrument with Level 3 inputs in the fair value hierarchy for the nine months ended September 30, 2015:
(In thousands)
 
Listing Note
Beginning balance as of December 31, 2014
 
$
—

   Fair value at issuance
 
8,670

   Fair value adjustment
 
(5,290
)
Ending balance as of September 30, 2015
 
$
3,380






15
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

The following table provides quantitative information about the significant Level 3 input used (in thousands):
Financial Instrument
 
Fair Value at September 30, 2015
 
Principal Valuation Technique
 
Unobservable Inputs
 
Input Value
Listing Note
 
$
3,380

 
Monte Carlo Simulation
 
Expected volatility
 
23.0%
The following discussion provides a description of the impact on a fair value measurement of a change in each unobservable input in isolation. For the relationship described below, the inverse relationship would also generally apply.
Expected volatility is a measure of the variability in possible returns for an instrument, parameter or market index given how much the particular instrument, parameter or index changes in value over time. Generally, the higher the expected volatility of the underlying, 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, due to/from affiliates, accounts payable and dividends payable approximates their carrying value on the consolidated balance sheets due to their short-term nature. The fair values of the Company's remaining financial instruments that are not reported at fair value on the consolidated balance sheets are reported below.
 
 
 
 
Carrying Amount(1)
 
Fair Value
 
Carrying Amount(2)
 
Fair Value
(In thousands)
 
Level
 
September 30,
2015
 
September 30,
2015
 
December 31,
2014
 
December 31,
2014
Mortgage notes payable
 
3
 
$
510,225

 
$
508,153

 
$
282,351

 
$
280,967

Credit Facility (3)
 
3
 
$
735,357

 
$
747,223

 
$
659,268

 
$
669,824

__________________________________________________________
(1)
Carrying value includes $509.4 million mortgage notes payable and $0.8 million mortgage premiums, net as of September 30, 2015.
(2)
Carrying value includes $281.2 million mortgage notes payable and $1.2 million mortgage premiums, net as of December 31, 2014.
(3)
As more fully described in Note 8, certain of the Credit Facility advances are denominated in Euro and British Pounds. All of the foreign currency advances as of September 30, 2015 were designated as net investment hedges and measured at fair value through other comprehensive income as part of the cumulative translation adjustment. As of December 31, 2014, the foreign currency advances were not designated as net investment hedges and thus any foreign currency transaction gains (losses) were reflected in earnings.
The fair value of the mortgage notes payable and Credit Facility is estimated using a discounted cash flow analysis, based on the Advisor's experience with similar types of borrowing arrangements.
Note 7 — Listing Note
In connection with the Listing, the Company, as the general partner of the OP, caused the OP, subject to the terms of the Second Amended and Restated Limited Partnership Agreement, to issue a note (the "Listing Note") to the Special Limited Partner, to evidence the OP’s obligation to distribute to the Special Limited Partner an aggregate amount (the "Listing Amount") equal to 15.0% of the difference (to the extent the result is a positive number) between:
•
the sum of (i) the "market value" (as defined in the Listing Note) of all of the Company’s outstanding shares of Common Stock plus (ii) the sum of all distributions or dividends (from any source) paid by the Company to its stockholders prior to the Listing; and
•
the sum of (i) the total amount raised in the Company’s IPO and its DRIP prior to the Listing ("Gross Proceeds") plus (ii) the total amount of cash that, if distributed to those stockholders who purchased shares in the IPO and under the DRIP, would have provided those stockholders a 6.0% cumulative, non-compounded, pre-tax annual return (based on a 365-day year) on the Gross Proceeds.
The market value used to calculate the Listing Amount will not be determinable until the end of a measurement period of 30 consecutive trading days, commencing on the 180th calendar day following the Listing, unless another liquidity event, such as a merger, occurs prior to the end of the measurement period. If another liquidity event occurs prior to the end of the measurement period, the Listing Note provides for appropriate adjustment to the calculation of the Listing Amount. The Special Limited Partner will have the right to receive distributions of Net Sales Proceeds, as defined in the Listing Note, until the Listing Note is paid in

16
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

full; provided that, the Special Limited Partner has the right, but not the obligation, to convert the entire special limited partner interest into OP Units. Those OP Units would be convertible for the cash value of a corresponding number of shares of Common Stock, at the Company's option, or a corresponding number of shares of Common Stock in accordance with the terms contained in the Second Amended and Restated Limited Partnership Agreement.
Until the amount of the Listing Note can be determined, the Listing Note is considered a liability which is marked to fair value at each reporting date, with changes in the fair value recorded in the consolidated statements of operations and comprehensive income (loss). The Listing Note fair value at issuance and as of September 30, 2015 was determined using a Monte Carlo simulation, which uses a combination of observable and unobservable inputs. As of September 30, 2015, the Listing Note had a fair value of $3.4 million. The final value of the Listing Note could differ materially from the initial or current fair value at September 30, 2015 (see Note 6 — Fair Value of Financial Instruments).
Note 8 — Derivatives and Hedging Activities
Risk Management Objective
The Company uses derivative financial instruments, including interest rate swaps, caps, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings. Certain foreign investments expose the Company to fluctuations 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 U.S. dollar ("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 the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, the Company only enters into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which the Company and its affiliates may also have other financial relationships. The Company does not anticipate that any such counterparties will fail to meet their obligations.
The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the Balance Sheet as of September 30, 2015 and December 31, 2014:
(In thousands)
 
Balance Sheet Location
 
September 30, 2015
 
December 31, 2014
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Interest rate swaps (GBP)
 
Derivatives assets, at fair value
 
$
4

 
$
18

Interest rate swaps (GBP)
 
Derivatives liabilities, at fair value
 
(5,231
)
 
(4,353
)
Interest rate swaps (EUR)
 
Derivatives liabilities, at fair value
 
(2,024
)
 
(1,315
)
Cross currency swaps (GBP)
 
Derivatives assets, at fair value
 
—

 
4,517

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

 
7,219

Cross currency swaps (GBP)
 
Derivatives liabilities, at fair value
 
—

 
(447
)
Total
 
 
 
$
(7,251
)
 
$
5,639

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Forwards (EUR-USD)
 
Derivatives assets, at fair value
 
$
1,182

 
$
736

Forwards (GBP-USD)
 
Derivatives assets, at fair value
 
1,072

 
1,148

Cross currency swaps (GBP)
 
Derivatives assets, at fair value
 
348

 
—

Cross currency swaps (EUR)
 
Derivatives assets, at fair value
 
2,845

 
—

Cross currency swaps (GBP)
 
Derivatives liabilities, at fair value
 
(1
)
 
—

Total
 
 
 
$
5,446

 
$
1,884


17
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company's derivatives as of September 30, 2015 and December 31, 2014.
 
 
 
 
 
 
 
 
 
 
Gross Amounts Not Offset on the Balance Sheet
 
 

(In thousands)
 
Gross Amounts of Recognized Assets
 
Gross Amounts of Recognized (Liabilities)
 
Gross Amounts Offset on the Balance Sheet
 
Net Amounts of Assets (Liabilities) presented on the Balance Sheet
 
Financial Instruments
 
Cash Collateral Received (Posted)
 
Net Amount
September 30, 2015
 
$
5,451

 
$
(7,256
)
 
$
—

 
$
(1,805
)
 
$
—

 
$
—

 
$
(1,805
)
December 31, 2014
 
$
13,638

 
$
(6,115
)
 
$
—

 
$
7,523

 
$
—

 
$
—

 
$
7,523

In addition to the above derivative arrangements, the Company also uses non-derivative financial instruments to hedge its exposure to foreign currency exchange rate fluctuations as part of its risk management program, including foreign denominated debt issued and outstanding with third parties to protect the value of its net investments in foreign subsidiaries against exchange rate fluctuations. The Company draws foreign currency advances under its Credit Facility to fund certain investments in the respective local currency which creates a natural hedge against the original equity invested in the real estate investments, removing the need for the final cross currency swaps (See Note 4 — Revolving Credit Facility). As further discussed below, in conjunction with the restructuring of the cross currency swaps on February 4, 2015, foreign currency advances of €110.5 million and £68.5 million were drawn under the Company’s Credit Facility. The Company separately designated each foreign currency draw as a net investment hedge under ASC 815. Effective May 17, 2015, the Company modified the hedging relationship and designated all current and future foreign currency draws as net investment hedges.
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.
As of September 30, 2015 and December 31, 2014, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
 
 
September 30, 2015
 
December 31, 2014
Derivatives
 
Number of
Instruments
 
Notional Amount
 
Number of
Instruments
 
Notional Amount
 
 
 
 
(In thousands)
 
 
 
(In thousands)
Interest rate swaps (GBP)
 
27
 
$
486,421

 
20
 
$
371,225

Interest rate swaps (EUR)
 
15
 
326,301

 
10
 
282,999

Total
 
42
 
$
812,722

 
30
 
$
654,224

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction impacts earnings. During 2015, such derivatives were used to hedge the variable cash flows associated with variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and nine months ended September 30, 2015, the Company recorded losses of $23,000 and $89,000 of ineffectiveness in earnings, respectively. During the three and nine months ended September 30, 2014 there were no losses due to ineffectiveness.
During the three months ended September 30, 2015, the Company terminated one of its interest rate swaps and accelerated the reclassification of amounts in other comprehensive income (loss) to net income (loss) as the probability of the hedged transaction occurring had been eliminated. The accelerated amounts were a loss of $38,000.
Amounts reported in accumulated other comprehensive income (loss) 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 $4.5 million will be reclassified from other comprehensive income (loss) as an increase to interest expense.

18
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the three and nine months ended September 30, 2015 and 2014.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2015
 
2014
 
2015
 
2014
Amount of gain (loss) recognized in accumulated other comprehensive income from derivatives (effective portion)
 
$
(5,045
)
 
$
5,735

 
$
8,119

 
$
(84
)
Amount of loss reclassified from accumulated other comprehensive income into income as interest expense (effective portion)
 
$
(1,170
)
 
$
(595
)
 
$
(567
)
 
$
(1,197
)
Amount of loss recognized in income on derivative instruments (ineffective portion, reclassifications of missed forecasted transactions and amounts excluded from effectiveness testing)
 
$
(23
)
 
$
—

 
$
(89
)
 
$
—

Foreign Currency Swaps Designated as Net Investment Hedges
The Company is exposed to fluctuations in foreign exchange rates on property investments in foreign countries which pay rental income, incur property related expenses and hold debt instruments in currencies other than its functional currency, the USD. The Company uses foreign currency derivatives including cross currency swaps to hedge its exposure to changes in foreign exchange rates on certain of its foreign investments. Cross currency swaps involve fixing the applicable exchange rate for delivery of a specified amount of foreign currency on specified dates.
On February 4, 2015, the Company restructured its cross currency swaps and replaced its initial US dollar equity funding in certain foreign real estate investments with foreign currency debt. As part of the restructuring, foreign currency advances of €110.5 million and £68.5 million were drawn under the Company’s Credit Facility which created a natural hedge against the original equity invested in the real estate investments, thus removing the need for the final equity notional component of the cross currency swaps. The cross currency swaps had been designated as net investment hedges through the date of the restructure. For derivatives designated as net investment hedges, the effective portion of changes in the fair value of the derivatives are reported in accumulated other comprehensive income (loss) (outside of earnings) as part of the cumulative translation adjustment. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. Amounts are reclassified out of accumulated other comprehensive income (loss) into earnings when the hedged net investment is either sold or substantially liquidated. The restructuring and settlement of the cross currency swaps resulted in a gain of approximately $19.0 million, with $10.1 million in proceeds received and $8.9 million retained by the bank as a reduction of outstanding Credit Facility balance. The gain will remain in the cumulative translation adjustment (CTA) until such time as the net investments are sold or substantially liquidated in accordance with ASC 830.
As of September 30, 2015, the Company's cross currency swaps were not designated as net investment hedges. The Company had the following outstanding cross currency swaps that were used to hedge its net investments in foreign operations at December 31, 2014:
 
 
December 31, 2014
Derivatives
 
Number of
Instruments
 
Notional Amount
 
 
 
 
(In thousands)
Cross currency swaps (GBP - USD) (1)
 
5
 
$
107,623

Cross currency swaps (EUR - USD) (1)
 
10
 
134,285

Total
 
15
 
$
241,908

____________________________________
(1) Payments and obligations pursuant to these foreign currency swap agreements were guaranteed by the Company, ARC Global Holdco, LLC and the OP.

19
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

Foreign Denominated Debt Designated as Net Investment Hedges
Effective May 17, 2015, all foreign currency draws under the Credit Facility were designated as net investment hedges. As such, the effective portion of changes in value due to currency fluctuations are reported in accumulated other comprehensive income (loss) (outside of earnings) as part of the cumulative translation adjustment. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. Amounts are reclassified out of accumulated other comprehensive income (loss) into earnings when the hedged net investment is either sold or substantially liquidated.
As of September 30, 2015, total foreign currency advances under the Credit Facility were approximately $567.4 million, which reflects advances of £160.2 million ($243.0 million based upon an exchange rate of £1.00 to $1.52, as of September 30, 2015) and advances of €288.4 million ($324.3 million based upon an exchange rate of €1.00 to $1.12, as of September 30, 2015). The Company recorded gains of $1.5 million and $2.4 million for the three and nine months ended September 30, 2015, respectively, due to the ineffectiveness resulting from the over-hedged position of the foreign currency advances over the related net investments.
Prior to May 16, 2015, foreign currency advances which comprised of $92.1 million of GBP draws (based upon an exchange rate of $1.58 to £1.00, as of May 16, 2015) and $126.0 million of EUR draws (based upon an exchange rate of $1.14 to €1.00, as of May 16, 2015) were not designated as net investment hedges and, accordingly, the changes in value through May 16, 2015 due to currency fluctuations were reflected in earnings. As a result, the Company recorded remeasurement losses on the foreign denominated draws of $2.9 million for the nine months ended September 30, 2015. As all foreign draws are now designated as net investment hedges there were no additional remeasurement gains (losses) for the three months ended September 30, 2015.
Non-designated Derivatives
The Company is exposed to fluctuations in the exchange rates of its functional currency, the USD, against the Pound Sterling ("GBP") and the Euro ("EUR"). The Company uses foreign currency derivatives including 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 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). During the third quarter 2015, the Company identified errors in accounting for the cross currency derivatives that were no longer designated as hedges subsequent to their restructuring on February 4, 2015 which resulted in the Company recording additional gain on derivative investments of $1.1 million during the three and nine months ended September 30, 2015 (see Note 2 — Summary of Significant Accounting Policies). The Company recorded total gains of $2.3 million and $2.8 million on the non-designated hedges for the three and nine months ended September 30, 2015, respectively. For the three and nine months ended September 30, 2014 the Company recorded gains on the non-designated hedges of $0.8 million and $0.6 million, respectively.
As of September 30, 2015 and December 31, 2014, the Company had the following outstanding derivatives that were not designated as hedges under qualifying hedging relationships.
 
