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Global Net Lease, Inc. - Quarter Report: 2018 June (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 June 30, 2018
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number: 001-37390
image3a14.gif
Global Net Lease, Inc.
(Exact name of registrant as specified in its charter)
Maryland
 
45-2771978
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
405 Park Ave., 3rd Floor, New York, NY
 
10022
(Address of principal executive offices)
 
(Zip Code)
(212) 415-6500
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer ¨
(Do not check if a smaller reporting company)
Smaller reporting company o
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
As of July 31, 2018, the registrant had 67,306,615 shares of common stock outstanding.

GLOBAL NET LEASE, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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

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


 
June 30,
2018
 
December 31,
2017
ASSETS
 
 
 
Real estate investments, at cost (Note 3):
 
 
 
Land
$
408,178

 
$
402,318

Buildings, fixtures and improvements
2,219,486

 
2,138,405

Construction in progress
2,970

 
2,328

Acquired intangible lease assets
642,472

 
629,626

Total real estate investments, at cost
3,273,106

 
3,172,677

Less accumulated depreciation and amortization
(391,269
)
 
(339,931
)
Total real estate investments, net
2,881,837

 
2,832,746

Cash and cash equivalents
93,326

 
102,425

Restricted cash
2,873

 
5,302

Derivative assets, at fair value (Note 7)
7,568

 
2,176

Unbilled straight-line rent
45,027

 
42,739

Prepaid expenses and other assets
51,156

 
22,617

Due from related parties
16

 
16

Deferred tax assets
1,006

 
1,029

Goodwill and other intangible assets, net
22,443

 
22,771

Deferred financing costs, net
5,833

 
6,774

     Total Assets
$
3,111,085

 
$
3,038,595

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Mortgage notes payable, net (Note 4)
$
975,929

 
$
984,876

Revolving credit facilities (Note 5)
458,880

 
298,909

Term loan, net (Note 5)
224,510

 
229,905

Acquired intangible lease liabilities, net
32,787

 
31,388

Derivative liabilities, at fair value (Note 7)
5,976

 
15,791

Due to related parties
779

 
829

Accounts payable and accrued expenses
27,152

 
23,227

Prepaid rent
16,690

 
18,535

Deferred tax liability
15,511

 
15,861

Taxes payable
1,933

 
2,475

Dividends payable
2,341

 
2,556

Total Liabilities
1,762,488

 
1,624,352

Commitments and contingencies (Note 9)
—

 
—

Stockholders' Equity (Note 8):
 
 
 
7.25% Series A cumulative redeemable preferred shares, $0.01 par value, liquidation preference $25.00 per share, 13,409,650 and 5,409,650 authorized, 5,413,665 and 5,409,650 issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
54

 
54

Common Stock, $0.01 par value, 100,000,000 shares authorized, 67,306,615 and 67,287,231 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
2,003

 
2,003

Additional paid-in capital
1,859,990

 
1,860,058

Accumulated other comprehensive income
19,116

 
19,447

Accumulated deficit
(532,566
)
 
(468,396
)
Total Stockholders' Equity
1,348,597

 
1,413,166

Non-controlling interest
—

 
1,077

 Total Equity
1,348,597

 
1,414,243

     Total Liabilities and Equity
$
3,111,085

 
$
3,038,595

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

2
GLOBAL NET LEASE, INC.

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

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
 
Rental income
 
$
65,562

 
$
60,214

 
$
129,354

 
$
118,706

Operating expense reimbursements
 
5,409

 
4,772

 
9,703

 
9,117

Total revenues
 
70,971

 
64,986

 
139,057

 
127,823

 
 
 
 
 
 
 
 
 
 Expenses (income):
 
 
 
 
 
 
 
 
Property operating
 
8,211

 
7,570

 
15,681

 
14,806

Fire (recovery) loss
 
(1
)
 
500

 
(80
)
 
500

Operating fees to related parties
 
7,138

 
5,713

 
13,969

 
11,443

Acquisition and transaction related
 
2,399

 
443

 
3,724

 
1,139

General and administrative
 
2,556

 
2,053

 
4,607

 
3,823

Equity-based compensation
 
(23
)
 
(2,235
)
 
(855
)
 
(2,219
)
Depreciation and amortization
 
29,813

 
27,497

 
59,309

 
54,611

Total expenses
 
50,093

 
41,541

 
96,355

 
84,103

Operating income
 
20,878

 
23,445

 
42,702

 
43,720

Other income (expense):
 
 
 
 
 
 
 
 
Interest expense
 
(14,415
)
 
(11,634
)
 
(27,390
)
 
(23,165
)
(Loss) gain on dispositions of real estate investments
 
(3,818
)
 
(143
)
 
(3,818
)
 
814

Gain (loss) on derivative instruments
 
6,333

 
(2,990
)
 
3,398

 
(3,460
)
Unrealized loss on undesignated foreign currency advances and other hedge ineffectiveness
 
(47
)
 
(2,971
)
 
(90
)
 
(3,853
)
Other income
 
12

 
3

 
23

 
10

Total other expense, net
 
(11,935
)
 
(17,735
)
 
(27,877
)
 
(29,654
)
Net income before income tax
 
8,943

 
5,710

 
14,825

 
14,066

Income tax expense
 
(1,200
)
 
(510
)
 
(2,270
)
 
(1,416
)
Net income
 
7,743

 
5,200

 
12,555

 
12,650

Net income attributable to non-controlling interest
 
—

 
—

 
—

 
(21
)
Preferred Stock dividends
 
(2,455
)
 
—

 
(4,906
)
 
—

Net income attributable to common stockholders
 
$
5,288

 
$
5,200

 
$
7,649

 
$
12,629

 
 
 
 
 
 
 
 
 
Basic and Diluted Earnings Per Share:
 
 
 
 
 
 
 
 
Basic and diluted net income per share attributable to common stockholders
 
$
0.08

 
$
0.08

 
$
0.11

 
$
0.18

Weighted average shares outstanding:
 
 
 
 
 
 
 
 
Basic and Diluted
 
67,292,021

 
66,652,221

 
67,289,639

 
66,461,663

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

3
GLOBAL NET LEASE, INC.

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



 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
7,743

 
$
5,200

 
$
12,555

 
$
12,650

 
 
 
 
 
 
 
 
 
Other comprehensive income
 
 
 
 
 
 
 
 
Cumulative translation adjustment
 
(16,878
)
 
9,097

 
(6,078
)
 
10,800

Designated derivatives, fair value adjustments
 
1,401

 
1,618

 
5,747

 
3,229

Other comprehensive income
 
(15,477
)
 
10,715

 
(331
)
 
14,029

 
 
 
 
 
 
 
 
 
Comprehensive (loss) income
 
(7,734
)
 
15,915

 
12,224

 
26,679

Amounts attributable to non-controlling interest
 
 
 
 
 
 
 
 
Net income
 
—

 
—

 
—

 
(21
)
Cumulative translation adjustment
 
—

 
(14
)
 
—

 
(15
)
Designated derivatives, fair value adjustments
 
—

 
(2
)
 
—

 
(8
)
Comprehensive income attributable to non-controlling interest
 
—

 
(16
)
 
—

 
(44
)
 
 
 
 
 
 
 
 
 
Preferred Stock dividends
 
(2,455
)
 
—

 
(4,906
)
 
—

 
 
 
 
 
 
 
 
 
Comprehensive (loss) income attributable to common stockholders
 
$
(10,189
)
 
$
15,899

 
$
7,318

 
$
26,635

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

4
GLOBAL NET LEASE, INC.

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

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

 
$
54

 
67,287,231

 
$
2,003

 
$
1,860,058

 
$
19,447

 
$
(468,396
)
 
$
1,413,166

 
$
1,077

 
$
1,414,243

Common Stock issuance costs
 
—

 
—

 
19,384

 
—

 
(72
)
 
—

 
—

 
(72
)
 
—

 
(72
)
Issuance of Preferred Stock, net
 
4,015

 
—

 
—

 
—

 
(219
)
 
—

 
—

 
(219
)
 
—

 
(219
)
Common Stock dividends declared
 
—

 
—

 
—

 
—

 
—

 
—

 
(71,661
)
 
(71,661
)
 
—

 
(71,661
)
Preferred Stock dividends declared
 
—

 
—

 
—

 
—

 
—

 
—

 
(4,906
)
 
(4,906
)
 
—

 
(4,906
)
Equity-based compensation
 
—

 
—

 
—

 
—

 
223

 
—

 
—

 
223

 
(1,077
)
 
(854
)
Distributions to non-controlling interest holders
 
—

 
—

 
—

 
—

 
—

 
—

 
(158
)
 
(158
)
 
—

 
(158
)
Net Income
 
—

 
—

 
—

 
—

 
—

 
—

 
12,555

 
12,555

 
—

 
12,555

Cumulative translation adjustment
 
—

 
—

 
—

 
—

 
—

 
(6,078
)
 
—

 
(6,078
)
 
—

 
(6,078
)
Designated derivatives, fair value adjustments
 
—

 
—

 
—

 
—

 
—

 
5,747

 
—

 
5,747

 
—

 
5,747

Balance, June 30, 2018
 
5,413,665

 
$
54

 
67,306,615

 
$
2,003

 
$
1,859,990

 
$
19,116

 
$
(532,566
)

$
1,348,597

 
$
—

 
$
1,348,597

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

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


 
 
Six Months Ended June 30,
 
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net income
 
$
12,555

 
$
12,650

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

 
 
Depreciation
 
31,892

 
28,970

Amortization of intangibles
 
27,416

 
25,641

Amortization of deferred financing costs
 
2,400

 
1,823

Amortization of mortgage discounts and premiums, net
 
530

 
287

Amortization of mezzanine discount
 
—

 
17

Amortization of below-market lease liabilities
 
(1,807
)
 
(1,644
)
Amortization of above-market lease assets
 
2,371

 
2,089

Amortization of above- and below- market ground lease assets
 
488

 
463

Bad debt expense
 
104

 
593

Unbilled straight-line rent
 
(3,336
)
 
(6,917
)
Equity-based compensation
 
(855
)
 
(2,219
)
Unrealized (gain) loss on foreign currency transactions, derivatives, and other
 
(3,706
)
 
4,903

Unrealized loss on undesignated foreign currency advances and other hedge ineffectiveness
 
90

 
3,853

Gain on disposition of real estate investments
 
3,818

 
(814
)
Changes in operating assets and liabilities, net:
 
 
 
 
Prepaid expenses and other assets
 
(7,358
)
 
(2,616
)
Deferred tax assets
 
23

 
(67
)
Accounts payable and accrued expenses
 
7,800

 
99

Prepaid rent
 
(1,845
)
 
2,435

Deferred tax liability
 
(350
)
 
1,063

Taxes payable
 
(542
)
 
(1,693
)
Net cash provided by operating activities
 
69,688

 
68,916

Cash flows from investing activities:
 
 
 
 
Investment in real estate and real estate related assets
 
(161,786
)
 
(30,290
)
Deposits for real estate acquisitions
 
(24,551
)
 
—

Capital expenditures
 
(546
)
 
(541
)
Proceeds from dispositions of real estate investments
 
19,376

 
12,440

Payments for settlement of derivatives
 
(561
)
 
—

Net cash used in investing activities
 
(168,068
)
 
(18,391
)
Cash flows from financing activities:
 
 
 
 
Borrowings under revolving credit facilities
 
192,000

 
75,335

Repayments on revolving credit facilities
 
(30,000
)
 
(5,050
)
Repayment of mezzanine facility
 
—

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

 
—

Payments on mortgage notes payable
 
(25,362
)
 
(21,758
)
Issuance of common stock, net
 
(72
)
 
18,333

Issuance of preferred stock, net
 
(219
)
 
—

Payments of financing costs
 
—

 
(967
)
Dividends paid on Common Stock
 
(71,661
)
 
(70,759
)
Dividends paid on Preferred Stock
 
(4,906
)
 
—

Distributions to non-controlling interest holders
 
(158
)
 
(415
)
Advances/acquired related party receivable (Note 10)
 
—

 
3,853

Net cash provided by (used in) financing activities
 
92,372

 
(57,965
)
Net change in cash, cash equivalents and restricted cash
 
(6,008
)
 
(7,440
)
Effect of exchange rate changes on cash
 
(5,520
)
 
2,662

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

 
77,328

Cash, cash equivalents and restricted cash, end of period
 
$
96,199

 
$
72,550

 
 
 
 
 
Cash and cash equivalents, end of period
 
$
93,326

 
$
67,411

Restricted cash, end of period
 
2,873

 
5,139

Cash, cash equivalents and restricted cash, end of period
 
$
96,199

 
$
72,550




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



 
 
Six Months Ended June 30,
 
 
2018
 
2017
Supplemental Disclosures:
 
 
 
 
Cash paid for interest
 
$
24,981

 
$
20,741

Cash paid for income taxes
 
2,812

 
3,109


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

7
GLOBAL NET LEASE, INC.

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


Note 1 — Organization
Global Net Lease, Inc. (the "Company"), which incorporated on July 13, 2011, is a Maryland corporation that elected and qualified to be taxed as a real estate investment trust ("REIT") for United States ("U.S.") federal income tax purposes beginning with the taxable year ended December 31, 2013. The Company invests in commercial properties, with an emphasis on sale-leaseback transactions involving single tenant net-leased commercial properties. The Company was sponsored by an affiliate of AR Global Investments, LLC (the successor business to AR Capital LLC, "AR Global"). Affiliates of AR Global provide asset management services to the Company pursuant to advisory agreements.
As of June 30, 2018, the Company owned 333 properties consisting of 25.0 million rentable square feet, which were 99.5% leased, with a weighted-average remaining lease term of 8.5 years. Based on the percentage of annualized rental income on a straight-line basis as of June 30, 2018, 51.4% of the Company's properties are located in the U.S. and 48.6% in Europe. The Company may also originate or acquire first mortgage loans, mezzanine loans, preferred equity or securitized loans (secured by real estate). As of June 30, 2018, the Company did not own any first mortgage loans, mezzanine loans, preferred equity or securitized loans.
Substantially all of the Company's business is conducted through the Global Net Lease Operating Partnership, L.P. (the "OP"), a Delaware limited partnership. The Company has retained Global Net Lease Advisors, LLC (the "Advisor") to manage the Company's affairs on a day-to-day basis. The Company's properties are managed and leased by Global Net Lease Properties, LLC (the "Property Manager"). The Advisor, and the Property Manager are under common control with AR Global. These related parties receive compensation and fees for various services provided to the Company.
Following the termination of Moor Park Capital Partners LLP (the "Former Service Provider"), effective as of March 17, 2018, the Advisor, together with its service providers, assumed full management responsibility of the Company’s European real estate portfolio. Prior to the termination of the Former Service Provider, the Former Service Provider provided, subject to the Advisor's oversight and pursuant to a service provider agreement (the “Service Provider Agreement”), certain real estate related services, as well as sourcing and structuring of investment opportunities, performance of due diligence, and arranging debt financing and equity investment syndicates, solely with respect to investments in Europe. Since the termination of the Former Service Provider, the Advisor has built a European-focused management team and engaged third-party service providers to assume certain duties previously performed by the Service Provider. See Note 9 - Commitments and Contingencies for further details.
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company included herein were prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to this Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair statement of results for the interim periods. All intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results for the entire year or any subsequent interim period.
These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2017, which are included in the Company's Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the "SEC") on February 28, 2018. There have been no significant changes to the Company's significant accounting policies during the six months ended June 30, 2018, other than those relating to new accounting pronouncements (see "Recently Issued Accounting Pronouncements" section below).
The accompanying unaudited consolidated financial statements include the accounts of the Company, the OP and its subsidiaries. All intercompany accounts and transactions are eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity ("VIE") for which the Company is the primary beneficiary. The Company has determined that the OP is a VIE of which the Company is the primary beneficiary. Substantially all of the Company's assets and liabilities are held by the OP.
Critical Accounting Policies

8
GLOBAL NET LEASE, INC.

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

Judgments and Estimates
The Company regularly makes a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses in order to prepare its consolidated financial statements in conformity with GAAP. These estimates and assumptions are based on management's best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, such as the prevailing economic and business environment. The Company adjusts such estimates when facts and circumstances dictate. The most significant estimates the Company makes include recoverability of accounts receivable, allocation of property purchase price to tangible and intangible assets acquired and liabilities assumed, determination of impairment of long-lived assets, valuation of derivative financial instruments, valuation of compensation plans, and estimating the useful life of a long-lived asset. Actual results could differ materially from those estimated.
Investments in Real Estate
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful
life of the asset. Costs of repairs and maintenance are expensed as incurred.
The Company evaluates the inputs, processes and outputs of each asset acquired to determine if the transaction is a business combination or an asset acquisition. If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statements of operations. If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired assets.
In both a business combination and an asset acquisition, the Company allocates the purchase price of acquired properties to
tangible and identifiable intangible assets or liabilities based on their respective fair values. Tangible assets may include land, land improvements, buildings, fixtures and tenant improvements. Intangible assets or liabilities may include the value of in-place leases, above- and below- market leases and other identifiable assets or liabilities based on lease or property specific characteristics. In addition, any assumed mortgages receivable or payable and any assumed or issued non-controlling interests (in a business combination) are recorded at their estimated fair values. In allocating the fair value to assumed mortgages, amounts are recorded to debt premiums or discounts based on the present value of the estimated cash flows, which is calculated to account for either above or below-market interest rates. In a business combination, the difference between the purchase price and the fair value of identifiable net assets acquired is either recorded as goodwill or as a bargain purchase gain. In an asset acquisition, the difference between the acquisition price (including capitalized transaction costs) and the fair value of identifiable net assets acquired is allocated to the non-current assets. All acquisitions during the six months ended June 30, 2018 and the year ended December 31, 2017 were asset acquisitions.
Purchase Accounting and Acquisition of Real Estate
The Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets acquired, including those acquired in the Company's merger (the "Merger"), which closed in December 2016, with American Realty Capital Global Trust II, Inc. ("Global II"), which was sponsored and advised by affiliates of AR Global, based on their respective fair values. Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. The Company utilizes various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and fixtures are based on cost segregation studies performed by independent third parties or on the Company's analysis of comparable properties in the Company's portfolio. Identifiable intangible assets include amounts allocated to acquire leases for above- and below-market lease rates, the value of in-place leases, and the value of customer relationships, as applicable.
Factors considered in the analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property, taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at contract rates during the expected lease-up period, which typically ranges from 12 to 18 months. The Company also estimates costs to execute similar leases including leasing commissions, legal and other related expenses.
Above-market and below-market lease values for acquired properties are initially recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease, and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the remaining initial term plus the term of any below-market fixed rate renewal options for below-market leases. The capitalized above-market lease values are amortized as a reduction of base rental revenue over the remaining terms of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any

9
GLOBAL NET LEASE, INC.

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

below-market fixed rate renewal options of the respective leases. If a tenant with a below market rent renewal does not renew, any remaining unamortized amount will be taken into income at that time.
The aggregate value of intangible assets related to customer relationship, as applicable, is measured based on the Company's evaluation of the specific characteristics of each tenant’s lease and the Company's overall relationship with the tenant. Characteristics considered by the Company in determining these values include the nature and extent of its existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals, among other factors.
In making estimates of fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. The Company also considers information obtained about each property as a result of the Company's pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
Derivative Instruments
The Company may use derivative financial instruments, including interest rate swaps, caps, options, floors and other interest
rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings. Certain of the Company's foreign operations expose the Company to fluctuations of foreign interest rates and exchange rates. These fluctuations may impact the value of the Company's cash receipts and payments in the Company's functional currency, the U.S. dollar ("USD"). The Company enters into derivative financial instruments to protect the value or fix the amount of certain obligations in terms of its functional currency.
The Company records all derivatives on the consolidated balance sheets at fair value. The accounting for changes in the fair
value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in
a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to
apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
The accounting for subsequent changes in the fair value of these derivatives depends on whether each has been designed and
qualifies for hedge accounting treatment. If the Company elects not to apply hedge accounting treatment (or for derivatives that
do not qualify as hedges), any changes in the fair value of these derivative instruments is recognized immediately in gains (losses) on derivative instruments in the consolidated statements of operations. If a derivative is designated and qualifies for cash flow hedge accounting treatment, the change in the estimated fair value of the derivative is recorded in other comprehensive income (loss) in the consolidated statements of comprehensive income (loss) to the extent that it is effective. Any ineffective portion of a change in derivative fair value is immediately recorded in earnings.
Impairment of Long Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net earnings.
Goodwill
The Company evaluates goodwill for impairment at least annually or upon the occurrence of a triggering event. A triggering event is an event or circumstance that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company performed a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. Based on our assessment we determined that the goodwill is not impaired as of June 30, 2018.
Revenue Recognition