 
September 30, 2015
 
December 31, 2014
Derivatives
 
Number of
Instruments
 
Notional Amount
 
Number of
Instruments
 
Notional Amount
 
 
 
 
(In thousands)
 
 
 
(In thousands)
Forwards (GBP - USD)
 
50
 
$
8,387

 
80
 
$
13,664

Forwards (EUR - USD)
 
19
 
7,779

 
31
 
12,699

Cross currency swaps (GBP - USD)
 
9
 
84,868

 
—
 
—

Cross currency swaps (EUR - USD)
 
5
 
102,932

 
—
 
—

Total
 
83
 
$
203,966

 
111
 
$
26,363



20
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

Credit-risk-related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.
As of September 30, 2015, the fair value of derivatives in a net liability position including accrued interest but excluding any adjustment for nonperformance risk related to these agreements was $8.3 million. As of September 30, 2015, the Company has not posted any collateral related to these agreements and was not in breach of any agreement provisions. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at their aggregate termination value.
Note 9 — Common Stock
The Company listed its Common Stock on the NYSE under the symbol "GNL" on June 2, 2015. On the same day, the Company commenced the Tender Offer which expired on June 29, 2015. On July 6, 2015, the Company accepted and repurchased approximately 11.9 million shares of its Common Stock under the terms of the Tender Offer at a price of $10.50 per share, for an aggregate amount of $125.0 million, excluding fees and expenses related to the Tender Offer and including fractional shares repurchased thereafter. The Company funded the Tender Offer using cash on hand and funds available under its Credit Facility.
As of September 30, 2015 and December 31, 2014, the Company had 168,936,633 and 177,933,175 shares of Common Stock outstanding, respectively, including shares issued under the dividend reinvestment plan (the "DRIP"), but not including unvested restricted shares, the OP Units issued to limited partners other than the Company or long-term incentive units issued in accordance with the OPP which are currently, or may be in the future, convertible into shares of Common Stock.
Monthly Dividends and Change to Payment Dates
Historically, the Company has calculated its monthly dividend based upon daily record and dividend declaration dates so that its stockholders would be entitled to be paid dividends beginning with the month in which their shares were purchased. Following the Listing, the Company pays dividends on the 15th day of each month at a rate of $0.059166667 per share to stockholders of record as of close of business on the 8th day of such month.
On April 7, 2015, the Company suspended the DRIP. The final issuance of shares of Common Stock pursuant to the DRIP occurred in connection with the Company’s April dividend which was paid on May 1, 2015.
Share Repurchase Program
On April 7, 2015, the Company's board of directors approved the termination of the Company’s Share Repurchase Program (“SRP”). The Company processed all of the requests received under the SRP in the first quarter of 2015 and will not process further requests.
The following table reflects the cumulative number of common shares repurchased as of December 31, 2014 and as of and for the nine months ended September 30, 2015:
 
 
Number of Shares Repurchased
 
Weighted Average Price per Share
Cumulative repurchases as of December 31, 2014
 
99,969

 
$
9.91

Redemptions
 
135,123

 
9.78

Shares repurchased under Tender Offer
 
11,904,762

 
10.50

Cumulative repurchases as of September 30, 2015
 
12,139,854

 
$
10.49


21
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

Note 10 — Commitments and Contingencies
Operating Ground Leases
Certain properties acquired are subject to ground leases, which are accounted for as operating leases. The ground leases have varying ending dates, renewal options, and rental rate escalations, with the latest leases extending to April 2105. Future minimum rental payments to be made by the Company under these noncancelable ground leases, excluding increases resulting from increases in the consumer price index, are as follows:
(In thousands)
 
Future Ground Lease Payments
2015 (remainder)
 
$
336

2016
 
1,354

2017
 
1,382

2018
 
1,408

2019
 
1,436

2020
 
1,464

Thereafter
 
67,621

Total
 
$
75,001

The Company incurred rent expense on ground leases of $26,000 and $0.1 million during the three and nine months ended September 30, 2015, respectively. There was no ground rent expense during the three and nine months ended September 30, 2014.
Litigation and Regulatory Matters
In the ordinary course of business, the Company may become subject to litigation, claims and regulatory matters. There are no material legal or regulatory proceedings pending or known to be contemplated against the Company.
Environmental Matters
In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. As of September 30, 2015, the Company had not been notified by any governmental authority of any non-compliance, liability or other claim, and is not aware of any other environmental condition that it believes will have a material adverse effect on the results of operations.
Note 11 — Related Party Transactions
As of September 30, 2015 and December 31, 2014, the Sponsor, the Special Limited Partner and a subsidiary of the Service Provider owned, in the aggregate, 244,444 shares of the Company's outstanding Common Stock. The Advisor, the Service Provider, and their affiliates may incur costs and fees on behalf of the Company. As of September 30, 2015 and December 31, 2014, the Company had $0.1 million and $0.5 million of receivable from affiliated entities and $0.9 million and $0.4 million of payable to their affiliates, respectively.
The Company is the sole general partner of the OP and holds the majority of OP Units. The Special Limited Partner, a limited partner, held 22 OP Units as of September 30, 2015, which represented a nominal percentage of the aggregate OP ownership.
On June 2, 2015, the Advisor exchanged 1,726,323 previously-issued Class B units for 1,726,323 OP Units pursuant to the OP Agreement. These OP Units are exchangeable for shares of Common Stock of the Company on a one-for-one basis, or the cash value of shares of Common Stock (at the option of the Company), 12 months from the Listing Date subject to the terms of the limited partnership agreement of the OP. The Advisor and the OP also entered into a Contribution and Exchange Agreement pursuant to which the Advisor contributed $0.8 million in cash to the OP in exchange for 83,333 OP Units. As of September 30, 2015, the Advisor held a total of 1,461,753 OP Units, the Service Provider held a total of 347,903 OP Units, and the Special Limited Partner held 22 OP Units. The Company paid $0.3 million of OP Unit distributions during the three and nine months ended September 30, 2015.
A holder of OP Units, other than the Company, has the right to convert OP Units for a corresponding number of shares of the Company's Common Stock, at the Company's option, or the cash value equivalent of those shares in accordance with the limited partnership agreement of the OP. The remaining rights of the holders of OP Units are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP's assets.

22
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

On September 30, 2015, the Company fully redeemed its investment of $0.5 million in a real estate income fund managed by an affiliate of the Sponsor (see Note 6 — Fair Value of Financial Instruments).
Fees Paid in Connection with the IPO
The Legacy Dealer Manager was paid fees and compensation in connection with the sale of the Company's Common Stock in the IPO which was completed on June 30, 2014. Specifically, the Legacy Dealer Manager was paid selling commissions of up to 7.0% of the per share purchase price of offering proceeds before reallowance of commissions earned by participating broker-dealers. In addition, the Legacy Dealer Manager was paid 3.0% of the per share purchase price from the sale of the Company's shares, a portion of which was reallowed to participating broker-dealers.
The following table details total selling commissions and dealer manager fees incurred from and payable to the Legacy Dealer Manager related to the sale of Common Stock as of and for the periods presented:
 
 
 
 
 
 
 
 
 
 
Payable as of
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
September 30,
 
December 31,
(In thousands)
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Total commissions and fees to Legacy Dealer Manager
 
$
—

 
$
1,821

 
$
(8
)
 
$
148,377

 
$
—

 
$
13

The Advisor and its affiliates were paid compensation and received reimbursement for services relating to the IPO, including transfer agent services provided by an affiliate of the Legacy Dealer Manager. All offering costs incurred by the Company or the Advisor and its affiliated entities on behalf of the Company have been charged to additional paid-in capital on the accompanying consolidated balance sheets. The following table details fees and offering cost reimbursements incurred and payable to the Advisor and the Legacy Dealer Manager related to the sale of Common Stock as of and for the periods presented:
 
 
 
 
 
 
 
 
Payable as of
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
September 30,
 
December 31,
(In thousands)
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Fees and expense reimbursements to the Advisor and Legacy Dealer Manager
 
$
—

 
$
5,889

 
$
—

 
$
17,635

 
$
—

 
$
61

The Company was responsible for paying offering and related costs from the IPO, excluding commissions and dealer manager fees, up to a maximum of 1.5% of gross proceeds received from its ongoing offering of Common Stock, measured at the end of the offering. Offering costs in excess of the 1.5% cap as of the end of the offering were the Advisor's responsibility. The Advisor reimbursed the Company $0.5 million of offering costs. Offering and related costs, excluding commissions and dealer manager fees, did not exceed 1.5% of gross proceeds received from the IPO.
After the escrow break, the Advisor elected to cap cumulative offering costs incurred by the Company, net of unpaid amounts, to 11.5% of gross Common Stock proceeds during the offering period. As of September 30, 2015, cumulative offering costs were $188.1 million. Cumulative offering costs of the IPO net of unpaid amounts did not exceed 11.5%.
Fees Paid in Connection With the Operations of the Company
Until June 2, 2015, the Advisor was paid an acquisition fee of 1.0% of the contract purchase price of each acquired property and 1.0% of the amount advanced for a loan or other investment. Solely with respect to investment activities in Europe, the Service Provider was paid 50% of the acquisition fees and the Advisor was paid the remaining 50%, as set forth in the service provider agreement. The Advisor was also reimbursed for insourced expenses incurred in the process of acquiring properties, which were limited to 0.5% of the contract purchase price and 0.5% of the amount advanced for a loan or other investment. Additionally, the Company paid third party acquisition expenses.

23
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

The Company's Advisor provides services in connection with the origination or refinancing of any debt that the Company obtained and used to acquire properties or to make other permitted investments, or that was assumed, directly or indirectly, in connection with the acquisition of properties. Until June 2, 2015, the Company paid the Advisor a financing coordination fee equal to 0.75% of the amount available and/or outstanding under such financing, subject to certain limitations. Solely with respect to the Company's investment activities in Europe, the Service Provider was paid 50% of the financing coordination fees and the Advisor received the remaining 50%.
Until the Listing, the Company compensated the Advisor for its asset management services in an amount equal to 0.75% per annum of the total of: the cost of the Company's assets (cost includes the purchase price, acquisition expenses, capital expenditures and other customarily capitalized costs, but excluding acquisition fees) plus costs and expenses incurred by the Advisor in providing asset management services, less the excess, if any, of dividends over FFO plus acquisition fees expenses and restricted share grant amortization. Until April 1, 2015, as compensation for this arrangement, the Company caused the OP to issue (subject to periodic approval by the board of directors) to the Advisor and Service Provider performance-based restricted partnership units of the OP designated as "Class B units," which were intended to be profits interests and would vest, and no longer be subject to forfeiture, at such time as: (x) the value of the OP's assets plus all dividends made equaled or exceeded the total amount of capital contributed by investors plus a 6.0% cumulative, pre-tax, non-compounded annual return thereon (the "economic hurdle"); (y) any one of the following had occurred: (1) the termination of the advisory agreement by an affirmative vote of a majority of the Company's independent directors without cause; (2) a listing; or (3) another liquidity event; and (z) the Advisor is still providing advisory services to the Company (the "performance condition"). The value of issued Class B units was determined and expensed when the Company deemed the achievement of the performance condition was probable, which occurred as of the Listing. As of June 2, 2015, in aggregate, the board of directors had approved the issuance of 1,726,323 Class B units to the Advisor and the Service Provider in connection with this arrangement. The Advisor and the Service Provider received distributions on unvested Class B units equal to the dividend rate received on the Company's Common Stock. Such distributions on issued Class B units in the amount of $0.3 million were included in general and administrative expenses in the consolidated statements of operations and comprehensive income (loss) for the nine months ended September 30, 2015. Subsequent to the Listing, the Company recorded OP Unit distributions which are included in consolidated statement of changes in stockholders' equity. The Company has recorded distributions on issued Class B units in the amounts of $0.2 million and $0.3 million for the three and nine months ended September 30, 2014, respectively. From April 1, 2015 to the Listing Date, the Advisor was paid for its asset management services in cash.
The performance condition related to these Class B units was satisfied upon completion of the Listing, and the Class B units vested at a cost of $14.5 million on June 2, 2015. Concurrently, the Class B units were converted to OP Units on a one-to-one basis. The vested value was calculated based, in part, on the closing price of Company's Common Stock on June 2, 2015 less an estimated discount for the one year lock-out period of transferability or liquidity of the OP Units.
On the Listing Date, the Company entered into the Fourth Amended and Restated Advisory Agreement (the “Amended Advisory Agreement”) by and among the Company, the OP and the Advisor, which, among other things, eliminated the acquisition fee and finance coordination fee payable to the Advisor under the original Advisory Agreement, as amended, except for fees with respect to properties under contract, letter of intent or under negotiation as of the Listing Date. Under the terms of the Amended Advisory Agreement, the Company pays the Advisor:
(i)
a base fee of $18.0 million per annum payable in cash monthly in advance (“Minimum Base Management Fee”);
(ii)
plus a variable fee, payable monthly in advance in cash, equal to 1.25% of the cumulative net proceeds realized by the Company from the issuance of any common equity, including any common equity issued in exchange for or conversion of preferred stock or exchangeable notes, as well as, from any other issuances of common, preferred, or other forms of equity of the Company, including units of any operating partnership (“Variable Base Management Fee”); and
(iii)
an incentive fee (“Incentive Compensation”), 50% payable in cash and 50% payable in shares of the Company’s Common Stock (which shares are subject to certain lock up restrictions), equal to: (a) 15% of the Company’s Core AFFO (as defined in the Amended Advisory Agreement) per weighted average share outstanding for the applicable period (“Core AFFO Per Share”)(1) in excess of an incentive hurdle based on an annualized Core AFFO Per Share of $0.73, plus (b) 10% of the Core AFFO Per Share in excess of an incentive hurdle of an annualized Core AFFO Per Share of $0.95. The $0.73 and $0.95 incentive hurdles are subject to annual increases of 1% to 3%. The Base Management Fee and the Incentive Compensation are each subject to an annual adjustment.
The annual aggregate amount of the Minimum Base Management Fee and Variable Base Management Fee (collectively, the “Base Management Fee”) that may be paid under the Advisory Agreement will also be subject to varying caps based on assets under management (“AUM”)(2), as defined in the Advisory Agreement.

24
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

_______________________________
(1) For purposes of the Amended Advisory Agreement, Core AFFO per share means (i) Net income adjusted for the following items (to the extent they are included in Net income): (a) real estate related depreciation and amortization; (b) Net income from unconsolidated partnerships and joint ventures; (c) one-time costs that the Advisor deems to be non-recurring; (d) non-cash equity compensation (other than any Restricted Share Payments); (e) other non-cash income and expense items; (f) non-cash dividends related to the Class B Units of the OP and certain non-cash interest expenses related to securities that are convertible to Common Stock; (g) gains (or losses) from the sale of Investments; (h) impairment losses on real estate; (i) acquisition and transaction related costs; (j) straight-line rent; (k) amortization of above and below market leases and liabilities; (l) amortization of deferred financing costs; (m) accretion of discounts and amortization of premiums on debt investments; (n) mark-to-market adjustments included in Net income; (o) unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and (p) consolidated and unconsolidated partnerships and joint ventures. (ii) divided by the weighted average outstanding shares of Common Stock on a fully diluted basis for such period.
(2) For purposes of the Advisory Agreement, "AUM" means, for a specified period, an amount equal to (A) (i) the aggregate costs of the Company's investments (including acquisition fees and expenses) at the beginning of such period (before reserves for depreciation of bad debts, or similar non-cash reserves) plus (ii) the aggregate cost of he Company's investment at the end of such period (before reserves fro depreciation or bad debts, or similar non-cash reserves) divided by (B) two (2).
In addition, the per annum aggregate amount of the Base Management Fee and the Incentive Compensation to be paid under the Amended Advisory Agreement is capped at (a) 1.25% of the AUM for the previous year if AUM is less than or equal to $5.0 billion; (b) 0.95% if the AUM is equal to or exceeds $15.0 billion; or (c) a percentage equal to: (A) 1.25% less (B) (i) a fraction, (x) the numerator of which is the AUM for such specified period less $5.0 billion and (y) the denominator of which is $10.0 billion multiplied by (ii) 0.30% if AUM is greater than $5.0 billion but less than $15.0 billion. The Variable Base Management Fee is also subject to reduction if there is a sale or sales of one or more Investments in a single or series of related transactions exceeding $200.0 million and, the special dividend(s) related thereto.
In connection with providing strategic advisory services related to certain portfolio acquisitions, the Company has entered into arrangements in which the investment banking division of the Legacy Dealer Manager is paid a transaction fee of 0.25% of the Transaction Value for such portfolio acquisition transactions. Pursuant to such arrangements to date, the Transaction Value has been defined as: (i) the value of the consideration paid or to be paid for all the equity securities or assets in connection with the sale transaction or acquisition transaction (including consideration payable with respect to convertible or exchangeable securities and option, warrants or other exercisable securities and including dividends or dividends and equity security repurchases made in anticipation of or in connection with the sale transaction or acquisition transaction), or the implied value for all the equity securities or assets of the Company or acquisition target, as applicable, if a partial sale or purchase is undertaken, plus (ii) the aggregate value of any debt, capital lease and preferred equity security obligations (whether consolidated, off-balance sheet or otherwise) of the Company or acquisition target, as applicable, outstanding at the closing of the sale transaction or acquisition transaction), plus (iii) the amount of any fees, expenses and promote paid by the buyer(s) on behalf of the Company or the acquisition target, as applicable. Should the Legacy Dealer Manager provide strategic advisory services related to additional portfolio acquisition transactions, the Company will enter into new arrangements with the Legacy Dealer Manager on such terms as may be agreed upon between the two parties.
Property Manager provides property management and leasing services for properties owned by the Company, for which the Company pays fees equal to: (i) with respect to stand-alone, single-tenant net leased properties which are not part of a shopping center, 2.0% of gross revenues from the properties managed and (ii) with respect to all other types of properties, 4.0% of gross revenues from the properties managed.
For services related to overseeing property management and leasing services provided by any person or entity that is not an affiliate of the Property Manager, the Company pays the Property Manager an oversight fee equal to 1.0% of gross revenues of the property managed.
Solely with respect to the Company's investments in properties located in Europe, the Service Provider receives a portion of the fees payable to the Advisor equal to: (i) with respect to single-tenant net leased properties which are not part of a shopping center, 1.75% of the gross revenues from such properties and (ii) with respect to all other types of properties, 3.5% of the gross revenues from such properties. The Property Manager is paid 0.25% of the gross revenues from European single-tenant net leased properties which are not part of a shopping center and 0.5% of the gross revenues from all other types of properties, reflecting a split of the oversight fee with the Service Provider.