10
GLOBAL NET LEASE, INC.

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

The Company's revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease agreement and are reported on a straight-line basis over the initial term of the lease. Since many of the Company's leases provide for rental increases at specified intervals, straight-line basis accounting requires the Company to record a receivable, and include in revenues, unbilled rent receivables that the Company will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. For new leases after acquisition, the commencement date is considered to be the date the lease is executed. The Company defers the revenue related to lease payments received from tenants in advance of their due dates. When the Company acquires a property, the acquisition date is considered to be the commencement date for purposes of this calculation.
The Company reviews receivables related to rent and unbilled rent receivables and determines collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, the Company records an increase in the Company's allowance for uncollectible accounts or records a direct write-off of the receivable in the Company's consolidated statements of operations.
Cost recoveries from tenants are included in operating expense reimbursement in the period the related costs are incurred, as applicable.
Income Taxes
The Company elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), beginning with the taxable year ended December 31, 2013. Commencing with such taxable year, the Company has been organized and operated in such a manner as to qualify for taxation as a REIT under the Code. The Company intends to continue to operate in such a manner to continue to qualify for taxation as a REIT, but no assurance can be given that it will operate in a manner so as to remain qualified as a REIT. As a REIT, the Company generally will not be subject to federal corporate income tax to the extent it distributes annually all of its REIT taxable income.
The Company conducts business in various states and municipalities within the U.S. and Puerto Rico, the United Kingdom and Western Europe and, as a result, the Company or one of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and certain foreign jurisdictions. As a result, the Company may be subject to certain federal, state, local and foreign taxes on its income and assets, including alternative minimum taxes, taxes on any undistributed income and state, local or foreign income, franchise, property and transfer taxes. Any of these taxes decrease Company's earnings and available cash.
Significant judgment is required in determining the Company's tax provision and in evaluating its tax positions. The Company establishes tax reserves based on a benefit recognition model, which the Company believes could result in a greater amount of benefit (and a lower amount of reserve) being initially recognized in certain circumstances. Provided that the tax position is deemed more likely than not of being sustained, the Company recognizes the largest amount of tax benefit that is greater than 50 percent likely of being ultimately realized upon settlement.
The Company derecognizes the tax position when the likelihood of the tax position being sustained is no longer more likely than not. The Company recognizes deferred income taxes in certain of its subsidiaries taxable in the U.S. or in foreign jurisdictions. Deferred income taxes are generally the result of temporary differences (items that are treated differently for tax purposes than for GAAP purposes). In addition, deferred tax assets arise from unutilized tax net operating losses, generated in prior years. The Company provides a valuation allowance against its deferred income tax assets when it believes that it is more likely than not that all or some portion of the deferred income tax asset may not be realized. Whenever a change in circumstances causes a change in the estimated realizability of the related deferred income tax asset, the resulting increase or decrease in the valuation allowance is included in deferred income tax expense (benefit).
The Company derives most of its REIT taxable income from its real estate operations in the U.S. and has historically distributed all of its REIT taxable income to its shareholders. As such, the Company's real estate operations are generally not subject to federal tax, and accordingly, no provision has been made for U.S. federal income taxes in the consolidated financial statements for these operations. These operations may be subject to certain state, local, and foreign taxes, as applicable. The Company's deferred tax assets and liabilities are primarily the result of temporary differences related to the following:
•
Basis differences between tax and GAAP for certain international real estate investments. For income tax purposes, in certain acquisitions, the Company assumes the seller’s basis, or the carry-over basis, in the acquired assets. The carry-over basis is typically lower than the purchase price, or the GAAP basis, resulting in a deferred tax liability with an offsetting increase to goodwill or the acquired tangible or intangible assets;
•
Timing differences generated by differences in the GAAP basis and the tax basis of assets such as those related to capitalized acquisition costs and depreciation expense; and
•
Tax net operating losses in certain subsidiaries, including those domiciled in foreign jurisdictions that may be realized in future periods if the respective subsidiary generates sufficient taxable income.

11
GLOBAL NET LEASE, INC.

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

The Company recognizes current income tax expense for state and local income taxes and taxes incurred in its foreign jurisdictions. The Company's current income tax expense fluctuates from period to period based primarily on the timing of its taxable income.
Reportable Segments
The Company determined that it has one reportable segment, with activities related to investing in real estate. The Company’s investments in real estate generate rental revenue and other income through the leasing of properties, which comprise 100% of total consolidated revenues. Management evaluates the operating performance of the Company’s investments in real estate on an individual property level.
Out-of-Period Adjustments
During the three and six months ended June 30, 2017, the Company recorded $0.5 million of additional rental income and unbilled straight-line rent due to an error in the calculation of straight-line rent for one of the Company's properties acquired during 2014. The Company concluded that this adjustment was not material to the financial position or results of operations for the current period or any prior period.
Also, during the year ended December 31, 2017, the Company identified certain historical errors in its current taxes payable as well as its statement of comprehensive income (loss), consolidated statement of changes in equity, and statement of cash flows since 2013 which impacted the quarterly financial statements and annual periods previously issued. Specifically, when recording its annual provision, the Company had adjusted its current taxes payable to the cumulative amount of taxes payable without consideration for cumulative payments. This adjustment was made with an offsetting amount in cumulative translation adjustments within other comprehensive income ("OCI") and accumulated other comprehensive income ("AOCI"). As of December 31, 2016, income taxes payable were overstated and AOCI was understated by $4.7 million. OCI was understated by $2.9 million, $1.9 million and overstated by $0.1 million for the years end December 31, 2016, 2015 and Pre-2015, respectively. We concluded that the errors noted above were not material to the current period or any historical periods presented and have adjusted the amounts on a cumulative basis in the year ended December 31, 2017.
Recently Issued Accounting Pronouncements
Adopted as of January 1, 2018:
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and has since issued several additional amendments thereto (collectively referred to herein as "ASC 606"). ASC 606 establishes a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Under ASC 606, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. A reporting entity may apply the amendments in ASC 606 using either a modified retrospective approach, by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or a full retrospective approach. The Company adopted this guidance effective January 1, 2018, for all future financial statements issued, under the modified retrospective approach and it did not have an impact on the Company's consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Also, in February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which updated guidance previously issued by ASU 2016-01. The guidance in ASU 2016-01 and 2018-01 amends the recognition and measurement of financial instruments. The new guidance significantly revises an entity’s accounting related to equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. Among other things, it also amends the presentation and disclosure requirements associated with the fair value of financial instruments. The Company adopted ASU 2016-01 and ASU 2018-03 effective January 1, 2018, using the modified retrospective transition method, and there was no material impact to the Company's consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides guidance on how certain transactions should be classified and presented in the statement of cash flows as either operating, investing or financing activities. Among other things, the update provides specific guidance on where to classify debt prepayment and extinguishment costs, payments for contingent consideration made after a business combination and distributions received from equity method investments. The Company adopted the new guidance beginning in the first quarter of 2018, with reclassification of prior period amounts, where applicable, and it did not have a significant impact on its statement of cash flows.

12
GLOBAL NET LEASE, INC.

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

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which revises the definition of a business. Amongst other things, this new guidance is applicable when evaluating whether an acquisition (disposal) should be treated as either a business acquisition (disposal) or an asset acquisition (disposal). Under the revised guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset or group of similar assets, the assets acquired would not be considered a business. The revised guidance is effective for reporting periods beginning after December 15, 2017, and the amendments will be applied prospectively. The Company early adopted the provisions of this guidance effective January 1, 2017. While the Company's acquisitions have historically been classified as either business combinations or asset acquisitions, certain acquisitions that were classified as business combinations by the Company likely would have been considered asset acquisitions under the new standard. As a result, future transaction costs are more likely to be capitalized since the Company expects most of its future acquisitions to be classified as asset acquisitions under this new standard. All of the Company's acquisitions during 2018 and 2017 have been classified as asset acquisitions.
In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Assets Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which provides guidance related to partial sales of non-financial assets, eliminates rules specifically addressing the sales of real estate, clarifies the definition of in substance non-financial assets, removes exception to the financial asset derecognition model and clarifies the accounting for contributions of non-financial assets to joint ventures. The Company adopted this guidance effective January 1, 2018 using the modified transition method. The Company expects that any future sales of real estate in which the Company retains a non-controlling interest in the property would result in the full gain amount being recognized at the time of the partial sale. Historically, the Company has not retained any interest in properties it has sold.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance that clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The update states that modification accounting should be used unless the fair value of the award, the vesting terms of the award, and the classification of the award as either equity or liability, all do not change as a result of the modification. The Company adopted this guidance effective January 1, 2018 using the modified retrospective transition method. The Company expects that any future modifications to the Company's issued share-based awards will be accounted for using modification accounting, unless the modification meets all of the exception criteria noted above. As a result, the modification would be treated as an exchange of the original award for a new award, with any incremental fair value being treated as additional compensation cost.
Pending Adoption as of June 30, 2018:
In February 2018, the FASB issued ASU 2018-02, Income Statement- Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The new guidance addresses the impact of Tax Cuts and Jobs Act signed into law on December 22, 2017, (“Tax Cuts and Jobs Act”) on items within accumulated other comprehensive income which do not reflect the appropriate tax rate. ASU 2018-02 allows the Company to retrospectively reclassify the income tax effects on items in Accumulated Other Comprehensive Income (“AOCI”) to retained earnings for all periods in which the effect of the change in the U.S. federal corporate income tax rate was recognized. In addition, all companies are required to disclose whether the company has elected to reclassify the income tax effects of the Tax Cuts and Jobs Act to retained earnings and disclose information about any other income tax effects that are reclassified from AOCI by the Company. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Companies are required to apply the proposed amendments either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company is currently evaluating the impact of this new guidance.
ASU 2016-02, Leases (Topic 842) ("ASC 842") originally stated that companies would be required to bifurcate certain lease revenues between lease and non-lease components, however, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, in July 2018 ("ASU 2018-11"), which allows lessors a practical expedient by class of underlying assets to account for lease and non-lease components as a single lease component if certain criteria are met. Additionally, only incremental direct leasing costs may be capitalized under this new guidance, which is consistent with the Company’s existing policies. ASC 842 originally required a modified retrospective method of adoption, however, ASU 2018-11 indicates that companies may be permitted to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The pronouncement allows some optional practical expedients. The Company does not expect this guidance to impact its existing lessor revenue recognition pattern. The Company expects to adopt this new guidance on January 1, 2019 and will continue to evaluate the impact of this guidance until it becomes effective.
The Company is a lessee for some properties in which it has ground leases as of December 31, 2017. For these leases, the Company will be required to record a right-of-use asset and lease liability equal to the present value of the remaining lease payments

13
GLOBAL NET LEASE, INC.

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

upon adoption of this update. The new standard requires lessees to apply a dual lease classification approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes how entities measure credit losses for financial assets carried at amortized cost. The update eliminates the requirement that a credit loss must be probable before it can be recognized and instead requires an entity to recognize the current estimate of all expected credit losses. Additionally, the update requires credit losses on available-for-sale debt securities to be carried as an allowance rather than as a direct write-down of the asset. The amendments become effective for reporting periods beginning after December 15, 2019. Early adoption is permitted for reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact of this new guidance.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-Controlling Interests with a Scope Exception guidance that changes the method to determine the classification of certain financial instruments with a down round feature as liabilities or equity instruments and clarify existing disclosure requirements for equity-classified instruments. A down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. As a result, a freestanding equity-linked financial instrument no longer would be accounted for as a derivative liability, rather, an entity that presents earnings per share is required to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features. The revised guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. Adoption should be applied retrospectively to outstanding financial instruments with a down round feature with a cumulative-effect adjustment to the statement of financial position. The Company is currently evaluating the impact of this new guidance.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. The transition guidance provides companies with the option of early adopting the new standard using a modified retrospective transition method in any interim period after issuance of the update, or alternatively requires adoption for fiscal years beginning after December 15, 2018. This adoption method will require the Company to recognize the cumulative effect of initially applying the ASU as an adjustment to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that the Company adopts the update. While the Company continues to assess all potential impacts of the standard, the Company currently expects adoption to have an immaterial impact on the Company's consolidated financial statements.
In July 2018, the FASB issued ASU 2018-07, Compensation- Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting as an amendment and update expanding the scope of Topic 718. The amendment specifies that Topic 718 now applies to all share-based payment transactions, even non-employee awards, in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. Under the new guidance, awards to nonemployees are measured on the grant date, rather than on the earlier of the performance commitment date or the date at which the nonemployee’s performance is complete. Also, the awards would be measured by estimating the fair value of the equity instruments to be issued, rather than the fair value of the goods or services received or the fair value of the equity instruments issued, whichever can be measured more reliably. In addition, entities may use the expected term to measure nonemployee awards or elect to use the contractual term as the expected term, on an award-by-award basis. The new guidance is effective for the Company in annual periods beginning after December 15, 2018, and interim periods within those annual periods, with early adoption permitted. The Company expects this amendment to impact the award made to the Advisor pursuant to the new multi-year outperformance agreement entered into with the Advisor in July 2018 (the "2018 OPP," see Note 14 — Subsequent Events for details) and is currently evaluating the impact of this new guidance.

14
GLOBAL NET LEASE, INC.

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

Note 3 — Real Estate Investments, Net
Property Acquisitions
As of June 30, 2018, included in other assets is $24.6 million in deposits on acquisitions for two properties with an aggregate acquisition price of $146.2 million. The following table presents the allocation of the assets acquired and liabilities assumed during the six months ended June 30, 2018 and 2017, based on the exchange rate at the time of purchase. All acquisitions in both periods were considered asset acquisitions for accounting purposes.
 
 
Six Months Ended June 30,
(Dollar amounts in thousands)
 
2018
 
2017
Real estate investments, at cost:
 
 
 
 
Land
 
$
18,816

 
$
5,443

Buildings, fixtures and improvements
 
122,796

 
22,131

Total tangible assets
 
141,612

 
27,574

Acquired intangible lease assets:
 
 
 
 
In-place leases
 
24,669

 
4,003

Above-market lease assets
 
—

 
47

Below-market lease liabilities
 
(4,495
)
 
(1,334
)
Cash paid for acquired real estate investments
 
$
161,786

 
$
30,290

Number of properties purchased
 
13

 
3

Acquired Intangible Lease Assets
We allocate a portion of the fair value of real estate acquired to identified intangible assets and liabilities, consisting of the value of origination costs (tenant improvements, leasing commissions, and legal and marketing costs), the value of above-market and below-market leases, and the value of tenant relationships, if applicable, based in each case on their relative fair values. The Company periodically assesses whether there are any indicators that the value of the intangible assets may be impaired by performing a net present value analysis of future cash flows, discounted for the inherent risk associated with each investment. For the three and six months ended June 30, 2018, we did not record any impairment charges for the intangible assets associated with our real estate investments.
Dispositions
As of June 30, 2018 and December 31, 2017, the Company did not have any properties that were classified as assets held for sale. The Company sold one real estate asset during the three and six months ended June 30, 2018 located in San Jose, California for a total contract sales price of $20.3 million, resulting in net proceeds of $1.3 million after repayment of mortgage debt and a loss of $3.8 million, which is reflected in loss on dispositions of real estate investments in the accompanying consolidated statements of operations for the three and six months ended June 30, 2018.
During the six months ended June 30, 2017, the Company sold its property located in Fort Washington, Pennsylvania for a total contract sales price of $13.0 million, resulting in net proceeds of $12.4 million and a gain of $0.4 million, which is reflected in gains on dispositions of real estate investments in the accompanying consolidated statements of operations for the six months ended June 30, 2017. Also included in gains on dispositions of real estate investments is approximately $0.6 million reduction in the Gain Fee payable to the Advisor as a result of reinvestments during the six months ended June 30, 2017 (see Note 10 — Related Party Transactions for details) and a $0.1 million reduction to gain on disposition associated with a property sold in 2016 related to post-closing settlement for deferred rent.

15
GLOBAL NET LEASE, INC.

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

Future Minimum Rents
The following table presents future minimum base rental cash payments due to the Company over the next five calendar years and thereafter as of June 30, 2018. These amounts exclude contingent rent payments, as applicable, that may be collected from certain tenants based on provisions related to sales thresholds and increases in annual rent based on exceeding certain economic indexes among other items.
(In thousands)
 
Future Minimum
Base Rent Payments (1)
2018 (remainder)
 
$
127,817

2019
 
258,324

2020
 
261,743

2021
 
262,429

2022
 
253,036

2023
 
228,931

Thereafter
 
716,143

 
 
$
2,108,423

___________________________________________
(1) 
Assumes exchange rates of £1.00 to $1.32 for GBP and €1.00 to $1.17 for EUR as of June 30, 2018 for illustrative purposes, as applicable.
There were no tenants whose annualized rental income on a straight-line basis represented 10.0% or greater of consolidated annualized rental income on a straight-line basis as of June 30, 2018 and December 31, 2017.
The following table lists the country where the Company has concentrations of properties where annualized rental income on a straight-line basis represented 10.0% or greater of consolidated annualized rental income on a straight-line basis as of June 30, 2018 and December 31, 2017.
Country, State or Territory
 
June 30,
2018
 
December 31,
2017
United Kingdom
 
21.0%
 
22.1%
United States
 
51.4%
 
48.9%
___________________________________________
*
Annualized rental income on a straight-line basis was not 10% or greater of total annualized rental income as of the period specified. There is no State in the United States that exceeded the 10.0% threshold.

16
GLOBAL NET LEASE, INC.

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

Note 4 —Mortgage Notes Payable, Net
Mortgage notes payable, net as of June 30, 2018 and December 31, 2017 consisted of the following:
 
 
 
 
Encumbered Properties
 
Outstanding Loan Amount (1)
 
Effective Interest Rate
 
Interest Rate
 
 
Country
 
Portfolio
 
 
June 30,
2018
 
December 31,
2017
 
 
 
Maturity
 
 
 
 
 
 
(In thousands)
 
(In thousands)
 
 
 
 
 
 
Finland:
 
Finnair
 
4
 
$
33,181

 
$
34,022

 
2.2%
(2) 
Fixed
 
Sep. 2020
 
 
Tokmanni
 
1
 
33,853

 
34,711

 
2.4%
(2) 
Fixed
 
Oct. 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
France:
 
Auchan
 
1
 
9,697

 
9,943

 
1.7%
(2) 
Fixed
 
Dec. 2019
 
 
Pole Emploi
 
1
 
6,777

 
6,948

 
1.7%
(2) 
Fixed
 
Dec. 2019
 
 
Sagemcom
 
1
 
41,944

 
43,006

 
1.7%
(2) 
Fixed
 
Dec. 2019
 
 
Worldline
 
1
 
5,842

 
5,990

 
1.9%
(2) 
Fixed
 
Jul. 2020
 
 
DCNS
 
1
 
11,099

 
11,381

 
1.5%
(2) 
Fixed
 
Dec. 2020
 
 
ID Logistics II
 
2
 
12,268

 
12,578

 
1.3%
 
Fixed
 
Jun. 2021
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Germany
 
Rheinmetall
 
1
 
12,385

 
12,698

 
2.6%
(2) 
Fixed
 
Jan. 2019
 
 
OBI DIY
 
1
 
5,258

 
5,391

 
2.4%
 
Fixed
 
Jan. 2019
 
 
RWE AG
 
3
 
73,023

 
74,872

 
1.6%
(2) 
Fixed
 
Oct. 2019
 
 
Rexam
 
1
 
5,999

 
6,301

 
1.8%
(2) 
Fixed
 
Oct. 2019
 
 
Metro Tonic
 
1
 
30,962

 
31,746

 
1.7%
(2) 
Fixed
 
Dec. 2019
 
 
ID Logistics I 
 
1
 
4,673

 
4,792

 
1.0%
 
Fixed
 
Oct. 2021
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Luxembourg:
 
DB Luxembourg
 
1
 
42,061

 
43,126

 
1.4%
(2) 
Fixed
 
May 2020
The Netherlands:
 