25
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

The following table reflects related party fees incurred, forgiven and contractually due as of and for the periods presented:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Payable (Receivable) as of
 
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
 
Incurred
 
Forgiven
 
Incurred
 
Forgiven
 
Incurred
 
Forgiven
 
Incurred
 
Forgiven
 
September 30, 2015
 
December 31, 2014
One-time fees and reimbursements:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition fees and related cost reimbursements (1)
 
$
14

 
$
—

 
$
13,734

 
$
—

 
$
722

 
$
—

 
$
22,889

 
$
—

 
$
1

 
$
2

Financing coordination fees (2)
 
325

 
—

 
637

 
—

 
823

 
—

 
3,484

 
—

 
(19
)
 
—

Ongoing fees:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset management fees (3)
 
4,500

 
—

 
—

 
—

 
9,001

 
—

 
—

 
—

 
217

(5) 
—

Property management and leasing fees (4)
 
986

 
697

 
167

 
152

 
2,999

 
1,921

 
354

 
355

 
16

(6) 
52

Strategic advisory fees
 
—

 
—

 
346

 
—

 
—

 
—

 
561

 
—

 
—

 
—

Class B OP Unit Distributions
 
(94
)
 
—

 
50

 
—

 
339

 
—

 
77

 
—

 
216

(6) 
—

Vesting of Class B units (3)
 
—

 
—

 
—

 
—

 
14,480

 
—

 
—

 
—

 
—

 
—

Total related party operational fees and reimbursements
 
$
5,731

 
$
697

 
$
14,934

 
$
152

 
$
28,364

 
$
1,921

 
$
27,365

 
$
355

 
$
431

 
$
54

___________________________________________________________________________
(1) 
These affiliated fees are recorded within acquisition and transaction related costs on the consolidated statement of operations and comprehensive income (loss).
(2) 
These affiliated costs are recorded as deferred financing costs and amortized over the term of the respective financing arrangement.
(3) 
From January 1, 2013 to April 1, 2015, the Company caused the OP to issue to the Advisor (subject to periodic approval by the board of directors) restricted performance based Class B units for asset management services, which would vest if certain conditions occur. At the Listing Date, all Class B units held by the Advisor converted to OP Units. From April 1, 2015 until the Listing Date, the Company paid the Advisor asset management fees in cash (as elected by the Advisor). From the Listing Date, the Advisor received asset management fees in cash in accordance with the Amended and Restated Advisory Agreement. No Incentive Compensation was incurred for the three and nine months ended September 30, 2015.
(4) 
The Advisor waived 100% of fees from U.S. assets and its allocated portion of 50% of fees from European assets.
(5) 
Balance included within due to affiliates on the consolidated balance sheet as of September 30, 2015. In addition, due to affiliates includes $0.7 million of costs accrued for transfer asset and personnel services received from the Company's affiliated parties including ANST, Advisor and RCS which are recorded within general and administrative expenses on the consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2015 and are not reflected in the table above.
(6) 
Balance included within accounts payable and accrued expenses on the consolidated balance sheet as of September 30, 2015.
The Company reimburses the Advisor's costs of providing administrative services, subject to the limitation that the Company will not reimburse the Advisor for any amount by which the Company's operating expenses (including the asset management fee) at the end of the four preceding fiscal quarters exceeds the greater of (a) 2.0% of average invested assets and (b) 25.0% of net income other than any additions to reserves for depreciation, bad debt or other similar non-cash reserves and excluding any gain from the sale of assets for that period. Additionally, the Company reimburses the Advisor for personnel costs in connection with other services, in addition to paying an asset management fee; however, the Company does not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives acquisition fees or real estate commissions. No reimbursement was incurred from the Advisor for providing services during the three and nine months ended September 30, 2015 and 2014.
In order to improve operating cash flows and the ability to pay dividends from operating cash flows, the Advisor may waive certain fees including asset management and property management fees. Because the Advisor may waive certain fees, cash flow from operations that would have been paid to the Advisor may be available to pay dividends to stockholders. The fees that may be forgiven are not deferrals and accordingly, will not be paid to the Advisor. In certain instances, to improve the Company's working capital, the Advisor may elect to absorb a portion of the Company's general and administrative costs or property operating expenses. These absorbed costs are presented net in the accompanying consolidated statements of operations and comprehensive loss. During the three and nine months ended September 30, 2015, the Advisor absorbed some of the property management and professional fees. During the three and nine months ended September 30, 2014, there were no property operating and general administrative expenses absorbed by our Advisor.

26
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

During the three and nine months ended September 30, 2015, the Company has incurred approximately $0.1 million and $0.7 million, respectively, of recurring transfer agent services fees to American National Stock Transfer, LLC ("ANST"), an affiliate of Realty Capital Securities, LLC, which were included in general and administrative expenses in the consolidated statements of operations and comprehensive income (loss).
Fees Paid in Connection with the Liquidation or Listing of the Company's Real Estate Assets
On December 31, 2014, the Company entered into an agreement with RCS Capital, the investment banking and capital markets division of the Legacy Dealer Manager, for strategic and financial advice and assistance in connection with (i) a possible sale transaction involving the Company (ii) the possible listing of the Company’s securities on a national securities exchange, and (iii) a possible acquisition transaction involving the Company. The Company also retained Barclays Capital Inc. as a strategic advisor. Both RCS Capital and Barclays Capital Inc., were each entitled to receive a transaction fee equal to 0.23% of the transaction value in connection with a possible sale transaction, listing or acquisition, if any. In connection with Listing, the Company incurred approximately $18.5 million of listing related fees during the nine months ended September 30, 2015 of which $6.0 million was paid to RCS Capital and $6.1 million to Barclays Capital Inc., including out of pocket expense in connection with these agreements. The Company did not incur any additional listing fees during the three months ended September 30, 2015. In addition, the Company incurred and paid to RCS Capital $2.5 million for personnel and support services in connection with the Listing. The Company also incurred $0.6 million of transfer agent fees to ANST in relation to the Listing. In connection with the Listing and the Amended Advisory Agreement, the Company terminated the subordinated termination fee that would be due to the Advisor in the event of termination of the advisory agreement. All costs noted above were included in listing fees in the consolidated statements of operations and comprehensive income (loss) under listing fees for the three and nine months ended September 30, 2015.
Note 12 — Economic Dependency
Under various agreements, the Company has engaged or will engage the Advisor, its affiliates and entities under common control with the Advisor, and the Service Provider, to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, the sale of shares of the Company's Common Stock available for issue, transfer agency services, as well as other administrative responsibilities for the Company including accounting services and investor relations.
As a result of these relationships, the Company is dependent upon the Advisor and its affiliates and the Service Provider. In the event that these companies are unable to provide the Company with the respective services, the Company will be required to find alternative providers of these services.
Note 13 — Share-Based Compensation
Stock Option Plan
 The Company has a stock option plan (the "Plan") which authorizes the grant of nonqualified stock options to the Company's independent directors, officers, advisors, consultants and other personnel, subject to the absolute discretion of the board of directors and the applicable limitations of the Plan. The exercise price for all stock options granted under the Plan will be equal to the fair market value of a share on the last business day preceding the annual meeting of stockholders. A total of 0.5 million shares have been authorized and reserved for issuance under the Plan. As of September 30, 2015 and December 31, 2014, no stock options were issued under the Plan.
Restricted Share Plan
The Company's employee and director incentive restricted share plan ("RSP") provides the Company with the ability to grant awards of restricted shares to the Company's directors, officers and employees (if the Company ever has employees), employees of the Advisor and its affiliates, employees of entities that provide services to the Company, directors of the Advisor or of entities that provide services to the Company, certain consultants to the Company and the Advisor and its affiliates or to entities that provide services to the Company.
Prior to April 8, 2015, the RSP provided for the automatic grant of 3,000 restricted shares of Common Stock to each of the independent directors, without any further action by the Company's board of directors or the stockholders, on the date of initial election to the board of directors and on the date of each annual stockholder's meeting. Restricted stock issued to independent directors vested over a five-year period beginning on the first anniversary of the date of grant in increments of 20% per annum. On April 8, 2015, the Company amended the RSP ("the Amended RSP"), among other things, to remove the fixed amount of shares that are automatically granted to the independent directors and remove the fixed vesting period of five years. Under the Amended RSP, the annual amount granted to the independent directors is determined by the board of directors.

27
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

Effective upon the Listing Date, the Company’s board of directors approved the following changes to independent director compensation: (i) increasing in the annual retainer payable to all independent directors to $100,000 per year, (ii) increase in the annual retainer for the non-executive chair to $105,000, (iii) increase in the annual retainer for independent directors serving on the audit committee, compensation committee or nominating and corporate governance committee to $30,000. All annual retainers are payable 50% in the form of cash and 50% in the form of restricted stock units ("RSU") which vest over a three-year period. In addition, the directors have the option to elect to receive the cash component in the form of RSUs which would vest over a three-year period. Under the Amended RSP, restricted share awards entitle the recipient to receive shares of Common Stock from the Company under terms that provide for vesting over a specified period of time or upon attainment of pre-established performance objectives. Such awards would typically be forfeited with respect to the unvested shares upon the termination of the recipient's employment or other relationship with the Company. In connection with the Listing, the Company's board of directors also approved a one-time retention grant of 40,000 RSUs to each of the directors valued at $8.52 per unit, which vest over a five-year period. On July 13, 2015, the Company granted an annual retainer to each of its independent directors comprising of 50% (or $0.1 million) in cash and 50% (or 7,352) in RSUs which vest over a three-year period with the vesting period beginning on June 15, 2015. In addition, the Company granted $0.1 million in non executive chair compensation in cash and 50% (or 5,882) in RSUs which vest over a three-year period with the vesting period beginning on June 15, 2015.
Prior to April 8, 2015, the total number of shares of Common Stock granted under the RSP could not exceed 5.0% of the Company's outstanding shares on a fully diluted basis at any time, and in any event could not exceed 7.5 million shares (as such number may be adjusted for stock splits, stock dividends, combinations and similar events). The Amended RSP increased the number of shares the Company's Common Stock, par value $0.01 per share, available for awards thereunder to 10% of the Company’s outstanding shares of Common Stock on a fully diluted basis at any time. The Amended RSP also eliminated the limit of 7.5 million shares of Common Stock permitted to be issued as RSUs.
Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash dividends prior to the time that the restrictions on the restricted shares have lapsed. Any dividends payable in common shares shall be subject to the same restrictions as the underlying restricted shares.
The following table reflects restricted share award activity for the nine months ended September 30, 2015:
 
Number of Restricted Shares
 
Weighted-Average Issue Price
Unvested, December 31, 2014
14,400

 
$
9.00

Granted prior to Listing Date (1)
3,000

 
9.00

One-time Listing Grant
160,000

 
8.52

Granted (2)
27,938

 
8.84

Vested (3)
(17,400
)
 
9.00

Unvested, September 30, 2015
187,938

 
$
8.87

____________________________________
(1) 
Based on the original RSP in place prior to April 8, 2015.
(2) 
Based on the Amended RSP which provides an annual retainer to: (i) all independent directors; (ii) independent directors serving on the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee; and (iii) the non-executive chair.
(3) 
RSUs granted prior to April 8, 2015 vested immediately prior to the Listing.
The fair value of the restricted shares granted prior to the Listing Date is based on the per share price in the IPO and the fair value of the restricted shares granted on or after the Listing Date is based on the market price of Common Stock as of the grant date, and is expensed over the vesting period. Compensation expense related to restricted stock was approximately $92,000 and $88,000 during the nine months ended September 30, 2015 and 2014, respectively, and is recorded as general and administrative expense in the accompanying statements of operations. As of September 30, 2015, the Company had $1.5 million unrecognized compensation costs related to unvested restricted share awards granted under the Company’s Amended RSP.
Multi-Year Outperformance Agreement
In connection with the Listing, the Company entered into the OPP with the OP and the Advisor. Under the OPP, the Advisor was issued 9,041,801 long term incentive plan ("LTIP Units") in the OP with a maximum award value on the issuance date equal to 5.00% of the Company’s market capitalization (the “OPP Cap”). The LTIP Units are structured as profits interests in the OP.

28
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

The Advisor will be eligible to earn a number of LTIP Units with a value equal to a portion of the OPP Cap upon the first, second and third anniversaries of the Effective Date, which is the Listing Date, June 2, 2015, based on the Company’s achievement of certain levels of total return to its stockholders (“Total Return”), including both share price appreciation and Common Stock dividends, as measured against a peer group of companies, as set forth below, for the three-year performance period commencing on the Effective Date (the “Three-Year Period”); each 12-month period during the Three-Year Period (the “One-Year Periods”); and the initial 24-month period of the Three-Year Period (the “Two-Year Period”), as follows:
 
 
 
 
Performance Period
 
Annual Period
 
Interim Period
Absolute Component: 4% of any excess Total Return attained above an absolute hurdle measured from the beginning of such period:
 
21%
 
7%
 
14%
Relative Component: 4% of any excess Total Return attained above the Total Return for the performance period of the Peer Group*, subject to a ratable sliding scale factor as follows based on achievement of cumulative Total Return measured from the beginning of such period:
 
 
 
 
 
 
 
•
100% will be earned if cumulative Total Return achieved is at least:
 
18%
 
6%
 
12%
 
•
50% will be earned if cumulative Total Return achieved is:
 
—%
 
—%
 
—%
 
•
0% will be earned if cumulative Total Return achieved is less than:
 
—%
 
—%
 
—%
 
•
a percentage from 50% to 100% calculated by linear interpolation will be earned if the cumulative Total Return achieved is between:
 
0% - 18%
 
0% - 6%
 
0% - 12%
_______________________________________________________
*
The “Peer Group” is comprised of Chambers Street Properties, Gramercy Property Trust Inc., Lexington Realty Trust, Select Income REIT, and W.P. Carey Inc.
The potential outperformance award is calculated at the end of each One-Year Period, the Two-Year Period and the Three-Year Period. The award earned for the Three-Year Period is based on the formula in the table above less any awards earned for the Two-Year Period and One-Year Periods, but not less than zero; the award earned for the Two-Year Period is based on the formula in the table above less any award earned for the first and second One-Year Period, but not less than zero. Any LTIP Units that are unearned at the end of the Performance Period will be forfeited.
Subject to the Advisor’s continued service through each vesting date, one third of any earned LTIP Units will vest on each of the third, fourth and fifth anniversaries of the Effective Date. Any earned and vested LTIP Units may be converted into OP Units in accordance with the terms and conditions of the limited partnership agreement of the OP. The OPP provides for early calculation of LTIP Units earned and for the accelerated vesting of any earned LTIP Units in the event Advisor is terminated or in the event the Company incurs a change in control, in either case prior to the end of the Three-Year Period.
The Company records equity based compensation expense associated with the awards over the requisite service period of five years on a graded vesting basis. Equity-based compensation expense is adjusted each reporting period for changes in the estimated market-related performance. Compensation expense related to the OPP was $0.5 million and $2.3 million for the three and nine months ended September 30, 2015. Subject to the Advisor’s continued service through each vesting date, one third of any earned LTIP Units will vest on each of the third, fourth and fifth anniversaries of the Effective Date. Until such time as an LTIP Unit is earned in accordance with the provisions of the OPP, the holder of such LTIP Unit is entitled to distributions on such LTIP Unit equal to 10% of the distributions made per OP Unit. The Company has accrued $0.2 million in distributions related to LTIP Units during the three and nine months ended September 30, 2015, which is included in non-controlling interest in the consolidated balance sheets. After an LTIP Unit is earned, the holder of such LTIP Unit is entitled to a catch-up distribution and then the same distributions as the holders of an OP Unit. At the time the Advisor’s capital account with respect to an LTIP Unit is economically equivalent to the average capital account balance of an OP Unit, the LTIP Unit has been earned and it has been vested for 30 days, the Advisor, in its sole discretion, will be entitled to convert such LTIP Unit into an OP Unit in accordance with the provisions of the limited partnership agreement of the OP. The OPP provides for early calculation of LTIP Units earned and for the accelerated vesting of any earned LTIP Units in the event Advisor is terminated by the Company or in the event the Company incurs a change in control, in either case prior to the end of the Three-Year Period.
The valuation of the OPP is determined using a Monte Carlo simulation. This analysis reflects the contractual terms of the OPP, including the performance periods and total return hurdles, as well as observable market-based inputs, including interest rate curves, and unobservable inputs, such as expected volatility. As a result, the Company has determined that its OPP valuation in its entirety is classified in Level 3 of the fair value hierarchy.

29
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

The following table presents information about the Company's OPP, which is measured at fair value on a recurring basis as of September 30, 2015, aggregated by the level in the fair value hierarchy within which the instrument falls:
(In thousands)
 
Quoted Prices in Active Markets
Level 1
 
Significant Other Observable Inputs
Level 2
 
Significant Unobservable Inputs
Level 3
 
Total
OPP at September 30, 2015
 
$
—

 
$
—

 
$
(27,200
)
 
$
(27,200
)
Level 3 Valuations
The following is a reconciliation of the beginning and ending balance for the changes in instruments with Level 3 inputs in the fair value hierarchy for the nine months ended September 30, 2015:
(In thousands)
 
OPP
Beginning Balance as of December 31, 2014
 
$
—

  Fair value at issuance
 
27,500

  Fair value adjustment
 
(300
)
Ending Balance as of September 30, 2015
 
$
27,200

The following table provides quantitative information about significant Level 3 inputs used:
Financial Instrument
 
Fair Value at September 30, 2015
 
Principal Valuation Technique
 
Unobservable Inputs
 
Input Value
 
 
(In thousands)
 
 
 
 
 
 
OPP
 
$
27,200

 
Monte Carlo Simulation
 
Expected volatility
 
22.0
%
The following discussion provides a description of the impact on a fair value measurement of a change in each unobservable input in isolation. For the relationship described below, the inverse relationship would also generally apply.
Expected volatility is a measure of the variability in possible returns for an instrument, parameter or market index given how much the particular instrument, parameter or index changes in value over time. Generally, the higher the expected volatility of the underlying, 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.
On August 7, 2015, the Company amended and restated the OPP (the “Amended OPP”) with the OP and the Advisor to amend certain definitions related to performance measurement to equitably adjust for share issuances and share repurchases on a go-forward basis. The amendment resulted in an immaterial adjustment to compensation cost as of the modification date.
Other Share-Based Compensation
The Company may issue Common Stock in lieu of cash to pay fees earned by the Company's directors at each director's election. There are no restrictions on the shares issued since these payments in lieu of cash relate to fees earned for services performed. There were no such shares of Common Stock issued in lieu of cash during the nine months ended September 30, 2015. There were 1,056 shares of Common Stock issued in lieu of cash during the nine months ended September 30, 2014 which resulted in additional share based compensation of $10,000.

30
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

Note 14 — Earnings Per Share
The following is a summary of the basic and diluted net income (loss) per share computation for the periods presented:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands, except share and per share data)
 
2015
 
2014
 
2015
 
2014
Net income (loss) attributable to stockholders
 
$
5,432

 
$
(24,558
)
 
$
(14,377
)
 
$
(48,386
)
Adjustments to net income (loss) attributable to stockholders for common share equivalents
 
(249
)
 
—

 
(249
)
 
—

Adjusted net income (loss) attributable to stockholders
 
$
5,183

 
$
(24,558
)
 
$
(14,626
)
 
$
(48,386
)
 
 
 
 
 
 
 
 
 
Basic and diluted net income (loss) per share attributable to stockholders
 
$
0.03

 
$
(0.14
)
 
$
(0.08
)
 
$
(0.44
)
Basic and diluted weighted average shares outstanding
 
168,948,345

 
175,401,867

 
176,124,355

 
108,779,593

Under current authoritative guidance for determining earnings per share, all nonvested share-based payment awards that contain non-forfeitable rights to distributions are considered to be participating securities and therefore are included in the computation of earnings per share under the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common shares and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Our nonvested RSUs and LTIPs contain rights to receive non-forfeitable distributions and therefore we apply the two-class method of computing earnings per share. The calculation of earnings per share below excludes the non-forfeitable distributions to the nonvested RSUs and LTIPs from the numerator.
Diluted net income (loss) per share assumes the conversion of all Common Stocks share equivalents into an equivalent number of common shares, unless the effect is anti-dilutive. The Company considers unvested restricted stock, OP Units (excluding converted Class B units) and LTIP Units to be common share equivalents. For the three and nine months ended September 30, 2015 and 2014, the following common share equivalents were excluded from the calculation of diluted earnings per share:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Unvested restricted stock
 
187,938

 
7,200

 
187,938

 
14,400

OP Units (1)
 
1,809,678

 
22

 
1,809,678

 
22

Class B units
 
—

 
170,297

 
—

 
340,456

OPP (LTIP Units)
 
9,041,801

 
—

 
9,041,801

 
—

Total anti-dilutive common share equivalents
 
11,039,417

 
177,519

 
11,039,417

 
354,878

____________________________________
(1) OP Units included 1,726,323 of converted Class B units on Listing, 83,333 OP Units issued to the Advisor, and 22 OP Units issued to the Special Limited Partner.

Conditionally issuable shares relating to the OPP award (See Note 13 — Share Based Compensation) would be included in the computation of fully diluted EPS (if dilutive) based on shares that would be issued if the balance sheet date were the end of the measurement period. No LTIP share equivalents were included in the computation for the three and nine months ended September 30, 2015 because no units or shares would have been issued based on the stock price at September 30, 2015.

31
GLOBAL NET LEASE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)

Note 15 — Subsequent Events
The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q, and determined that there have not been any events that have occurred that would require adjustments to, or disclosures in, the consolidated financial statements, except for the following disclosures.
On November 9, 2015, AR Capital, LLC (“ARC”) advised the Company that ARC and Apollo Global Management, LLC (NYSE: APO) (together with its consolidated subsidiaries, “Apollo”) have mutually agreed to terminate an agreement, dated as of August 6, 2015, pursuant to which Apollo would have purchased a controlling interest in a newly formed company that would have owned a majority of the ongoing asset management business of AR Capital, including the Advisor and the Property Manager.  The termination has no effect on the Company’s current management team.

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Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements of Global Net Lease, Inc. and the notes thereto. As used herein, the terms "Company," "we," "our" and "us" refer to Global Net Lease, Inc., a Maryland corporation, including, as required by context, to Global Net Lease Operating Partnership, L.P., a Delaware limited partnership, which we refer to as the "OP," and to its subsidiaries. The Company is externally managed by Global Net Lease Advisors, LLC (our "Advisor"), a Delaware limited liability company.
Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements including statements regarding the intent, belief or current expectations of the Company and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "plans," "intends," "should" or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.
The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
•
All of our executive officers are also officers of our Advisor and other American Realty Capital-affiliated entities. As a result, our executive officers, our Advisor and its affiliates face conflicts of interest, including significant conflicts created by our Advisor's compensation arrangements with us and other investment programs advised by American Realty Capital affiliates and conflicts in allocating time among these investment programs and us. These conflicts could result in unanticipated actions.
•
Because investment opportunities that are suitable for us may also be suitable for other American Realty Capital- advised investment programs, our Advisor and its affiliates face conflicts of interest relating to the purchase of properties and other investments and such conflicts may not be resolved in our favor, meaning that we could invest in less attractive assets, which could reduce the investment return to our stockholders.
•
We may be unable to pay or maintain cash dividends or increase dividends over time.
•
We are obligated to pay fees which may be substantial to our Advisor and its affiliates.
•
We depend on tenants for our rental revenue and, accordingly, our rental revenue is dependent upon the success and economic viability of our tenants.
•
Increases in interest rates could increase the amount of our debt payments and limit our ability to pay dividends to our stockholders.
•
We may not generate cash flows sufficient to pay dividends to our stockholders, as such, we may be forced to borrow at unfavorable rates or depend on our Advisor to waive reimbursement of certain expense and fees to fund our operations. There is no assurance that our Advisor will waive reimbursement of expenses or fees.
•
Any of these dividends may reduce the amount of capital we ultimately invest in properties and other permitted investments and negatively impact the value of our common stock.
•
We are subject to risks associated with our international investments, including risks associated with compliance with and changes in foreign laws, fluctuations in foreign currency exchange rates and inflation.
•
We are subject to risks associated with any dislocations or liquidity disruptions that may exist or occur in the credit markets of the United States of America and Europe from time to time.
•
We may fail to qualify, or continue to qualify, to be treated as a real estate investment trust ("REIT") for U.S. federal income tax purposes, which would result in higher taxes, may adversely affect operations and would reduce our NAV and cash available for dividends.
•
We may be deemed to be an investment company under the Investment Company Act of 1940, as amended ("the Investment Company Act"), and thus subject to regulation under the Investment Company Act.
•
We may be exposed to risks due to a lack of tenant diversity, investment types and geographic diversity.
•
We may be exposed to changes in general economic, business and political conditions, including the possibility of intensified international hostilities, acts of terrorism, and changes in conditions of United States of America or international lending, capital and financing markets.

33
Table of Contents

Overview
We were incorporated on July 13, 2011 as a Maryland corporation that elected and qualified to be taxed as a REIT for U.S. federal income tax purposes beginning with our taxable year ended December 31, 2013.
On April 20, 2012, we commenced our initial public offering ("IPO" or "offering") on a "reasonable best efforts" basis of up to 150.0 million shares of common stock, $0.01 par value per share ("Common Stock"), at a price of $10.00 per share, subject to certain volume and other discounts. We completed our IPO on June 30, 2014. On June 2, 2015, in anticipation of the listing of our shares of Common Stock on the New York Stock Exchange (the "NYSE"), we announced the suspension of the DRIP. On May 7, 2015, we filed a post-effective amendment to our registration statement on Form S-11 (File No. 001-37390) (as amended, the "Registration Statement") to deregister the unsold shares registered under the Registration Statement.
We operated as a non-traded REIT through June 1, 2015. On June 2, 2015 we listed our Common Stock on the "NYSE" under the symbol "GNL" (the "Listing"). In connection with the Listing, we offered to purchase up to 11.9 million of shares of our Common Stock at a price of $10.50 per share (the "Tender Offer"). As a result of the Tender Offer, on July 6, 2015 we purchased approximately 11.9 million shares of our Common Stock at a price of $10.50 per share, for an aggregate amount of $125.0 million, excluding fees and expenses relating to the Tender Offer and including fractional shares repurchased thereafter.
We were formed to primarily acquire a diversified portfolio of commercial properties, with an emphasis on sale-leaseback transactions involving single tenant net-leased commercial properties. We may also originate or acquire first mortgage loans secured by real estate. Our primary geographic target is the United States, although up to 40% of our portfolio may consist of properties located in Europe with a potential additional 10% allocation of properties located elsewhere internationally. We purchased our first property and commenced active operations in October 2012. As of September 30, 2015, we owned 329 properties consisting of 18.7 million rentable square feet, which were 100% leased, with a weighted average remaining lease term of 11.5 years. Based on original purchase price, 60.4% of our properties are located in the U.S. and 39.6% in Europe.
Substantially all of the Company's business is conducted through the OP. As of September 30, 2015, the Advisor held 1,461,753 units of limited partnership interests in the OP ("OP Units"), Moor Park Capital Partners LLP (the "Service Provider") held 347,903 OP Units and Global Net Lease Special Limited Partner, LLC (the "Special Limited Partner") held 22 OP Units. In accordance with the limited partnership agreement of the OP, a holder of OP Units has the right to convert OP Units for a corresponding number of shares of the Company's Common Stock, at the Company's option, or the cash value of those corresponding shares. The remaining rights of the limited partner interests are limited and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP's assets.
We have no direct employees. Our Advisor has been retained to manage the Company's affairs on a day-to-day basis. The properties are managed and leased by Global Net Lease Properties, LLC (the "Property Manager"). Realty Capital Securities, LLC (the "Legacy Dealer Manager") served as the dealer manager of the IPO. The Advisor, Property Manager, Special Limited Partner and Legacy Dealer Manager are under common control with the parent of the Sponsor, as a result of which they are related parties, and have received compensation, fees and expense reimbursements for services related to the IPO and for the investment and management of the Company's assets. The Advisor has entered into a service provider agreement with an affiliate of the Service Provider. Pursuant to the service provider agreement, the Service Provider provides, subject to the Advisor's oversight, certain real estate related services, as well as sourcing and structuring of investment opportunities, performance of due diligence, and arranging debt financing and equity investment syndicates, solely with respect to investments in Europe. Pursuant to the service provider agreement, 50.0% of the fees payable by the Company to the Advisor and a percentage of the fees paid to the Property Manager are paid or assigned to the Service Provider, solely with respect to the Company's foreign investments in Europe. Such fees are deducted from fees paid to the Advisor.
Significant Accounting Estimates and Critical Accounting Policies
Set forth below is a summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation of our financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these estimates are subject to a degree of uncertainty. These significant accounting estimates and critical accounting policies include:
Revenue Recognition
Our revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. Since many of our leases provide for rental increases at specified intervals, straight-line basis accounting requires us to record a receivable, and include in revenues unbilled rent receivables that we will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. We defer the revenue related to lease payments received from tenants in advance of their due dates.