ING Amsterdam
 
1
 
51,408

 
52,710

 
1.7%
(2) 
Fixed
 
Jun. 2020
 
 
Total EUR denominated
 
22
 
380,430

 
390,215

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United Kingdom:
 
McDonald's
 
—
 
—

 
1,025

 
—%
(2) 
Fixed
 
Feb. 2018
 
 
Wickes Building Supplies I
 
—
 
—

 
2,226

 
—%
(2) 
Fixed
 
May 2018
 
 
Everything Everywhere
 
—
 
—

 
5,397

 
—%
(2) 
Fixed
 
Jun. 2018
 
 
Thames Water
 
1
 
7,924

 
8,096

 
4.1%
(2) 
Fixed
 
Jul. 2018
 
 
Wickes Building Supplies II
 
1
 
2,509

 
2,626

 
4.2%
(2) 
Fixed
 
Jul. 2018
 
 
Northern Rock
 
2
 
6,934

 
7,084

 
4.4%
(2) 
Fixed
 
Sep. 2018
 
 
Wickes Building Supplies III
 
1
 
2,179

 
2,564

 
4.3%
(2) 
Fixed
 
Nov. 2018
 
 
Provident Financial
 
1
 
16,839

 
17,203

 
4.1%
(2) 
Fixed
 
Feb. 2019
 
 
Crown Crest
 
1
 
25,424

 
25,973

 
4.2%
(2) 
Fixed
 
Feb. 2019
 
 
Aviva
 
1
 
20,736

 
21,183

 
3.8%
(2) 
Fixed
 
Mar. 2019
 
 
Bradford & Bingley
 
1
 
9,985

 
10,200

 
3.5%
(2) 
Fixed
 
May 2020
 
 
Intier Automotive Interiors
 
1
 
6,241

 
6,375

 
3.5%
(2) 
Fixed
 
May 2020
 
 
Capgemini
 
1
 
6,247

 
6,381

 
3.2%
(2) 
Fixed
 
Jun. 2020
 
 
Fujitsu
 
3
 
32,728

 
33,435

 
3.2%
(2) 
Fixed
 
Jun. 2020
 
 
Amcor Packaging
 
7
 
4,129

 
4,218

 
3.5%
(2) 
Fixed
 
Jul. 2020
 
 
Fife Council
 
1
 
2,422

 
2,474

 
3.5%
(2) 
Fixed
 
Jul. 2020
 
 
Malthrust
 
3
 
4,226

 
4,318

 
3.5%
(2) 
Fixed
 
Jul. 2020
 
 
Talk Talk
 
1
 
5,052

 
5,161

 
3.5%
(2) 
Fixed
 
Jul. 2020
 
 
HBOS
 
3
 
7,119

 
7,272

 
3.5%
(2) 
Fixed
 
Jul. 2020
 
 
DFS Trading
 
5
 
13,391

 
13,680

 
3.4%
(2) 
Fixed
 
Oct. 2019
 
 
DFS Trading
 
2
 
3,135

 
3,203

 
3.4%
(2) 
Fixed
 
Oct. 2019
 
 
HP Enterprise Services
 
1
 
12,266

 
12,531

 
3.4%
(2) 
Fixed
 
Oct. 2019

17
GLOBAL NET LEASE, INC.

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

 
 
 
 
Encumbered Properties
 
Outstanding Loan Amount (1)
 
Effective Interest Rate
 
Interest Rate
 
 
Country
 
Portfolio
 
 
June 30,
2018
 
December 31,
2017
 
 
 
Maturity
 
 
Foster Wheeler
 
1
 
51,905

 
53,026

 
2.6%
(2) 
Fixed
 
Oct. 2018
 
 
Harper Collins
 
1
 
37,080

 
37,880

 
3.4%
(2) 
Fixed
 
Oct. 2019
 
 
NCR Dundee
 
1
 
7,449

 
7,610

 
2.9%
(2) 
Fixed
 
Apr. 2020
 
 
Total GBP denominated
 
40
 
285,920

 
301,141

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States:
 
Quest Diagnostics
 
1
 
52,800

 
52,800

 
2.8%
(3) 
Variable
 
Sep. 2018
 
 
Western Digital
 
—
 
—

 
17,363

 
—%
(4) 
Fixed
 
Jul. 2021
 
 
AT&T Services
 
1
 
33,550

 
33,550

 
2.9%
(5) 
Variable
 
Dec. 2020
 
 
FedEx Freight
 
1
 
6,165

 
6,165

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

 
4,110

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

 
187,000

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

 
—

 
4.4%
 
Fixed
 
Feb. 2028
 
 
Total USD denominated
 
24
 
316,375

 
300,988

 
 
 
 
 
 
 
 
Gross mortgage notes payable
 
86
 
982,725

 
992,344

 
3.1%
 
 
 
 
 
 
Mortgage discount
 
—
 
(1,373
)
 
(1,927
)
 
—
 
 
 
 
 
 
Deferred financing costs, net of accumulated amortization
 
—
 
(5,423
)
 
(5,541
)
 
—
 
 
 
 
 
 
Mortgage notes payable, net
 
86
 
$
975,929

 
$
984,876

 
3.1%
 
 
 
 
_______________________________
(1) 
Amounts borrowed in local currency and translated at the spot rate as of the periods presented.
(2) 
Fixed as a result of an interest rate swap agreement.
(3) 
The interest rate is 2.0% plus 1-month LIBOR.
(4) 
The debt prepayment costs associated with the sale of Western Digital were $1.3 million.
(5) 
The interest rate is 2.0% plus 1-month Adjusted LIBOR as defined in the mortgage agreement.
The following table presents future scheduled aggregate principal payments on the Company's gross mortgage notes payable over the next five calendar years and thereafter as of June 30, 2018:
(In thousands)
 
Future Principal Payments (1)
2018 (remainder)
 
$
124,251

2019
 
286,124

2020
 
325,384

2021
 
27,216

2022
 
—

2023
 
—

Thereafter
 
219,750

Total
 
$
982,725

_________________________
(1) 
Assumes exchange rates of £1.00 to $1.32 for GBP and €1.00 to $1.17 for EUR as of June 30, 2018 for illustrative purposes, as applicable.
The Company's mortgage notes payable agreements require compliance with certain property-level financial covenants including debt service coverage ratios. As of June 30, 2018, the Company was in compliance with all financial covenants under its mortgage notes payable agreements.
As of December 31, 2017, the Company was in breach of a loan-to-vacant possession financial covenant on one mortgage note payable agreement, which had an outstanding principal balance of $37.9 million (£28.1 million) as of December 31, 2017. During the fourth quarter of 2017, the Company repaid £0.8 million and in January 2018 the Company repaid €0.1 million of principal on two separate mortgage note payable agreements in order to cure loan to value financial covenant breaches which did not result in events of default. The Company was in compliance with the remaining covenants under its mortgage notes payable agreements as of December 31, 2017.

18
GLOBAL NET LEASE, INC.

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

Multi-Tenant Mortgage Loan II
On January 26, 2018, the Company entered into a multi-tenant mortgage loan, yielding gross proceeds of $32.8 million with a fixed interest rate of 4.32% and a 10-year maturity in February 2028. The multi-tenant mortgage loan is secured by eight properties in six states totaling approximately 627,500 square feet. Proceeds were used to pay down approximately $30.0 million of outstanding indebtedness under the Revolving Credit Facility and for general corporate purposes and future acquisitions.
Note 5 — Credit Facilities
The table below details the outstanding balances as of June 30, 2018 and December 31, 2017 under the credit agreement with KeyBank National Association (“KeyBank”), as agent, and the other lender parties thereto, that provides for a $500.0 million senior unsecured multi-currency revolving credit facility (the “Revolving Credit Facility”) and a €194.6 million ($225.0 million U.S. Dollar ("USD") equivalent at closing) senior unsecured term loan facility (the “Term Facility” and, together with the Revolving Credit Facility, the “Credit Facility”).
 
 
June 30, 2018
 
December 31, 2017
(In thousands)
 
TOTAL USD
 
 
USD
 
GBP
 
EUR
 
TOTAL USD
 
 
USD
 
GBP
 
EUR
Revolving Credit Facilities
 
$
458,880

 
 
$
371,000

 
£
40,000

 
€
30,000

 
$
298,909

 
 
$
209,000

 
£
40,000

 
€
30,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Term Loan
 
227,406

 
 
—

 
—

 
194,637

 
233,165

 
 
—

 
—

 
194,637

Deferred financing costs
 
(2,896
)
 
 
—

 
—

 
—

 
(3,260
)
 
 
—

 
—

 
—

Term Loan, Net
 
224,510

 
 
—

 
—

 
194,637

 
229,905

 
 
—

 
—

 
194,637

Total Credit Facility(1)
 
$
683,390

 
 
$
371,000

 
£
40,000

 
€
224,637

 
$
528,814

 
 
$
209,000

 
£
40,000

 
€
224,637

(1) 
Assumes exchange rates of £1.00 to $1.32 for GBP and €1.00 to $1.17 for EUR as of June 30, 2018 for illustrative purposes, as applicable.
Credit Facility - Terms
On July 24, 2017, the Company, through the OP, entered into a credit agreement with KeyBank. The aggregate total commitments under the Credit Facility are $725.0 million based on USD equivalents at closing. Upon request of the Company, subject in all respects to the consent of the lenders in their sole discretion, these aggregate total commitments may be increased up to an aggregate additional amount of $225.0 million, allocated to either or among both portions of the Credit Facility, with total commitments under the Credit Facility not to exceed $950.0 million.
The Credit Facility consists of two components, a Revolving Credit Facility and a Term Facility. The Revolving Credit Facility is interest-only and matures on July 24, 2021, subject to one one-year extension at the Company’s option. The Term Facility portion of the Credit Facility is interest-only and matures on July 24, 2022. Borrowings under the Credit Facility bear interest at a variable rate per annum based on an applicable margin that varies based on the ratio of consolidated total indebtedness and the consolidated total asset value of the Company and its subsidiaries plus either (i) LIBOR, as applicable to the currency being borrowed, or (ii) a “base rate” equal to the greatest of (a) KeyBank’s “prime rate,” (b) 0.5% above the Federal Funds Effective Rate, or (c) 1.0% above one-month LIBOR. The range of applicable interest rate margins is from 0.60% to 1.20% per annum with respect to base rate borrowings and 1.60% to 2.20% per annum with respect to LIBOR borrowings. As of June 30, 2018, the Credit Facility had a weighted-average effective interest rate of 3.1% after giving effect to interest rate swaps in place.
The Credit Facility requires the Company through the OP to pay an unused fee per annum of 0.25% of the unused balance of the Revolving Credit Facility if the unused balance exceeds or is equal to 50% of the total commitment or a fee per annum of 0.15% of the unused balance of the Revolving Credit Facility if the unused balance is less than 50% of the total commitment. From and after the time the Company obtains an investment grade credit rating, the unused fee will be replaced with a facility fee based on the total commitment under the Revolving Credit Facility multiplied by 0.30%, decreasing as the Company’s credit rating increases.
The availability of borrowings under the Revolving Credit Facility is based on the value of a pool of eligible unencumbered real estate assets owned by the Company and compliance with various ratios related to those assets. As of June 30, 2018, approximately $14.2 million was available for future borrowings under the Revolving Credit Facility. On July 2, 2018, upon the Company's request, the lenders under the Credit Facility increased the aggregate total commitments (see Note 14 - Subsequent Events for additional information). Any future borrowings may, at the option of the Company, be denominated in USD, EUR,