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Table of Contents

As of September 30, 2015 and December 31, 2014, the Company included cumulative straight line rents receivable in prepaid expenses and other assets in the balance sheet of $20.1 million and $8.7 million, respectively. For the three and nine months ended September 30, 2015, the Company’s rental revenue included impacts of unbilled rental revenue of $3.8 million and $11.4 million respectively, to adjust contractual rent to straight line rent.
We continually review receivables related to rent and unbilled rent receivables and determine 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, we record an increase in our allowance for uncollectible accounts or record a direct write-off of the receivable in our consolidated statements of operations and comprehensive income (loss).
Cost recoveries from tenants are included in operating expense reimbursement in the period the related costs are incurred, as applicable.
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. Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
The Company evaluates the inputs, processes and outputs of each asset acquired to determine if the transaction is a business combination or 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 and comprehensive income (loss). 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 business combinations, 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 may include the value of in-place leases and above- and below- market leases. In addition, any assumed mortgages receivable or payable and any assumed or issued noncontrolling interests are recorded at their estimated fair values.
The Company is required to make subjective assessments as to the useful lives of the Company's properties for purposes of determining the amount of depreciation to record on an annual basis with respect to the Company's investments in real estate. These assessments have a direct impact on the Company's net income because if the Company were to shorten the expected useful lives of the Company's investments in real estate, the Company would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
The Company is required to present the operations related to properties that have been sold or properties that are intended to be sold as discontinued operations in the statement of operations for all periods presented. Properties that are intended to be sold are to be designated as “held for sale” on the consolidated balance sheet.
The Company evaluates the lease accounting for each new property acquired with existing or new lease and reviews for any capital lease criteria. A lease is classified by a tenant as a capital lease if the significant risks and rewards of ownership are considered to reside with the tenant. This situation is generally considered to be met if, among other things, the non-cancelable lease term is more than 75% of the useful life of the asset or if the present value of the minimum lease payments equals 90% or more of the leased property’s fair value at lease inception.
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 income.

35
Table of Contents

Purchase Price Allocation
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.
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.
The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of the in-place lease value and customer relationship intangibles is charged to expense.
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. 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 balance sheet 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 of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

36
Table of Contents

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, any changes in the fair value of these derivative instruments is recognized immediately in gains (losses) on derivative instruments in the consolidated statement of operations and comprehensive loss. If the derivative is designated and qualifies for hedge accounting treatment the change in the estimated fair value of the derivative is recorded in other comprehensive income (loss) to the extent that it is effective. Any ineffective portion of a derivative's change in fair value will be immediately recognized in earnings.
Listing Note
Concurrent with the Listing, we, as the general partner of the OP, caused the OP, subject to the terms of the Second Amended and Restated Agreement of Limited Partnership, to evidence the OP's obligation to distribute certain amounts to the Special Limited Partner through the issuance of the Listing Note. The amount of the Listing Note is determined, in part, based on the average market value of the Company’s outstanding shares of Common Stock for the period of 30 consecutive trading days, commencing on the 180th calendar day following the Listing. Until the principal amount of the Listing Note is determined, the Listing Note is treated as a liability and the Company estimates the contingent consideration using a valuation model and records the fair value of the Listing Note on the consolidated balance sheets. The initial fair value and subsequent changes in fair value are recorded in the consolidated statements of operations and comprehensive income (loss).
Multi-Year Outperformance Agreement
Concurrent with the Listing and modifications to Advisor agreement, the Company entered into a Multi-Year Outperformance Agreement (the “OPP”) with the OP and the Advisor. The Company records equity based compensation expense associated with the awards over the requisite service period of five years on a graded basis. The cumulative equity-based compensation expense is adjusted each reporting period for changes in the estimated market-related performance.
Recently Issued Accounting Pronouncements (Pending Adoption)
See Note 2 — Summary of Significant Accounting Policies for Recently Issued Accounting Pronouncements (Pending Adoption) to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for further discussion.
Properties
We acquire and operate a diversified portfolio of commercial properties, with an emphasis on sale-leaseback transactions involving single tenant net leases. All such properties may be acquired and operated by us alone or jointly with another party. Our portfolio of real estate properties was comprised of the following properties as of September 30, 2015:
Portfolio
 
Acquisition Date
 
Country
 
Number of Properties
 
Square Feet
 
Remaining
Lease Term (1)
McDonald's
 
Oct. 2012
 
UK
 
1
 
9,094

 
8.5
Wickes Building Supplies I
 
May 2013
 
UK
 
1
 
29,679

 
9.0
Everything Everywhere
 
Jun. 2013
 
UK
 
1
 
64,832

 
11.8
Thames Water
 
Jul. 2013
 
UK
 
1
 
78,650

 
6.9
Wickes Building Supplies II
 
Jul. 2013
 
UK
 
1
 
28,758

 
11.2
PPD Global Labs
 
Aug. 2013
 
US
 
1
 
76,820

 
9.2
Northern Rock
 
Sep. 2013
 
UK
 
2
 
86,290

 
7.9
Kulicke & Soffa
 
Sep. 2013
 
US
 
1
 
88,000

 
8.0
Wickes Building Supplies III
 
Nov. 2013
 
UK
 
1
 
28,465

 
13.2
Con-way Freight
 
Nov. 2013
 
US
 
7
 
105,090

 
8.2
Wolverine
 
Dec. 2013
 
US
 
1
 
468,635

 
7.3
Western Digital
 
Dec. 2013
 
US
 
1
 
286,330

 
5.2
Encanto
 
Dec. 2013
 
PR
 
18
 
65,262

 
9.8
Rheinmetall
 
Jan. 2014
 
GER
 
1
 
320,102

 
8.3
GE Aviation
 
Jan. 2014
 
US
 
1
 
369,000

 
10.3
Provident Financial
 
Feb. 2014
 
UK
 
1
 
117,003

 
20.1
Crown Crest
 
Feb. 2014
 
UK
 
1
 
805,530

 
23.4
Trane
 
Feb. 2014
 
US
 
1
 
25,000

 
8.2
Aviva
 
Mar. 2014
 
UK
 
1
 
131,614

 
13.7
DFS Trading
 
Mar. 2014
 
UK
 
5
 
240,230

 
14.5
GSA I
 
Mar. 2014
 
US
 
1
 
135,373

 
6.9
National Oilwell Varco
 
Mar. 2014
 
US
 
1
 
24,450

 
7.8
Talk Talk
 
Apr. 2014
 
UK
 
1
 
48,415

 
9.5

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Table of Contents

Portfolio
 
Acquisition Date
 
Country
 
Number of Properties
 
Square Feet
 
Remaining
Lease Term (1)
OBI DIY
 
Apr. 2014
 
GER
 
1
 
143,633

 
8.1
GSA II
 
Apr. 2014
 
US
 
2
 
24,957

 
7.5
DFS Trading
 
Apr. 2014
 
UK
 
2
 
39,331

 
14.5
GSA III
 
Apr. 2014
 
US
 
2
 
28,364

 
9.8
GSA IV
 
May 2014
 
US
 
1
 
33,000

 
9.8
Indiana Department of Revenue
 
May 2014
 
US
 
1
 
98,542

 
7.3
National Oilwell Varco II (2)
 
May 2014
 
US
 
1
 
23,475

 
14.2
Nissan
 
May 2014
 
US
 
1
 
462,155

 
13.0
GSA V
 
Jun. 2014
 
US
 
1
 
26,533

 
7.5
Lippert Components
 
Jun. 2014
 
US
 
1
 
539,137

 
10.9
Select Energy Services I
 
Jun. 2014
 
US
 
3
 
135,877

 
11.2
Bell Supply Co I
 
Jun. 2014
 
US
 
6
 
79,829

 
13.3
Axon Energy Products
 
Jun. 2014
 
US
 
3
 
213,634

 
11.3
Lhoist
 
Jun. 2014
 
US
 
1
 
22,500

 
7.3
GE Oil & Gas
 
Jun. 2014
 
US
 
2
 
69,846

 
8.0
Select Energy Services II
 
Jun. 2014
 
US
 
4
 
143,417

 
11.1
Bell Supply Co II
 
Jun. 2014
 
US
 
2
 
19,136

 
13.2
Superior Energy Services
 
Jun. 2014
 
US
 
2
 
42,470

 
8.7
Amcor Packaging
 
Jun. 2014
 
UK
 
7
 
294,580

 
9.2
GSA VI
 
Jun. 2014
 
US
 
1
 
6,921

 
8.5
Nimble Storage
 
Jun. 2014
 
US
 
1
 
164,608

 
6.1
FedEx -3-Pack
 
Jul. 2014
 
US
 
3
 
338,862

 
6.9
Sandoz, Inc.
 
Jul. 2014
 
US
 
1
 
154,101

 
10.8
Wyndham
 
Jul. 2014
 
US
 
1
 
31,881

 
9.6
Valassis
 
Jul. 2014
 
US
 
1
 
100,597

 
7.6
GSA VII
 
Jul. 2014
 
US
 
1
 
25,603

 
9.1
AT&T Services
 
Jul. 2014
 
US
 
1
 
401,516

 
10.8
PNC - 2-Pack
 
Jul. 2014
 
US
 
2
 
210,256

 
13.8
Fujitisu
 
Jul. 2014
 
UK
 
3
 
162,888

 
11.2
Continental Tire
 
Jul. 2014
 
US
 
1
 
90,994

 
6.8
Achmea
 
Jul. 2014
 
NETH
 
2
 
190,252

 
8.3
BP Oil
 
Aug. 2014
 
UK
 
1
 
2,650

 
10.1
Malthurst
 
Aug. 2014
 
UK
 
2
 
3,784

 
10.1
HBOS
 
Aug. 2014
 
UK
 
3
 
36,071

 
9.8
Thermo Fisher
 
Aug. 2014
 
US
 
1
 
114,700

 
8.9
Black & Decker
 
Aug. 2014
 
US
 
1
 
71,259

 
6.3
Capgemini
 
Aug. 2014
 
UK
 
1
 
90,475

 
7.5
Merck & Co.
 
Aug. 2014
 
US
 
1
 
146,366

 
9.9
Family Dollar - 65-Pack
 
Aug. 2014
 
US
 
65
 
541,472

 
13.9
GSA VIII
 
Aug. 2014
 
US
 
1
 
23,969

 
8.9
Garden Ridge
 
Sep. 2014
 
US
 
4
 
564,910

 
14.0
Waste Management
 
Sep. 2014
 
US
 
1
 
84,119

 
7.3
Intier Automotive Interiors
 
Sep. 2014
 
UK
 
1
 
152,711

 
8.6
HP Enterprise Services
 
Sep. 2014
 
UK
 
1
 
99,444

 
10.5
Shaw Aero Devices, Inc.
 
Sep. 2014
 
US
 
1
 
130,581

 
7.0
FedEx Freight
 
Sep. 2014
 
US
 
1
 
11,501

 
8.5
Hotel Winston
 
Sep. 2014
 
NETH
 
1
 
24,283

 
14.0
Dollar General - 39-Pack
 
Sep. 2014
 
US
 
39
 
369,644

 
12.5
FedEx III
 
Sep. 2014
 
US
 
2
 
221,260

 
8.8
Mallinkrodt Pharmaceuticals
 
Sep. 2014
 
US
 
1
 
89,900

 
8.9

38
Table of Contents

Portfolio
 
Acquisition Date
 
Country
 
Number of Properties
 
Square Feet
 
Remaining
Lease Term (1)
Kuka
 
Sep. 2014
 
US
 
1
 
200,000

 
8.8
CHE Trinity
 
Sep. 2014
 
US
 
2
 
373,593

 
7.2
FedEx IV
 
Sep. 2014
 
US
 
2
 
255,037

 
7.4
GE Aviation
 
Sep. 2014
 
US
 
1
 
102,000

 
7.3
DNV GL
 
Oct. 2014
 
US
 
1
 
82,000

 
9.4
Bradford & Bingley
 
Oct. 2014
 
UK
 
1
 
120,618

 
14.0
Rexam
 
Oct. 2014
 
GER
 
1
 
175,615

 
9.4
FedEx V
 
Oct. 2014
 
US
 
1
 
76,035

 
8.8
CJ Energy
 
Oct. 2014
 
US
 
1
 
96,803

 
10.5
Family Dollar II
 
Oct. 2014
 
US
 
34
 
282,730

 
14.0
Panasonic
 
Oct. 2014
 
US
 
1
 
48,497

 
12.8
Onguard
 
Oct. 2014
 
US
 
1
 
120,000

 
8.3
Metro Tonic
 
Oct. 2014
 
GER
 
1
 
636,066

 
10.0
Axon Energy Products
 
Oct. 2014
 
US
 
1
 
26,400

 
9.1
Tokmanni
 
Nov. 2014
 
FIN
 
1
 
800,834

 
17.9
Fife Council
 
Nov. 2014
 
UK
 
1
 
37,331

 
8.4
Family Dollar III
 
Nov. 2014
 
US
 
2
 
16,442

 
13.9
GSA IX
 
Nov. 2014
 
US
 
1
 
28,300

 
6.6
KPN BV
 
Nov. 2014
 
NETH
 
1
 
133,053

 
11.3
RWE AG
 
Nov. 2014
 
GER
 
3
 
594,415

 
9.2
Follett School
 
Dec. 2014
 
US
 
1
 
486,868

 
9.3
Quest Diagnostics
 
Dec. 2014
 
US
 
1
 
223,894

 
8.9
Family Dollar IV
 
Dec. 2014
 
US
 
1
 
8,030

 
13.9
Diebold
 
Dec. 2014
 
US
 
1
 
158,330

 
6.3
Dollar General
 
Dec. 2014
 
US
 
1
 
12,406

 
12.4
Weatherford Intl
 
Dec. 2014
 
US
 
1
 
19,855

 
10.1
AM Castle
 
Dec. 2014
 
US
 
1
 
127,600

 
9.1
FedEx VI
 
Dec. 2014
 
US
 
1
 
27,771

 
8.9
Constellium Auto
 
Dec. 2014
 
US
 
1
 
320,680

 
14.2
C&J Energy II
 
Mar. 2015
 
US
 
1
 
125,000

 
10.5
Fedex VII
 
Mar. 2015
 
US
 
1
 
12,018

 
9.0
Fedex VIII
 
Apr. 2015
 
US
 
1
 
25,852

 
9.0
Fresenius
 
May 2015
 
US
 
1
 
10,155

 
14.4
Fresenius
 
Jul. 2015
 
US
 
1
 
6,192

 
14.8
Crown Group
 
Aug. 2015
 
US
 
3
 
295,974

 
19.8
Crown Group
 
Aug. 2015
 
US
 
3
 
642,595

 
19.9
Mapes & Sprowl Steel, Ltd.
 
Sep. 2015
 
US
 
1
 
60,798

 
14.3
JIT Steel Services
 
Sep. 2015
 
US
 
2
 
126,983

 
14.3
Beacon Health System, Inc.
 
Sep. 2015
 
US
 
1
 
49,712

 
10.5
Hannibal/Lex JV LLC
 
Sep. 2015
 
US
 
1
 
109,000

 
14.0
FedEx Ground
 
Sep. 2015
 
US
 
1
 
91,029

 
9.8
Office Depot
 
Sep. 2015
 
NETH
 
1
 
206,331

 
13.4
Finnair
 
Sep. 2015
 
FIN
 
4
 
656,275

 
8.9
Total
 
 
 
 
 
329
 
18,739,733

 
11.5
_____________________________________
(1) 
Remaining lease term in years as of September 30, 2015.
(2) 
The Company has expanded the property in September 2015 by purchasing additional 15,975 square feet with 14.8 years of remaining lease term as of September 30, 2015.

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Table of Contents

Results of Operations
Comparison of Three Months Ended September 30, 2015 to Three Months Ended September 30, 2014
Rental Income
Rental income was $47.8 million and $25.4 million for the three months ended September 30, 2015 and 2014, respectively. The significant increase in rental income was driven primarily by our acquisition of 83 properties since September 30, 2014, for an aggregate purchase price of $0.9 billion.
Operating Expense Reimbursements
Operating expense reimbursements were $2.4 million for the three months ended September 30, 2015 compared to $0.5 million in the corresponding period in 2014. Our lease agreements generally require tenants to pay all property operating expenses, in addition to base rent, however some limited property operating expenses may be absorbed by the Company. Operating expense reimbursements primarily reflect insurance costs incurred by us and subsequently reimbursed by the tenant. The increase over 2014 is largely driven by acquisitions made in latter part of 2014 and during 2015.
Property Operating Expenses
Property operating expenses were $3.4 million for the three months ended September 30, 2015. These costs primarily relate to insurance on our properties, which are generally reimbursable by the tenants. Property operating expenses were $1.4 million for the three months ended September 30, 2014. The increase is primarily driven by our acquisition of 83 properties since September 30, 2014, most of which are triple net leases. The main exceptions are GSA properties for which certain expenses are not reimbursable by tenants.
Operating Fees to Affiliates
Operating fees to affiliates were $4.9 million for the three months ended September 30, 2015. Operating fees to affiliates represent compensation to the Advisor for asset management services as well as property management fees paid to the Service Provider for our European investments. Prior to April 1, 2015, we issued to the Advisor restricted performance based subordinated participation interests in the OP in the form of Class B units for asset management services, which converted to OP Units as of the Listing. For the three months ended September 30, 2014, the Board approved the issuance of 170,297 Class B Units to the Advisor assuming a price of $9.00 per unit.
Our Service Provider and Property Manager are entitled to fees for the management of our properties. Property management fees are calculated as a percentage of gross revenues. During the three months ended September 30, 2015 and 2014, property management fees were $1.0 million and $0.2 million, respectively. The Property Manager elected to waive $0.7 million and $0.2 million of the property management fees for the three months ended September 30, 2015 and 2014, respectively. There was no Incentive Compensation incurred for the three months ended September 30, 2015.
Acquisition and Transaction Related Costs
Acquisition and transaction related expenses for the three months ended September 30, 2015 of $4.7 million primarily related to the purchase of 18 properties with an aggregate purchase price of $207.8 million. Acquisition and transaction related expenses for the three months ended September 30, 2014 of $29.1 million were incurred related to the 150 properties acquired during that period with an aggregate purchase price of $0.9 billion.
Listing Fees
During the three months ended September 30, 2015, the Company did not incur any listing related fees in association with the Listing.
Vesting of Class B units
There was no additional expense realized during the three months ended September 30, 2015 relating to the vesting of Class B units previously issued to the Advisor for prior asset management services. The performance condition related to these Class B units was satisfied upon completion of the Listing and on June 2, 2015, the Class B units were converted to OP Units on a one-to-one basis.
Change in Fair Value of Listing Note
The change of $1.1 million for the three months ended September 30, 2015, represents the valuation change of the Listing Note. The fair value of the Listing Note obligation is not yet definitive and the final value could differ materially from the value at September 30, 2015. The Listing Note is marked-to-market quarterly, with changes in the value recorded in the consolidated statements of operations and comprehensive income (loss).

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General and Administrative Expense
General and administrative expense of $2.0 million for the three months ended September 30, 2015, primarily included board member compensation, directors and officers' liability insurance, and professional fees including audit and taxation services. General and administrative expense for the three months ended September 30, 2014 was approximately $0.7 million.
Equity Based Compensation
During the three months ended September 30, 2015, the Company recognized approximately $1.9 million primarily related to the amortization of the OPP.
Depreciation and Amortization
Depreciation and amortization expense was $22.9 million and $15.1 million for the three months ended September 30, 2015 and 2014, respectively. The majority of the portfolio was acquired in 2014. The purchase price of acquired properties is allocated to tangible and identifiable intangible assets and depreciated or amortized over the estimated useful lives. The increase is due to our acquisition of 329 properties since inception with an aggregate base purchase price of $2.6 billion, as of the respective acquisition dates.
Income Tax Expense
Income tax expense was $0.7 million for the three months ended September 30, 2015 primarily reflects provisions for taxes due in foreign jurisdictions. Income tax expense for the three months ended September 30, 2014 was approximately $0.1 million.
Interest Expense
Interest expense of $9.0 million and $4.1 million was incurred for the three months ended September 30, 2015 and 2014, respectively. The increase was primarily related to an increase in average borrowings to finance our property acquisitions and additional draws under credit facility.
Foreign Currency and Interest Rate Impact on Operations
There were minimal realized gains or (losses) on day to day foreign currency fluctuations for the three months ended September 30, 2015, reflecting the limited effect of day to day movements in foreign currency exchange rates. A loss on foreign currency of $0.7 million was realized for the three months ended September 30, 2014.
The gains on derivative instruments for the three months ended September 30, 2015 of $2.3 million reflect a negative marked-to-market impact from foreign currency and interest rate hedge instruments used to protect the investment portfolio from adverse currency and interest rate movements, and was mainly driven by volatility in foreign currencies, particularly the Euro. A gain on derivative instruments of $0.8 million was realized for the three months ended September 30, 2014.
The gains on hedges and derivatives deemed ineffective for the three months ended September 30, 2015 were $1.5 million relate to the marked-to-market adjustments of slightly over-hedged portion of our European investments at September 30, 2015. There were no corresponding gains or (losses) for the three months ended September 30, 2014.
We had no unrealized gains/losses on non-functional foreign currency advances that were not designated as net investment hedges for the three months ended September 30, 2015. There were no corresponding gains or (losses) for the three months ended September 30, 2014. Effective May 17, 2015, additional foreign currency advances were designated as net investment hedges.
Comparison of Nine Months Ended September 30, 2015 to Nine Months Ended September 30, 2014
Rental Income
Rental income was $142.5 million and $45.9 million for the nine months ended September 30, 2015 and 2014, respectively. The significant increase in rental income was driven primarily by our acquisition of 83 properties since September 30, 2014, for an aggregate purchase price of $0.9 billion.
Operating Expense Reimbursements
Operating expense reimbursements were $6.8 million for the nine months ended September 30, 2015 compared to $1.1 million in the corresponding period in 2014. Our lease agreements generally require tenants to pay all property operating expenses, in addition to base rent, however some limited property operating expenses may be absorbed by the Company. Operating expense reimbursements primarily reflect insurance costs incurred by us and subsequently reimbursed by the tenant. The increase over 2014 is largely driven by acquisitions made in 2014 and 2015.

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Table of Contents

Property Operating Expenses
Property operating expenses were $10.8 million for the nine months ended September 30, 2015. These costs primarily relate to insurance on our properties, which are generally reimbursable by the tenants. Property operating expenses were $2.4 million for the nine months ended September 30, 2014. The increase is primarily driven by our acquisition of 83 properties since September 30, 2014, most of which are triple net leases. The main exceptions are GSA properties for which certain expenses are not reimbursable by tenants.
Operating Fees to Affiliates
Operating fees to affiliates were $10.2 million for the nine months ended September 30, 2015. Operating fees to affiliates represent compensation to the Advisor for asset management services as well as property management fees paid to the Service Provider for our European investments. Prior to April 1, 2015, we issued the Advisor restricted performance based subordinated participation interests in the OP in the form of Class B units for asset management services, which converted to OP Units as of the Listing. For the nine months ended September 30, 2014, the Board approved the issuance of 317,064 Class B Units to the Advisor assuming a price of $9.00 per unit.
Our Service Provider and Property Manager are entitled to fees for the management of our properties. Property management fees are calculated as a percentage of gross revenues. During the nine months ended September 30, 2015 and 2014, property management fees were $3.0 million and $0.4 million, respectively. The Property Manager elected to waive $1.9 million and $0.4 million of the property management fees for the nine months ended September 30, 2015 and 2014, respectively. There was no Incentive Compensation incurred for the nine months ended September 30, 2015.
Acquisition and Transaction Related Costs
Acquisition and transaction related expenses for nine months ended September 30, 2015 of $6.0 million primarily related to the purchase of 22 properties with an aggregate purchase price of $255.0 million. Acquisition and transaction related expenses for the nine months ended September 30, 2014 of $53.9 million were incurred related to the 209 properties acquired during that period with an aggregate purchase price of $1.5 billion.
Listing Fees
During the nine months ended September 30, 2015, the Company paid approximately $18.5 million in listing related fees in association with the Listing.
Vesting of Class B units
Vesting of Class B units expense was $14.5 million for the nine months ended September 30, 2015, relating to the vesting of Class B units previously issued to the Advisor for prior asset management services. The performance condition related to these Class B units was satisfied upon completion of the Listing and on June 2, 2015, the Class B units were converted to OP Units on a one-to-one basis.
Change in Fair Value of Listing Note
The change of $3.4 million for the nine months ended September 30, 2015 represents the valuation change of the Listing Note through September 30, 2015. The fair value of the Listing Note obligation is not yet definitive and the final value could differ materially from the value at September 30, 2015. The Listing Note is marked-to-market quarterly, with changes in the value recorded in the consolidated statements of operations and comprehensive income (loss).
General and Administrative Expense
General and administrative expense was $5.6 million for the nine months ended September 30, 2015, primarily included board member compensation, directors and officers' liability insurance, and professional fees including audit and taxation services. General and administrative expense for the nine months ended September 30, 2014 was approximately $2.1 million.
Equity Based Compensation
During the nine months ended September 30, 2015, the Company recognized approximately $2.3 million primarily related to the amortization of the OPP and $0.1 million related to amortization of directors shares.
Depreciation and Amortization
Depreciation and amortization expense was $66.2 million and $27.1 million for the nine months ended September 30, 2015 and 2014, respectively. The majority of the portfolio was acquired in 2014. The purchase price of acquired properties is allocated to tangible and identifiable intangible assets and depreciated or amortized over the estimated useful lives. The increase is due our acquisition of 329 properties since inception with an aggregate base purchase price of $2.6 billion, as of the respective acquisition dates.

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Table of Contents

Income Tax Expense
The income tax expense was $3.6 million for the nine months ended September 30, 2015 primarily reflects provisions for taxes due in foreign jurisdictions. Income tax expense for the nine months ended September 30, 2014 was approximately $1.0 million.
Interest Expense
Interest expense of $24.8 million and $8.4 million was incurred for the nine months ended September 30, 2015 and 2014, respectively. The increase was primarily related to an increase in average borrowings used to finance our property acquisitions and additional draws under credit facility.
Foreign Currency and Interest Rate Impact on Operations
There were minimal realized gains or (losses) on day to day foreign currency fluctuations for the nine months ended September 30, 2015, reflecting the limited effect of day to day movements in foreign currency exchange rates. A loss on foreign currency of $0.8 million was realized for the nine months ended September 30, 2014.
The gains on derivative instruments for the nine months ended September 30, 2015 of $2.8 million reflect the positive marked-to-market impact from foreign currency and interest rate hedge instruments used to protect the investment portfolio from adverse currency and interest rate movements, and was mainly driven by volatility in foreign currencies, particularly the Euro. A gain on derivative instruments of $0.6 million was realized for the nine months ended September 30, 2014.
The gains on hedges and derivatives deemed ineffective for the nine months ended September 30, 2015 were $2.4 million which relate to the marked-to-market adjustments of slightly over-hedged portion of our European investments September 30, 2015. There were no corresponding gains or (losses) for the nine months ended September 30, 2014.
The unrealized losses on non-functional foreign currency advances that were not designated as net investment hedges for the nine months ended September 30, 2015 were $2.9 million. There were no corresponding gains or (losses) for the nine months ended September 30, 2014. Effective May 17, 2015, additional foreign currency advances were designated as net investment hedges.
Cash Flows for Nine Months Ended September 30, 2015
During the nine months ended September 30, 2015, net cash provided by operating activities was $66.4 million. The level of cash flows provided by operating activities is driven by the volume of acquisition activity, related rental income received, vesting of asset management fees in the form of Class B units, and the amount of interest payments on outstanding borrowings. Cash flows provided in operating activities during the nine months ended September 30, 2015 also included $6.0 million of acquisition and transaction related costs.
Net cash used in investing activities during the nine months ended September 30, 2015 was $222.0 million, primarily related to our acquisition of 22 properties with an aggregate base purchase price of $255.0 million, which were partially funded with borrowings under our credit facility.
Net cash provided in financing activities of $116.9 million during the nine months ended September 30, 2015 related to proceeds, net of receivables, from the issuance of Common Stock of $0.4 million, borrowings under credit facility of $476.2 million, proceeds from mortgage notes payable of $207.9 million and net advances from affiliates of $1.0 million, partially offset by Common Stock repurchases of $127.3 million and repayments on credit facility of $370.6 million. Other payments included dividends to stockholders of $68.1 million.
Cash Flows for the Nine Months Ended September 30, 2014
During the nine months ended September 30, 2014, net cash used in operating activities was $9.6 million. The level of cash flows used in or provided by operating activities is affected by the volume of acquisition activity, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rental payments. Cash flows used in operating activities during the nine months ended September 30, 2014 included $53.9 million of acquisition and transaction related costs.
Net cash used in investing activities during the nine months ended September 30, 2014 of $1.1 billion, primarily related to our acquisition of 209 properties with an aggregate base purchase price of $1.5 billion, and partially funded with $328.9 million borrowings under the credit facility of which $309.1 million is non-cash activity.
Net cash provided by financing activities of $1.4 billion during the nine months ended September 30, 2014 related to proceeds, net of receivables, from the issuance of Common Stock of $1.6 billion and borrowings under credit facility of $19.8 million, partially offset by offering cost payments of $167.6 million and repayments on credit facility of $19.6 million. Other payments included deferred financing costs of $10.1 million, dividends to stockholders of $21.6 million and net advances from affiliates of $0.5 million.

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Table of Contents


Liquidity and Capital Resources
As of September 30, 2015, we had cash of $32.1 million. Principal future demands on cash will include the purchase of additional properties or other investments in accordance with our investment strategy, payment of related acquisition costs, improvement costs, the payment of our operating and administrative expenses, continuing debt service obligations and dividends to our stockholders. Management expects that as our portfolio matures rental income from our properties should cover operating expenses and the payment of our monthly dividend.
Generally, we fund our acquisitions through a combination of cash with mortgage or other debt, but we also may acquire assets free and clear of permanent mortgage or other indebtedness. See Note 5 — Mortgage Notes Payable to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for further discussion. Other potential future sources of capital include proceeds from secured or unsecured financings from banks or other lenders, proceeds from future offerings, proceeds from the sale of properties and undistributed funds from operations.
As of September 30, 2015, we have a revolving credit facility that currently permits us to borrow up to $740.0 million. The initial maturity date of the credit facility is July 25, 2016. The credit facility also contains two one-year extension options, subject to certain conditions. See Note 4 — Revolving Credit Facility to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for further discussion of the terms and conditions of this facility.
As of September 30, 2015, total outstanding advances under the credit facility were $735.4 million. The unused borrowing capacity, based on the value of the borrowing base properties as of September 30, 2015 was $4.6 million.
Our current intention is to limit aggregate borrowings to 45% of the aggregate fair market value of our assets (calculated after the close of our offering and once we have invested substantially all the proceeds of our offering), unless borrowing a greater amount is approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for borrowing such a greater amount. This limitation does not apply to individual real estate assets or investments. At the date of acquisition of each asset, we anticipate that the cost of investment for such asset will be substantially similar to its fair market value, which will enable us to satisfy our requirements under our charter. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limits. As of September 30, 2015, we had secured mortgage notes payable of $509.4 million and outstanding advances under our credit facility of $735.4 million. Our debt leverage ratio was 47.3% (total debt as a percentage of total purchase price of real estate investments) as of September 30, 2015.
On April 7, 2015, the Company's board of directors approved the termination of the Company’s Share Repurchase Program (“SRP”). The Company processed all of the requests received under the SRP in the first quarter of 2015 and will not process further requests.
The following table reflects the cumulative number of common shares repurchased as of December 31, 2014 and as of and for the nine months ended September 30, 2015:
 
 
Number of Shares Repurchased
 
Weighted Average Price per Share
Cumulative repurchases as of December 31, 2014
 
99,969
 
$
9.91

Redemptions
 
135,123
 
9.78

Shares repurchased under Tender Offer
 
11,904,762

 
10.50

Cumulative repurchases as of September 30, 2015
 
12,139,854
 
$
10.49

In addition, in April 2015 the Company suspended its Dividend Reinvestment Program (DRIP) and terminated its Share Repurchase Program (SRP). The Company has enjoyed high participation in DRIP and its suspension will result in higher monthly cash dividend payments which will be funded from cash earned from the investment portfolio. The termination of SRP will have a positive but immaterial impact for liquidity purposes.