19
GLOBAL NET LEASE, INC.

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

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

20
GLOBAL NET LEASE, INC.

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

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

 
$
333

 
$
—

 
$
333

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

 
$
1,598

 
$
—

 
$
1,598

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

 
$
(402
)
 
$
—

 
$
(402
)
Put options (GBP & EUR)
 
$
—

 
$
63

 
$
—

 
$
63

Multi-year outperformance agreement (see Note 12)
 
$
—

 
$
—

 
$
—

 
$
—

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

 
$
(4,511
)
 
$
—

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

 
$
(2,737
)
 
$
—

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

 
$
(6,450
)
 
$
—

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

 
$
63

 
$
—

 
$
63

Multi-year outperformance agreement (see Note 12)
 
$
—

 
$
—

 
$
(1,600
)
 
$
(1,600
)
The valuation of the Company's multi-year outperformance agreement entered into with the Advisor in June 2015 (as amended, the "2015 OPP") was determined using a Monte Carlo simulation. See Note 12 — Share Based Compensation for more information about the 2015 OPP. This analysis reflects the contractual terms of the 2015 OPP, including the performance periods and total return hurdles, as well as observable market-based inputs, including interest rate curves, and unobservable inputs, such as expected volatility. As a result, the Company has determined that the 2015 OPP valuation in its entirety is classified in Level 3 of the fair value hierarchy. The 2015 OPP was replaced by the 2018 OPP, which was effective as of June 2, 2018. See Note 14 — Subsequent Events for more information about the 2018 OPP.
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 six months ended June 30, 2018.

21
GLOBAL NET LEASE, INC.

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

Level 3 Valuations
The following is a reconciliation of the beginning and ending balances for the changes in the instrument with Level 3 inputs in the fair value hierarchy for the six months ended June 30, 2018:
(In thousands)
 
OPP
Beginning Balance as of December 31, 2017
 
$
1,600

   Fair value adjustment
 
(1,600
)
Ending balance as of June 30, 2018
 
$
—

The following table provides quantitative information about the significant Level 3 input used:
Financial Instrument
 
Fair Value at June 30, 2018
 
Principal Valuation Technique
 
Unobservable Inputs
 
Input Value
 
 
(In thousands)
 
 
 
 
 
 
2015 OPP
 
$
—

 
Monte Carlo Simulation
 
Expected volatility
 
20.0%
The following discussion provides a description of the impact on a fair value measurement of a change in each unobservable input in isolation. For the relationship described below, the inverse relationship would also generally apply.
Expected volatility is a measure of the variability in possible returns for an instrument, parameter or market index given how much the particular instrument, parameter or index changes in value over time. Generally, the higher the expected volatility of the underlying instrument, parameter or market index, the wider the range of potential future returns. An increase in expected volatility, in isolation, would generally result in an increase in the fair value measurement of an instrument.
Financial Instruments not Measured at Fair Value on a Recurring Basis
The Company is required to disclose the fair value of financial instruments for which it is practicable to estimate value. The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, due to/from related parties, prepaid expenses and other assets, accounts payable, deferred rent and dividends payable approximate their carrying value on the consolidated balance sheets due to their short-term nature. The fair values of the Company's remaining financial instruments that are not reported at fair value on the consolidated balance sheets are reported below.
 
 
 
 
June 30, 2018
 
December 31, 2017
(In thousands)
 
Level
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Mortgage notes payable (1) (2) (3)
 
3
 
$
982,725

 
$
979,642

 
$
988,490

 
$
963,751

Revolving Credit Facility (4)
 
3
 
$
458,880

 
$
461,143

 
$
298,909

 
$
297,890

Term Facility (4)
 
3
 
$
224,510

 
$
228,406

 
$
229,905

 
$
233,916

__________________________________________________________
(1) 
Carrying value includes $1.0 billion gross mortgage notes payable and $1.4 million mortgage discounts, net as of June 30, 2018.
(2) 
Carrying value includes $1.0 billion gross mortgage notes payable and $1.9 million mortgage discounts, net as of December 31, 2017.
(3) 
Mortgage notes payable are presented net of deferred financing costs of $5.4 million and $5.5 million as of June 30, 2018 and December 31, 2017, respectively.
(4) 
Both facilities are part of the Credit Facility (see Note 5 — Credit Facilities for more information).
The fair value of the gross Mortgage notes payable, the Revolving Credit Facility and the Term Facility are estimated using a discounted cash flow analysis, based on the Advisor's experience with similar types of borrowing arrangements.
Note 7 — Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company may use derivative financial instruments, including interest rate swaps, caps, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings. Certain of the Company's foreign operations expose the Company to fluctuations of foreign interest rates and exchange rates. These fluctuations may impact the value of the Company’s cash receipts and payments in terms of the Company’s functional currency. The Company enters into derivative financial instruments to protect the value or fix the amount of certain obligations in terms of its functional currency, the USD.

22
GLOBAL NET LEASE, INC.

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

The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company's operating and financial structure as well as to hedge specific anticipated transactions. The Company does not intend to utilize derivatives for speculative or other purposes other than interest rate and currency risk management. The use of derivative financial instruments carries certain risks, including the risk that any counterparty to a contractual arrangement may not be able to perform under the agreement. To mitigate this risk, the Company only enters into a derivative financial instrument with a counterparty with a high credit rating with a major financial institution which the Company and its affiliates may also have other financial relationships with. The Company does not anticipate that any such counterparty will fail to meet its obligations.
The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the consolidated balance sheets as of June 30, 2018 and December 31, 2017:
(In thousands)
 
Balance Sheet Location
 
June 30,
2018
 
December 31,
2017
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign currency forwards (EUR-USD)
 
Derivative liabilities, at fair value
 
$
—

 
$
(304
)
Cross currency swaps (EUR)
 
Derivative liabilities, at fair value
 
—

 
(3,328
)
Cross currency swaps (GBP)
 
Derivative assets, at fair value
 
333

 
—

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

 
(1,183
)
Interest rate swaps (USD)
 
Derivative assets, at fair value
 
5,405

 
2,093

Interest rate swaps (GBP)
 
Derivative assets, at fair value
 
2

 
—

Interest rate swaps (GBP)
 
Derivative liabilities, at fair value
 
(2,023
)
 
(3,713
)
Interest rate swaps (EUR)
 
Derivative liabilities, at fair value
 
(2,045
)
 
(2,446
)
Total
 
 
 
$
1,672

 
$
(8,881
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Foreign currency forwards (GBP-USD)
 
Derivative assets, at fair value
 
$
1,066

 
$
20

Foreign currency forwards (GBP-USD)
 
Derivative liabilities, at fair value
 
(123
)
 
(1,175
)
Foreign currency forwards (EUR-USD)
 
Derivative assets, at fair value
 
699

 
—

Foreign currency forwards (EUR-USD)
 
Derivative liabilities, at fair value
 
(44
)
 
(1,258
)
Put options (EUR)
 
Derivative assets, at fair value
 
63

 
63

Interest rate swaps (EUR)
 
Derivative liabilities, at fair value
 
(1,741
)
 
(2,384
)
Total
 
 
 
$
(80
)
 
$
(4,734
)
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction impacts earnings. During 2018, such derivatives were used to hedge the variable cash flows associated with variable-rate debt. During the three and six months ended June 30, 2018, the Company recorded losses of approximately $45,822 and $89,235 of ineffectiveness in earnings, respectively. During the three and six months ended June 30, 2017, the Company recorded gains of approximately $30,000 and $0.1 million of ineffectiveness in earnings, respectively. Additionally, during the six months ended June 30, 2018, the Company accelerated the reclassification of amounts in other comprehensive income to earnings as a result of the hedged forecasted transactions becoming probable not to occur.  The accelerated amounts were a loss of $22,691.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $1.4 million will be reclassified from other comprehensive income as an increase to interest expense.
As of June 30, 2018 and December 31, 2017, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:

23
GLOBAL NET LEASE, INC.

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

 
 
June 30, 2018
 
December 31, 2017
Derivatives
 
Number of
Instruments
 
Notional Amount
 
Number of
Instruments
 
Notional Amount
 
 
 
 
(In thousands)
 
 
 
(In thousands)
Interest rate swaps (GBP)
 
17
 
$
285,920

 
19
 
$
301,155

Interest rate swaps (EUR)
 
13
 
216,702

 
13
 
222,190

Interest rate swaps (USD)
 
3
 
150,000

 
3
 
150,000

Total
 
33
 
$
652,622

 
35
 
$
673,345

In connection with the July 24, 2017 refinancing of the Prior Credit Facility, the Company terminated an interest rate swap with notional amount of £160.0 million for a payment of $2.6 million. This swap was designated as a cash flow hedge on the Company's GBP borrowings which were partially paid off. As a result of the termination, the Company accelerated the reclassification of amounts in other comprehensive income to earnings as a result of the hedged forecasted transactions becoming probable not to occur. The portion of the termination payment relating to the GBP borrowings that were paid off resulted in a charge to earnings of $1.1 million, included in loss on derivative instruments in the third quarter of 2017. The remaining amount relating to GBP borrowings still outstanding will remain in AOCI and be recorded as an adjustment to interest expense over the term of the related GBP borrowings.
In connection with the July 24, 2017 refinancing of the Prior Credit Facility, the Company novated an interest rate swap with a notional amount of €224.0 million. Subsequent to the novation, the swap no longer qualified for hedge accounting. The interest swap liability of $0.7 million at that date will remain in AOCI and be recorded as an adjustment to interest expense over the term of the related LIBOR borrowings. Subsequent changes in the value of the swap will be reflected in earnings.
The table below details the location in the consolidated financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the three and six months ended June 30, 2018 and 2017.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
 