44
Table of Contents

Non-GAAP Financial Measures
This section includes non-GAAP financial measures, including Funds from Operations, Core Funds from Operations and Adjusted Funds from Operations. A description of these non-GAAP measures and reconciliations to the most directly comparable GAAP measure, which is net income, is provided below.
Funds from Operations, Core Funds from Operations and Adjusted Funds from Operations
Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has promulgated a measure known as funds from operations ("FFO"), which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to net income or loss as determined under accounting principles generally accepted in the United States ("GAAP").
We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property but including asset impairment writedowns, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO. Our FFO calculation complies with NAREIT's definition.
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time, especially if not adequately maintained or repaired and renovated as required by relevant circumstances or as requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, because real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation and certain other items may be less informative. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization, among other things, provides a more complete understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. However, FFO, core funds from operations ("Core FFO") and adjusted funds from operations (“AFFO”), as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO, Core FFO and AFFO measures and the adjustments to GAAP in calculating FFO, Core FFO and AFFO. Other REITs may not define FFO in accordance with the current NAREIT definition (as we do) or may interpret the current NAREIT definition differently than we do and/or calculate Core FFO and/or AFFO differently than we do. Consequently, our presentation of FFO, Core FFO and AFFO may not be comparable to other similarly titled measures presented by other REITs.
We consider FFO, Core FFO and AFFO useful indicators of our performance. Because FFO calculations exclude such factors as depreciation and amortization of real estate assets and gains or losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), FFO facilitates comparisons of operating performance between periods and between other REITs in our peer group.
Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) that were put into effect in 2009 and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT's definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses for all industries as items that are expensed under GAAP, that are typically accounted for as operating expenses.
Core FFO is FFO, excluding acquisition and transaction related costs as well as certain other costs that are considered to be non-core, such as charges relating to the Listing Note and listing related fees. The purchase of properties, and the corresponding expenses associated with that process, is a key operational feature of our business plan to generate operational income and cash flows in order to make dividend payments to stockholders. In evaluating investments in real estate, we differentiate the costs to acquire the investment from the operations derived from the investment. By excluding expensed acquisition and transaction related costs as well as non-core costs, we believe Core FFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management's analysis of the investing and operating performance of our properties.
We exclude certain income or expense items from AFFO that we consider more reflective of investing activities, other non-cash income and expense items and the income and expense effects of other activities that are not a fundamental attribute of our business plan. These items include unrealized gains and losses, which may not ultimately be realized, such as gains or losses on

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contingent valuation rights, gains and losses on investments and early extinguishment of debt. We also exclude dividends on Class B OP Units as the related shares are assumed to have converted to common stock in our calculation of fully diluted weighted average shares of common stock. In addition, by excluding non-cash income and expense items such as amortization of above-market and below-market leases intangibles, amortization of deferred financing costs, straight-line rent and equity-based compensation from AFFO, we believe we provide useful information regarding income and expense items which have no cash impact and do not provide liquidity to the company or require capital resources of the company. By providing AFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our ongoing operating performance without the impacts of transactions that are not related to the ongoing profitability of our portfolio of properties. We also believe that AFFO is a recognized measure of sustainable operating performance by the REIT industry. Further, we believe AFFO is useful in comparing the sustainability of our operating performance with the sustainability of the operating performance of other real estate companies that are not making a significant number of acquisitions. Investors are cautioned that AFFO should only be used to assess the sustainability of our operating performance excluding these activities, as it excludes certain costs that have a negative effect on our operating performance during the periods in which these costs are incurred.
In calculating AFFO, we exclude certain expenses, which under GAAP are characterized as operating expenses in determining operating net income. These expenses are paid in cash by us, and therefore such funds will not be available to distribute to investors. All paid and accrued merger, acquisition and transaction related fees and certain other expenses negatively impact our operating performance during the period in which expenses are incurred or properties are acquired will also have negative effects on returns to investors, the ability to fund dividends or distributions in the future, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property and certain other expenses. AFFO that excludes such costs and expenses would only be comparable to companies that did not have such activities. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flow from operating activities. In addition, we view fair value adjustments as items which are unrealized and may not ultimately be realized. We view both gains and losses from fair value adjustments as items which are not reflective of ongoing operations and are therefore typically adjusted for when assessing operating performance. Excluding income and expense items detailed above from our calculation of AFFO provides information consistent with management's analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe AFFO provides useful supplemental information.
As a result, we believe that the use of FFO, Core FFO and AFFO, together with the required GAAP presentations, provide a more complete understanding of our performance relative to our peers and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities.

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The table below reflects the items deducted or added to net income (loss) attributable to stockholders in our calculation of FFO, Core FFO and AFFO for the periods indicated. The Company previously disclosed FFO and modified funds from operations as Non-GAAP measures. Prior periods have been recast based on the Non-GAAP Financial Measurements presented. Management believes these Non-GAAP measures are more meaningful to the users of our financial statements given our Listing.
 
 
Three Months Ended
 
Nine Months Ended
September 30, 2015
(In thousands)
 
March 31, 2015
 
June 30, 2015
 
September 30, 2015
 
Net income (loss) attributable to stockholders (in accordance with GAAP)
 
$
25,855

 
$
(45,664
)
 
$
5,432

 
$
(14,377
)
Depreciation and amortization
 
21,114

 
22,089

 
22,949

 
66,152

 FFO (as defined by NAREIT) attributable to stockholders
 
46,969

 
(23,575
)
 
28,381

 
51,775

Acquisition and transaction fees
 
1,085

 
212

 
4,680

 
5,977

Listing fees

—

 
18,503

 
—

 
18,503

Vesting of Class B units upon Listing
 
—

 
14,480

 
—

 
14,480

Change in fair value of Listing Note
 
—

 
4,430

 
(1,050
)
 
3,380

Core FFO
 
48,054

 
14,050

 
32,011

 
94,115

Non-cash equity based compensation
 
8

 
510

 
1,917

 
2,435

Non-cash portion of interest expense
 
1,944

 
1,994

 
2,306

 
6,244

Class B distributions
 
124

 
309

 
(94
)
 
339

Non recurring general and administrative expenses (1)
 
—

 
—

 
188

 
188

Straight-line rent
 
(4,439
)
 
(3,437
)
 
(3,697
)
 
(11,573
)
Amortization of above- and below- market leases and ground lease assets and liabilities, net
 
109

 
101

 
94

 
304

Realized losses on investment securities
 
—

 
—

 
66

 
66

(Gains) losses on derivative instruments (2)
 
—

 
—

 
—

 
—

(Gains) losses on hedges and derivatives deemed ineffective
 
(1,448
)
 
508

 
(1,505
)
 
(2,445
)
Unrealized (gains) losses on non-functional foreign currency advances not designated as net investment hedges
 
(8,907
)
 
11,842

 
—

 
2,935

Amortization of mortgage premium
 
(42
)
 
(202
)
 
(123
)
 
(367
)
AFFO
 
35,403

 
25,675

 
31,163

 
92,241

______________________________________________________
(1) 
Represents our estimate of non-recurring internal audit service fees.
(2) 
During the third quarter 2015, we no longer adjust AFFO for (gains) losses on derivative instruments. As a result of this change, we revised the prior period amounts in our reconciliation of AFFO. AFFO for three months ended June 30, 2015 and March 31, 2015 were previously reported as $29,411 and $31,192, respectively, when including the (gains) losses on derivatives instruments of $3,736 and $(4,211) for each of these respective periods.
Dividends
We pay dividends on the 15th day of each month at a rate of $0.059166667 per share to stockholders of record as of close of business on the 8th day of such month.
The amount of dividends payable to our stockholders is determined by our board of directors and is dependent on a number of factors, including funds available for dividends, our financial condition, capital expenditure requirements, as applicable, requirements of Maryland law and annual dividend requirements needed to qualify and maintain our status as a REIT for U.S. federal income tax purposes under the Internal Revenue Code of 1986, as amended (the "Code"). Dividend payments are dependent on the availability of funds. Our board of directors may reduce the amount of dividends paid or suspend dividend payments at any time and therefore dividend payments are not assured. There is no assurance that we will continue to declare dividends at this rate.
During the nine months ended September 30, 2015, dividends paid to common stockholders were $96.7 million, inclusive of $28.6 million of dividends issued under the DRIP. During the nine months ended September 30, 2015, cash used to pay dividends was generated from cash flows from operations, the net proceeds of our IPO and Common Stock issued under the DRIP.

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The following table shows the sources for the payment of dividends to common stockholders for the periods indicated:
 
 
Three Months Ended
 
Nine Months Ended September 30, 2015
 
 
March 31, 2015
 
June 30, 2015
 
September 30, 2015
 
(In thousands)
 
 
 
Percentage of Dividends
 
 
 
Percentage of Dividends
 
 
 
Percentage of Dividends
 
 
 
Percentage of Dividends
Dividends:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends to stockholders (1)
 
$
31,275

 
 
 
$
35,087

 
 
 
$
30,308

 
 
 
$
96,670

 
 
Other (2)
 
—

 
 
 
—

 
 
 
321

 
 
 
321

 
 
Total dividends
 
31,275

 
 
 
35,087

 
 
 
30,629

 
 
 
96,991

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Source of dividend coverage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows provided by operations
 
$
14,268

 
45.6
%
 
$
23,516

 
67.0
%
 
$
30,629

 
100.0
%
 
$
68,413

 
70.5
%
Proceeds from issuance of Common Stock
 
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
—

 
—
%
Common Stock issued under the DRIP
 
17,007

 
54.4
%
 
11,571

 
33.0
%
 
—

 
—
%
 
28,578

 
29.5
%
Total sources of dividend coverage
 
$
31,275

 
100.0
%
 
$
35,087

 
100.0
%
 
$
30,629

 
100.0
%
 
$
96,991

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows provided by operations (GAAP basis) (3)
 
$
34,489

 
 
 
$
9,948

 
 
 
$
56,453

 
 
 
$
66,401

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to stockholders (in accordance with GAAP)
 
$
25,855

 
 
 
$
(45,664
)
 
 
 
$
5,432

 
 
 
$
(14,377
)
 
 
______________________________________________________
(1) 
Dividends for the periods indicated above include cash dividends paid and DRIP dividends issued, and exclude dividends related to unvested restricted stock. For the three and nine months ended September 30, 2015 total accrued and unpaid distributions for unvested restricted stock were $36,000 and therefore were not included in the table above as they remain unpaid as of September 30, 2015.
(2) 
Includes distributions paid of $0.3 million for the OP Units. For the three and nine months ended September 30, 2015 total accrued and unpaid distributions to the participating LTIP Units were $0.2 million and therefore were not included in the table above as they remain unpaid as of September 30, 2015.
(3) 
Cash flows used in operations for the nine months ended September 30, 2015 reflects acquisition and transaction related expenses of $6.0 million.

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The following table compares cumulative dividends paid to cumulative net loss (in accordance with GAAP) for the period from July 13, 2011 (date of inception) through September 30, 2015:
 
 
For the Period from
July 13, 2011
(date of inception) to
(In thousands)
 
September 30, 2015
Dividends paid:
 
 
Common stockholders in cash
 
$
105,260

Common stockholders pursuant to DRIP
 
74,789

Vested restricted stockholders in cash
 
20

Total dividends paid
 
$
180,069

 
 
 

Reconciliation of net loss:
 
 

Revenues
 
$
246,653

Acquisition and transaction-related expenses
 
(97,448
)
Listing fees
 
(18,503
)
Vesting of Class B units
 
(14,480
)
Change in fair value of listing note
 
(3,380
)
Equity based compensation
 
(2,420
)
Depreciation and amortization
 
(108,672
)
Other operating expenses
 
(40,063
)
Income tax benefit (expense)
 
(2,215
)
Other non-operating expense
 
(34,950
)
Non-controlling interest
 
87

Net loss attributable to stockholders (in accordance with GAAP) (1)
 
$
(75,391
)
___________________________________________
(1) 
Net loss attributable to stockholders as defined by GAAP includes the non-cash impact of depreciation and amortization expense as well as costs incurred relating to acquisitions and related transactions.
Loan Obligations
Our loan obligations generally require principal and interest amounts payable monthly with all unpaid principal and interest due at maturity. The loan agreements stipulate compliance with specific reporting covenants. As of September 30, 2015, we were in compliance with the debt covenants under our loan agreements.
Our Advisor, with approval from our independent board of directors, may seek to borrow short-term capital that, combined with secured mortgage financing, exceeds our targeted leverage ratio. Such short-term borrowings may be obtained from third-parties on a case-by-case basis as acquisition opportunities present themselves simultaneous with our capital raising efforts. We view the use of short-term borrowings as an efficient and accretive means of acquiring real estate in advance of raising equity capital. Accordingly, we can take advantage of buying opportunities as we expand our fund raising activities. As additional equity capital is obtained, these short-term borrowings will be repaid.
Foreign Currency Translation
Our reporting currency is the U.S. dollar. The functional currency of our foreign investments is the applicable local currency for each foreign location in which we invest. Assets and liabilities in these foreign locations (including intercompany balances for which settlement is not anticipated in the foreseeable future) are translated at the spot rate in effect at the applicable reporting date. The amounts reported in the consolidated statements of operations are translated at the average exchange rates in effect during the applicable period. The resulting unrealized cumulative translation adjustment is recorded as a component of accumulated other comprehensive income (loss) in the consolidated statement of equity.