2018
 
2017
 
2018
 
2017
Amount of gain (loss) recognized in accumulated other comprehensive income (loss) from derivatives (effective portion)
 
$
7,076

 
$
(6,631
)
 
$
6,646

 
$
(8,614
)
Amount of loss reclassified from accumulated other comprehensive income (loss) into income as interest expense (effective portion)
 
$
(1,039
)
 
$
(1,581
)
 
$
(2,344
)
 
$
(3,053
)
Amount of (loss) gain recognized in income on derivative instruments (ineffective portion, reclassifications of missed forecasted transactions and amounts excluded from effectiveness testing)
 
$
(46
)
 
$
30

 
$
(112
)
 
$
66

Net Investment Hedges
The Company is exposed to fluctuations in foreign currency exchange rates on property investments in foreign countries which pay rental income, incur property related expenses and hold debt instruments in currencies other than its functional currency, the USD. The Company uses foreign currency derivatives including cross currency swaps to hedge its exposure to changes in foreign exchange rates on certain of its foreign investments. Cross currency swaps involve fixing the applicable exchange rate for delivery of a specified amount of foreign currency on specified dates.
For derivatives designated as net investment hedges, the effective portion of changes in the fair value of the derivatives are reported in Accumulated Other Comprehensive Income (outside of earnings) as part of the cumulative translation adjustment. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. Amounts are reclassified out of accumulated other comprehensive income into earnings when the hedged net investment is either sold or substantially liquidated.
As of June 30, 2018 and December 31, 2017, the Company had the following outstanding foreign currency derivatives that were designated as net investment hedges used to hedge its net investments in foreign operations:

24
GLOBAL NET LEASE, INC.

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

 
 
June 30, 2018
 
December 31, 2017
Derivatives
 
Number of
Instruments
 
Notional Amount
 
Number of
Instruments
 
Notional Amount
 
 
 
 
(In thousands)
 
 
 
(In thousands)
Cross currency swaps (EUR-USD)
 
—
 
$
—

 
3
 
$
43,222

Cross currency swaps (GBP-USD)
 
1
 
64,881

 
1
 
66,282

Foreign currency forwards (EUR-USD)
 
—
 
—

 
1
 
12,099

Total
 
1
 
$
64,881

 
5
 
$
121,603

Foreign Denominated Debt Designated as Net Investment Hedges
Effective May 17, 2015, all foreign currency draws under the Prior Credit Facility were designated as net investment hedges. As such, the effective portion of changes in value due to currency fluctuations are reported in accumulated other comprehensive income (loss) (outside of earnings) as part of the cumulative translation adjustment. The undesignated portion of the change in fair value of the derivatives is recognized directly in earnings. Amounts are reclassified out of accumulated other comprehensive income (loss) into earnings when the hedged net investment is either sold or substantially liquidated, or if the Company should no longer possess a controlling interest.
As of June 30, 2018, total foreign currency advances under the Credit Facility were approximately $315.3 million, which reflects advances of £40 million ($52.8 million based upon an exchange rate of £1.00 to $1.32, as of June 30, 2018) and advances of €224.6 million ($262.5 million based upon an exchange rate of €1.00 to $1.17, as of June 30, 2018).
The Company designates its net investment hedge position on the first day of each quarterly period. The table below presents the currency draws designated as net investment hedges and the related net investments in real estate designated in foreign currency.
 
 
April 1, 2018
(In thousands)
 
GBP
 
EUR
Currency draws (1)
 
£
40,000

 
€
224,637

Net Investments in Real Estate Denominated in Foreign Currency (2)
 
£
104,837

 
€
358,768

(1) $52.8 million and $262.5 million, respectively, based on the aforementioned exchange rates as of June 30, 2018.
(2) $138.5 million and $419.2 million, respectively, based on the aforementioned exchange rates as of June 30, 2018.
The Company records adjustments to earnings for currency impact related to undesignated excess positions, if any. There were no undesignated excess positions as of April 1, 2018. The Company recorded losses of $3.0 million and $3.9 million for the three and six months ended June 30, 2017 due to currency changes on the undesignated excess, as of April 1, 2017, of the foreign currency advances over the related net investments.
Additionally, in connection with the July 24, 2017 refinancing of the Prior Credit Facility, the Company terminated a cross currency swap with a notional amount of £49.1 million for a payment of $10.6 million. This swap was designated as a net investment hedge on the Company's EUR investments. The termination payment amount will remain in AOCI until the hedge item is liquidated.
Non-designated Derivatives
The Company is exposed to fluctuations in the exchange rates of its functional currency, the USD, against the GBP and the EUR. The Company uses foreign currency derivatives, including options, currency forward and cross currency swap agreements, to manage its exposure to fluctuations in GBP-USD and EUR-USD exchange rates. While these derivatives are hedging the fluctuations in foreign currencies, they do not meet the strict hedge accounting requirements to be classified as hedging instruments. Changes in the fair value of derivatives not designated as hedges under qualifying hedging relationships are recorded directly in net income (loss). The Company recorded gains of $6.3 million and $3.4 million on the non-designated hedges for the three and six months ended June 30, 2018, respectively. The Company recorded losses of $3.0 million and $3.5 million on the non-designated hedges for the three and six months ended June 30, 2017, respectively.

25
GLOBAL NET LEASE, INC.

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

As of June 30, 2018 and December 31, 2017, the Company had the following outstanding derivatives that were not designated as hedges under qualifying hedging relationships.
 
 
June 30, 2018
 
December 31, 2017
Derivatives
 
Number of
Instruments
 
Notional Amount
 
Number of
Instruments
 
Notional Amount
 
 
 
 
(In thousands)
 
 
 
(In thousands)
Foreign currency forwards (GBP-USD)
 
38
 
$
41,000

 
24
 
$
32,116

Foreign currency forwards (EUR-USD)
 
37
 
41,356

 
22
 
35,712

Interest rate swaps (EUR)
 
6
 
403,718

 
6
 
414,093

Interest rate floors (GBP)
 
1
 
37,080

 
—
 
—

Options (GBP-USD)
 
—
 
—

 
1
 
675

Options (EUR-USD)
 
2
 
5,000

 
5
 
9,250

Total
 
84
 
$
528,154

 
58
 
$
491,846

Offsetting Derivatives
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company's derivatives as of June 30, 2018 and December 31, 2017. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the accompanying consolidated balance sheets.
 
 
 
 
 
 
 
 
 
 
Gross Amounts Not Offset on the Balance Sheet
 
 

(In thousands)
 
Gross Amounts of Recognized Assets
 
Gross Amounts of Recognized (Liabilities)
 
Gross Amounts Offset on the Balance Sheet
 
Net Amounts of Assets (Liabilities) presented on the Balance Sheet
 
Financial Instruments
 
Cash Collateral Received (Posted)
 
Net Amount
June 30, 2018
 
$
7,568

 
$
—

 
$
—

 
$
7,568

 
$
(167
)
 
$
—

 
$
7,401

June 30, 2018
 
$
—

 
$
(5,976
)
 
$
—

 
$
(5,976
)
 
$
167

 
$
—

 
$
(5,809
)
December 31, 2017
 
$
2,176

 
$
(15,791
)
 
$
—

 
$
(13,615
)
 
$
—

 
$
—

 
$
(13,615
)
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 has drawn, and expects to continue to draw, foreign currency advances under the Prior Credit Facility and the 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 — Mortgage Notes Payable, Net). 
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 June 30, 2018, 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 $6.9 million. As of June 30, 2018, the Company had 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.

26
GLOBAL NET LEASE, INC.

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

Note 8 — Stockholders' Equity
Common Stock
As of June 30, 2018 and December 31, 2017, the Company had 67.3 million shares of Common Stock outstanding, respectively, excluding unvested restricted shares of Common Stock ("restricted shares") and long-term incentive plan units in the OP ("LTIP Units") issued in accordance with the OPP which are currently, or may be in the future, convertible into shares of Common Stock. The Company previously had limited partnership units in the OP ("OP Units") which were issued to limited partners other than the Company. During the second quarter of 2017, all remaining OP Units, which totaled 181,841, were converted into Common Stock. On February 28, 2017, the Company completed a reverse stock split of Common Stock, OP Units and LTIP Units, at a ratio of 1-for-3, the impact of which was already reflected in the Company's Annual Report on Form 10-K filed with the SEC on February 28, 2018.
Equity Distribution Agreement - Common Stock
The Company has entered into an Equity Distribution Agreement with UBS Securities LLC, Robert W. Baird & Co. Incorporated, Capital One Securities, Inc., Mizuho Securities USA Inc., FBR Capital Markets & Co. and KeyBanc Capital Markets Inc. to sell shares of Common Stock, to raise aggregate sales proceeds of $175.0 million, from time to time, pursuant to an “at the market” equity offering program (the “ATM Program”). During the six months ended June 30, 2018, the Company did not sell any shares of Common Stock through the ATM Program.
Preferred Stock
The Company is authorized to issue up to 16,670,000 shares of Preferred Stock, of which it has classified and designated 13,409,650 and 5,409,650 as authorized shares of its 7.25% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share ("Series A Preferred Stock"), as of June 30, 2018 and December 31, 2017, respectively. The Company had 5,413,665 and 5,409,650 shares of Series A Preferred Stock issued and outstanding, as of June 30, 2018 and December 31, 2017, respectively.
Equity Distribution Agreement - Series A Preferred Stock
In March 2018, the Company entered into an equity distribution agreement with Ladenburg Thalmann & Co. Inc., BMO Capital Markets Corp. and B. Riley FBR, Inc. to raise aggregate sales proceeds of $200.0 million from time to time pursuant to an ATM Program for its Series A Preferred Stock (the "Preferred Stock ATM Program"). During the three months ended June 30, 2018, the Company sold 2,339 shares of Series A Preferred Stock through the Preferred Stock ATM Program for net proceeds of $58,668, after commissions paid of $880 and additional issuance costs of $24,819. During the six months ended June 30, 2018, the Company sold an 4,015 shares of Series A Preferred Stock through the Preferred Stock ATM Program for net proceeds of $0.1 million, after commissions paid of $1,509 and additional issuance costs of $0.3 million.
Monthly Dividends
The Company generally pays dividends on Common Stock on the 15th day of each month in an amount equal to $0.1775 per share to stockholders of record as of close of business on, commencing with dividend payable in July 2018, the 13th day of such month. Prior to July 2018, the record date for the Company’s regular dividend was generally the 8th day of the applicable month. The Company's board of directors may alter the amounts of dividends paid or suspend dividend payments at any time and therefore dividend payments are not assured. For purposes of the presentation of information herein, the Company may refer to distributions by the OP on OP Units and LTIP Units as dividends.
Dividends on Series A Preferred Stock accrue in an amount equal to $0.453125 per share per quarter to Series A Preferred Stock holders, which is equivalent to 7.25% of the $25.00 liquidation preference per share of Series A Preferred Stock per annum. Dividends on the Series A Preferred Stock are payable quarterly in arrears on the 15th day of January, April, July and October of each year (or, if not on a business day, on the next succeeding business day) to holders of record at the close of business on the record date set by the Company's board of directors, which must be not more than 30 nor fewer than 10 days prior to the applicable payment date.