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Contractual Obligations
The following table presents our estimated future payments under contractual obligations at September 30, 2015 and the effect these obligations are expected to have on our liquidity and cash flow in the specified future periods:
(In thousands)
 
Total
 
Less than 1 Year
 
1-3 Years
 
3-5 Years
 
More than 5 Years
Principal on mortgage notes payable
 
$
509,427

 
$
747

 
$
104,900

 
$
354,804

 
$
48,976

Interest on mortgage notes payable (1)
 
62,402

 
15,186

 
29,170

 
17,130

 
916

Principal on credit facility (2)
 
735,357

 
735,357

 
—

 
—

 
—

Interest on credit facility (1)
 
11,233

 
11,233

 
—

 
—

 
—

Operating ground lease rental payments due
 
75,001

 
1,348

 
2,776

 
2,886

 
67,991

Total  (3) (4)
 
$
1,393,420

 
$
763,871

 
$
136,846

 
$
374,820

 
$
117,883

_________________________
(1) 
Based on interest rates at September 30, 2015.
(2) 
The initial maturity date of the Credit Facility is July 25, 2016 with two one-year extension options, subject to certain conditions.
(3) 
Amounts in the table above that relate to our foreign operations are based on the exchange rate of the local currencies at September 30, 2015, which consisted primarily of the Euro and British Pounds. At September 30, 2015, we had no material capital lease obligations for which we were the lessee, either individually or in the aggregate.
(4) 
Derivative payments are not included in this table due to the uncertainty of the timing and amounts of payments. Additionally, as derivatives can be settled at any point in time, they are generally not considered long-term in nature.
Inflation
We may be adversely impacted by inflation on any leases that do not contain indexed escalation provisions. In addition, we may be required to pay costs for maintenance and operation of properties which may adversely impact our results of operations due to potential increases in costs and operating expenses resulting from inflation.
Related-Party Transactions and Agreements
We have entered into agreements with affiliates of our Sponsor, whereby we have paid or may in the future pay certain fees or reimbursements to our Advisor or its affiliates and entities under common control with our Advisor in connection with sales and maintenance of Common Stock under our offering, transfer agency services, asset and property management services and reimbursement of operating and offering related costs. See Note 11 — Related Party Transactions to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of the various related party transactions, agreements and fees.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as of September 30, 2015 that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors other than our future obligations under nonconcealable operating ground leases (see Note 10 — Commitments and Contingencies and Contractual Obligations for details).
Election as a REIT 
We qualified to be taxed as a REIT for U.S. federal income tax purposes under Sections 856 through 860 of the Code, commencing with our taxable year ended December 31, 2013. Commencing with such taxable year, we were organized and operate in such a manner as to qualify for taxation as a REIT under the Code. We intend to continue to operate in such a manner to qualify for taxation as a REIT for U.S. federal income tax purposes, but no assurance can be given that we will operate in a manner so as to qualify or remain qualified as a REIT for U.S. federal income tax purposes. In order to continue to qualify for taxation as a REIT, we must, among other things, distribute annually at least 90% of our REIT taxable income. REITs are subject to a number of other organizational and operational requirements. Even if we qualify for taxation as a REIT, we may be subject to certain federal, state, local and foreign taxes on our 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 our earnings and our available cash.
In addition, our international assets and operations, including those designated as direct or indirect qualified REIT subsidiaries or other disregarded entities of a REIT, continue to be subject to taxation in the foreign jurisdictions where those assets are held or those operations are conducted.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices, interest rates and exchange rates. Our interest rate risk management objectives with respect to our long-term debt will be to limit the impact of interest rate changes in earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we enter into interest rate hedge contracts such as swaps and collars in order to mitigate our interest rate risk with respect to various debt instruments. We would not hold or issue these derivative contracts for trading or speculative purposes. We use foreign currency derivatives including cross currency swaps to hedge our exposure to changes in foreign exchange rates on certain of our foreign investments.
As of September 30, 2015, our total consolidated debt included borrowings under our credit facility and secured mortgage financings, with a total carrying value of $1.2 billion and a total estimated fair value of $1.3 billion and a weighted average effective interest rate per annum of 2.5%. At September 30, 2015, a significant portion (approximately 67.8%) of our debt either bore interest at fixed rates or were swapped or capped to a fixed rate. The estimated fair value of our fixed-rate debt and our variable-rate debt that currently bears interest at fixed rates or has effectively been converted to a fixed rate through the use of interest rate swaps is affected by changes in interest rates. For instance, if interest rates rise 100 basis points and our fixed rate debt balance remains constant, we expect the fair value of our obligation to decrease, the same way the price of a bond declines as interest rates rise. The sensitivity analysis related to our fixed-rate debt assumes an immediate 100 basis point move in interest rates from their September 30, 2015 levels, with all other variables held constant. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed-rate debt by $2.2 million. A 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed-rate debt by $6.0 million. Interest rate volatility associated with our unhedged variable-rate debt affects interest expense incurred and cash flow. The sensitivity analysis related to our unhedged variable-rate debt assumes an immediate 100 basis point move in interest rates at the beginning of the year with all other variables held constant. A 100 basis point increase or decrease in variable interest rates on our variable-rate debt would increase or decrease our interest expense by $0.5 million and $2.9 million, respectively.
These amounts were determined by considering the impact of hypothetical interest rate changes on our borrowing costs, and assuming no other changes in our capital structure. As the information presented above includes only those exposures that existed as of September 30, 2015, it does not consider exposures or positions arising after that date. The information represented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations.
Item 4. Controls and Procedures.
In accordance with Rules 13a-15(b) and 15d-15(b) of the Exchange Act, we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q and determined that the disclosure controls and procedures are effective.
No change occurred in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the three and nine months ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
As of the end of the period covered by this Quarterly Report on Form 10-Q, we are not a party to any material pending legal proceedings.
Item 1A. Risk Factors.
Our potential risks and uncertainties are presented in the section entitled "Risk Factors", contained in the Annual Report on Form 10-K for the year ended December 31, 2014. There have been no material changes from these risk factors, except for the items described below.
Dividends paid from sources other than our cash flows from operations, particularly from proceeds of our IPO, will result in us having fewer funds available for the acquisition of properties and other real estate-related investments and may dilute your interests in us, which may adversely affect our ability to fund future distributions with cash flows from operations and may adversely affect your overall return.
Distributions paid from sources other than our cash flows from operations, particularly from proceeds of our offering, reduce the funds available for the acquisition of properties and other real estate-related investments and may dilute your interests in us, which may adversely affect our ability to fund future distributions with cash flows from operations and may adversely affect your overall return.
Our cash flows provided by operations were $66.4 million for the nine months ended September 30, 2015. During the nine months ended September 30, 2015, we paid dividends of $96.7 million, of which $28.6 million, or 29.5%, was funded from proceeds from the issuance of Common Stock and proceeds from our IPO which were reinvested in Common Stock issued under the DRIP. The remaining $68.1 million, or 70.5%, was funded from cash flows from operations. During the nine months ended September 30, 2015 cash flows from operations included an increase in accounts payable and accrued expenses of $4.3 million, as reflected on the statement of cash flows. Accordingly, if these accounts payable and accrued expenses had been paid during the nine months ended September 30, 2015, there would have been $4.3 million less in cash flows from operations available to pay dividends. Using offering proceeds to pay dividends, especially if the dividends are not reinvested through our DRIP, reduces cash available for investment in assets and other purposes and reduces our per share stockholder equity. We may continue to use the net offering proceeds to fund dividends.
We may not generate sufficient cash flows from operations to pay dividends. If we have not generated sufficient cash flows from our operations and other sources, such as from borrowings, the sale of additional securities, advances from our Advisor, and/or our Advisor's deferral, suspension and/or waiver of its fees and expense reimbursements, in order to fund dividends, we may use the proceeds from our IPO. Moreover, our board of directors may change our dividend policy, in its sole discretion, at any time. We have not established any limit on the amount of proceeds from our IPO that may be used to fund dividends, except that, in accordance with our organizational documents and Maryland law, we may not make dividends that would: (1) cause us to be unable to pay our debts as they become due in the usual course of business; (2) cause our total assets to be less than the sum of our total liabilities plus senior liquidation preferences, if any; or (3) jeopardize our ability to continue to qualify as a REIT for U.S. federal income tax purposes.
Funding dividends from borrowings could restrict the amount we can borrow for investments, which may affect our profitability. Funding dividends with the sale of assets or the proceeds from issuance of Common Stock may affect our ability to generate cash flows. Funding dividends from the sale of additional securities could dilute your interest in us if we sell shares of our Common Stock or securities that are convertible or exercisable into shares of our Common Stock to third party investors. Payment of dividends from the mentioned sources could restrict our ability to generate sufficient cash flows from operations, affect our profitability and/or affect the dividends payable to you upon a liquidity event, any or all of which may have an adverse effect on your investment.
The requirements of being a public entity and sustaining growth may strain our resources.
As a newly public entity, we are subject to the rules and requirements of the Securities and Exchange Commission, or SEC, the Sarbanes-Oxley Act, the Dodd-Frank Act, the Public Company Accounting Oversight Board, or the PCAOB, and the NYSE, each of which imposes additional reporting and other obligations on public companies. These requirements may place a strain on our systems and resources. For example, the Securities Exchange Act of 1934, as amended, or the Exchange Act, requires that we file annual, quarterly and current reports with respect to our business and financial condition and the Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting, which is discussed below.

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We have been and will continue to be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. In addition, sustaining our growth also will require us to commit additional management, operational, and financial resources to identify new professionals to join the firm and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert management's attention from other business concerns, which could have a material adverse effect on our businesses, financial condition, results of operations and cash flows. We expect to incur significant additional annual expenses related to these steps and, among other things, additional directors' and officers' liability insurance, director fees, reporting requirements of the SEC, transfer agent fees, hiring additional accounting, legal and administrative personnel, increased auditing, tax and legal fees and similar expenses.
Our results of operations and share price could be adversely affected if we are unable to maintain effective internal controls.
The accuracy of our financial reporting is dependent on the effectiveness of our internal controls. We are required to provide a report from management to our shareholders on our internal control over financial reporting that includes an assessment of the effectiveness of these controls. Internal control over financial reporting has inherent limitations, including human error, the possibility that controls could be circumvented or become inadequate because of changed conditions, and fraud. Because of these inherent limitations, internal control over financial reporting might not prevent or detect all misstatements or fraud. If we cannot maintain and execute adequate internal control over financial reporting or implement required new or improved controls that provide reasonable assurance of the reliability of the financial reporting and preparation of our financial statements for external use, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, we could fail to meet our public reporting requirements on a timely basis, be required to restate our financial statements, and the market price of our securities could be materially adversely affected.
The trading price of our Common Stock has been volatile and may fluctuate.
The trading price of our Common Stock has been volatile and may continue to fluctuate widely as a result of a number of factors, many of which are outside our control. In addition, the stock market is subject to fluctuations in the share prices and trading volumes that affect the market prices of the shares of many companies. These broad market fluctuations have in the past and may in the future adversely affect the market price of our Common Stock. Among the factors that could affect the price of our common stock are:
•
our financial condition and performance;
•
the financial condition of our tenants, including the extent of tenant bankruptcies or defaults;
•
actual or anticipated quarterly fluctuations in our operating results and financial condition;
•
our dividend policy;
•
the reputation of REITs and real estate investments generally and the attractiveness of REIT equity securities in comparison to other equity securities, including securities issued by other real estate companies, and fixed income securities;
•
our reputation and the reputation of our Sponsor and its affiliates;
•
uncertainty and volatility in the equity and credit markets;
•
fluctuations in interest rates;
•
changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to our securities or those of other REITs;
•
failure to meet analysts’ revenue or earnings estimates;
•
speculation in the press or investment community;
•
strategic actions by us or our competitors, such as acquisitions or restructurings;
•
the extent of institutional investor interest in us;
•
the extent of short-selling of our Common Stock and the shares of our competitors;
•
fluctuations in the stock price and operating results of our competitors;
•
general financial and economic market conditions and, in particular, developments related to market conditions for REITs and other real estate related companies;
•
domestic and international economic factors unrelated to our performance; and
•
all other risk factors addressed in our Annual Report on the Form 10-K and above in this Quarterly Report on Form 10-Q.

A significant decline in our stock price could result in substantial losses for our stockholders.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds of Registered Securities.
On June 2, 2015, the Advisor contributed $0.8 million in exchange for 83,333 OP Units. 1,726,323 OP Units were issued in exchange for Class B Units which were issued in reliance upon exemptions from registration provided under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. These OP Units are exchangeable for shares of Common Stock of the Company on a one-for-one basis, or the cash value of shares of Common Stock (at the option of the Company), after 12 months from the Listing Date subject to the terms of the limited partnership agreement of the OP.

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Other than as described above, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended (the "Securities Act"), during the nine months ended September 30, 2015.
On April 20, 2012, we commenced our IPO on a "reasonable best efforts" basis of up to 150.0 million of Common Stock, pursuant to the Registration Statement filed with the SEC under the Securities Act. The Registration Statement also covers up to 25.0 million shares of Common Stock issuable pursuant the DRIP under which common stockholders may elect to have their dividends reinvested in additional shares of Common Stock. On June 13, 2014, we announced the reallocation 23.8 million shares which represented all remaining unsold shares available pursuant to the DRIP. On June 17, 2014, we registered an additional 25.0 million shares to be issued under the DRIP pursuant to a registration statement on Form S-3 (File No. 333-196829). As of September 30, 2015, we have issued 168.9 million shares of our Common Stock, and received $1.7 billion of offering proceeds from the sale of Common Stock, including shares issued under the DRIP and shares redeemed. On May 7, 2015, the Company filed a post-effective amendment to the Registration Statement to deregister the unsold shares registered under the Registration Statement.
As of September 30, 2015, cumulative offering costs included $18.2 million paid to the Advisor and Legacy Dealer Manager to reimburse offering costs incurred. As of September 30, 2015, we have incurred $188.1 million of total cumulative offering costs in connection with the issuance and dividend of our registered securities. The Advisor has elected to cap cumulative offering costs incurred by us, net of unpaid amounts, to 11.5% of gross Common Stock proceeds during the offering period. Cumulative offering costs, net of unpaid amounts, were less than the 11.5% threshold as of September 30, 2015.
We have used and expect to continue to use substantially all of the net proceeds from our IPO to primarily acquire a diversified portfolio of income producing real estate properties, focusing primarily on acquiring freestanding, single-tenant bank branches, convenience stores, office, industrial and retail properties net leased to investment grade and other credit-worthy tenants. We may also originate or acquire first mortgage loans secured by real estate. As of September 30, 2015, we have used debt financing of approximately $1.2 billion and the net proceeds from our IPO to purchase 329 properties with an aggregate base purchase price of $2.6 billion. We have used and may continue to use net proceeds from our IPO to fund a portion of our dividends. See Dividends in "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Distributions" for further discussion.
Issuer Purchases of Equity Securities
On April 7, 2015, the Company's board of directors approved the termination of the Company’s Share Repurchase Program (“SRP”). The Company processed all of the requests received under the SRP in the first quarter of 2015 and will not process further requests.
On June 2, 2015, the Company commenced the Tender Offer. The Tender Offer was completed on June 29, 2015 with the Company purchasing approximately 11.9 million shares of its Common Stock at a price of $10.50 per share, for an aggregate value of $125.0 million, excluding fees and expenses relating to the Tender Offer and including fractional shares repurchased thereafter. The Company funded the Tender Offer using cash on hand and funds available under its existing credit facility.
The following table reflects the cumulative number of common shares repurchased as of December 31, 2014 and as of and for the nine months ended September 30, 2015:
 
 
Number of Shares Repurchased
 
Weighted Average Price per Share
Cumulative repurchases as of December 31, 2014
 
99,969
 
$
9.91

Redemptions
 
135,123
 
9.78

Shares repurchased under Tender Offer
 
11,904,762

 
10.50

Cumulative repurchases as of September 30, 2015
 
12,139,854
 
$
10.49

Recent Sale of Unregistered Securities
On July 13, 2015, we issued $187,938 shares of restricted stock that vest over a period of five years to our independent directors, pursuant to our employee and director incentive restricted share plan. No selling commissions or other consideration will be paid in connection with such issuances, which were made without registration under the Securities Act in reliance upon the exemption from registration in Section 4(a)(2) of the Securities Act as transactions not involving any public offering.

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Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
On August 7, 2015, we amended and restated our OPP (the “Amended OPP”) with the OP and our Advisor to amend certain definitions related to performance measurement to equitably adjust for share issuances and share repurchases on a go-forward basis.
The description of the Amended OPP in this Quarterly Report on Form 10-Q is a summary and is qualified in its entirety by the terms of the Amended OPP.
On August 24, 2015, we amended our Credit Facility and increased our maximum borrowing to $740.0 million.
Item 6. Exhibits.
The exhibits listed on the Exhibit Index (following the signatures section of this report) are included, or incorporated by reference, in this Quarterly Report on Form 10-Q.

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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Global Net Lease, Inc.
 
By:
/s/ Scott J. Bowman
 
 
Scott J. Bowman
 
 
Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
By:
/s/ Patrick J. Goulding
 
 
Patrick J. Goulding
 
 
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)

Dated: November 10, 2015

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EXHIBITS INDEX



The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit No.
 
Description
10.44 *
 
Eighth Amendment to Credit Agreement, dated as of August 24, 2015, among Global Net Lease Operating Partnership, L.P., Global Net Lease, Inc., ARC Global Holdco, LLC, the guarantors party thereto, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent for the lenders.
31.1 *
 
Certification of the Principal Executive Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 *
 
Certification of the Principal Financial Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 *
 
Written statements of the Principal Executive Officer and Principal Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 *
 
XBRL (eXtensible Business Reporting Language). The following materials from American Realty Capital Global Trust II, Inc.'s Quarterly Report on Form 10-Q for the three ended September 30, 2014, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Loss, (iii) the Consolidated Statement of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements. As provided in Rule 406T of Regulation S-T, this information in furnished and not filed for purpose of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Exchange Act.
_________________________________________
*
Filed herewith
     




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