27
GLOBAL NET LEASE, INC.

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

Note 9 — 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 various expiration 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 non-cancelable ground leases, excluding increases resulting from increases in the consumer price index, are as follows:
(In thousands)
 
Future Ground
Lease Payments
2018 (remainder)
 
$
700

2019
 
1,399

2020
 
1,399

2021
 
1,399

2022
 
1,399

2023
 
1,399

Thereafter
 
41,362

Total
 
$
49,057

The Company incurred rent expense on ground leases of $0.3 million and $0.7 million during the three and six months ended June 30, 2018, respectively. The Company incurred rent expense on ground leases of $0.3 million and $0.6 million during the three and six months ended June 30, 2017, respectively.
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.
On January 25, 2018, the Service Provider filed a complaint against (i) GNL and the OP; (ii) the Property Manager, Global Net Lease Special Limited Partner, LLC (the "Special Limited Partner"), an affiliate of AR Global that directly owns the Advisor and the Property Manager, and the Advisor (collectively, the “GNL Advisor Defendants”); and (iii) AR Capital Global Holdings, LLC, and AR Global (together, the “AR Defendants”), in the Supreme Court of the State of New York, County of New York ("New York Supreme Court"). The complaint alleges that the notice sent to the Service Provider by the Company on January 15, 2018, terminating the Service Provider Agreement, was a pretext to enable the AR Defendants to seize the Service Provider's business. The complaint alleges breach of contract against GNL, the OP and the GNL Advisor Defendants, and tortious interference against the AR Defendants. The complaint seeks: (i) monetary damages against the defendants, (ii) to enjoin the termination of the Service Provider Agreement, and (iii) judgment declaring the termination to be void. The defendants believe the allegations in the complaint are without merit, and intend to defend against them vigorously. On January 26, 2018, the Service Provider made a motion seeking to preliminarily enjoin the defendants from terminating the Service Provider Agreement pending resolution of the lawsuit. On February 13, 2018, the defendants responded and moved to dismiss.
At a hearing on March 15, 2018, the New York Supreme Court issued a ruling (i) denying the Service Provider’s request for a preliminary injunction preventing defendants from terminating the Service Provider, (ii) dismissing the Service Provider’s claim for a declaratory judgment that the termination is void and of no force and effect, and (iii) allowing the Service Provider’s remaining claims to proceed.  On April 16, 2018, the defendants filed answers and counterclaims against the Service Provider alleging damages resulting from the Service Provider’s underperformance of its duties, as well as damages related to the Service Provider’s retention of approximately $91,000 in pre-paid fees for the post-termination period. The New York Supreme Court held a preliminary conference on April 17, 2018 at which it set a discovery schedule, and the parties have begun discovery. During the three and six months ended June 30, 2018, the Company incurred $0.9 million and $1.4 million, respectively, of litigation costs relating to the matter which are included in acquisition and transaction related costs in our Consolidated Statement of Operations.
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 June 30, 2018, 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.

28
GLOBAL NET LEASE, INC.

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

Note 10 — Related Party Transactions
As of June 30, 2018 and December 31, 2017, AR Global and its affiliates and a subsidiary of the Service Provider owned, in the aggregate, 35,900 and 39,904 shares of outstanding Common Stock, respectively. The Advisor, the Service Provider, and their affiliates may incur costs and fees on behalf of the Company. The Company had no receivables from related parties and $0.8 million of payables to their affiliates, as of June 30, 2018 and December 31, 2017, respectively.
As of June 30, 2018, AR Global indirectly owned 95% of the membership interests in the Advisor and Scott J. Bowman, the Company's former chief executive officer and president, directly owned the other 5% of the membership interests in the Advisor. Prior to his resignation as chief executive officer and president of the Company, Mr. Bowman owned 10% of the membership interests in the Advisor and AR Global indirectly owned the other 90% of the membership interests in the Advisor. James L. Nelson, the Company’s chief executive officer and president, holds a non-controlling profit interest in the Advisor and Property Manager. Mr. Nelson was appointed the Company's chief executive officer and president, effective as of August 8, 2017.
The Company is the sole general partner of the OP. The Advisor, the Service Provider, the Special Limited Partner and individual investors all previously held OP Units, however on April 1, 2017, the remaining 181,841 OP Units which were held by individual members and employees of AR Global, were converted into Common Stock. There were no OP Units held by anyone other than the Company outstanding as of June 30, 2018 and December 31, 2017. The OP made cash distributions to partners other than the Company of $0.1 million during the six months ended June 30, 2017.
In addition, in connection with the OPP, the Company paid $0.1 million and $0.3 million in distributions related to LTIP Units during the three and six months ended June 30, 2018, respectively, which are included in accumulated deficit in the consolidated statement of changes in equity. As of June 30, 2018 and December 31, 2017, the Company had no unpaid distributions relating to LTIP Units.
Realty Capital Securities, LLC (the "Former Dealer Manager") served as the dealer manager of the Company's initial public offering, which was ongoing from October 2012 to June 2014 and, together with its affiliates, continued to provide the Company with various services through December 31, 2015. RCS Capital Corporation ("RCAP"), the parent company of the Former Dealer Manager, and certain of its affiliates that provided services to the Company, filed for Chapter 11 bankruptcy protection in January 2016, prior to which it was also under common control with AR Global. In May 2016, RCAP and its affiliated debtors emerged from bankruptcy under the new name of Aretec Group, Inc. On March 8, 2017, the creditor trust established in connection with the RCAP bankruptcy filed suit against AR Global, the Advisor, advisors of other entities sponsored by AR Global, and AR Global's principals. The suit alleges, among other things, certain breaches of duties to RCAP. The Company is not named in the suit, nor are there any allegations related to the services the Advisor provides to the Company. On May 26, 2017, the defendants moved to dismiss. On November 30, 2017, the Court issued an opinion partially granting the defendants’ motion. On December 7, 2017, the creditor trust moved for limited reargument of the court's dismissal of its breach of fiduciary duty claim, and on January 10, 2018, the defendants filed a supplemental motion to dismiss certain claims. On April 5, 2018, the court issued an opinion denying the creditor trust's motion for reconsideration while partially granting the defendants' supplemental motion to dismiss. The Advisor has informed the Company that it believes that the suit is without merit and intends to defend against it vigorously.
Fees Paid in Connection With the Operations of the Company
On June 2, 2015 (the "Listing Date"), the Company entered into the Advisory Agreement. Under the terms of the 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 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 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 $2.37, plus (b) 10% of the Core AFFO Per Share in excess of an incentive hurdle of an annualized Core AFFO Per Share of $3.08. The $2.37 and $3.08 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.

29
GLOBAL NET LEASE, INC.

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

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 are subject to varying caps based on assets under management (“AUM”)(2), as defined in the Advisory Agreement.
_______________________________
(1) 
For purposes of the 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 (as defined in the Advisory Agreement)); (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) gain (or loss) from the sale of investments; (h) impairment loss on real estate; (i) acquisition and transaction related costs; (j) straight-line rent; (k) amortization of above and below market leases assets and liabilities; (l) amortization of deferred financing costs; (m) accretion of discounts and amortization of premiums on debt investments; (n) marked-to-market adjustments included in net income; (o) unrealized gain (loss) 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 the Company's investment at the end of such period (before reserves from depreciation or bad debts, or similar non-cash reserves) divided by (B) two (2).
Specifically, the per annum aggregate amount of the Base Management Fee and the Incentive Compensation to be paid under the 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 a special dividend(s) related thereto is paid to stockholders.
Property Management Fees
The 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. This oversight fee is no longer applicable to 12 of the Company's properties which became subject to a separate property management agreement with the Property Manager in October 2017 on otherwise identical terms to the existing property management agreement, which remained applicable to all other properties.
Solely with respect to the Company's investments in properties located in Europe, prior to the effectiveness of the termination of the Service Provider in March 2017, the Service Provider received, from the Advisor, 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 was 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. Following the termination of the Service Provider, the Service Provider no longer receives any amounts from the Advisor. For additional information, see Note 1 — Organization.
The following table reflects related party fees incurred, forgiven and contractually due as of and for the periods presented:

30
GLOBAL NET LEASE, INC.

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

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
 
 
 
 
 
2018
 
2017
 
2018
 
2017
 
(Receivable) Payable as of
 
(In thousands)
 
Incurred
 
Forgiven
 
Incurred
 
Forgiven
 
Incurred
 
Forgiven
 
Incurred
 
Forgiven
 
June 30, 2018
 
December 31, 2017
 
One-time fees and reimbursements:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees on gain from sale of investments
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
—

 
$
—

 
$
—

 
$
49

(2) 
$
49

(2) 
Ongoing fees (5):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset management fees (1)
 
5,658

 
—

 
5,207

 
—

 
11,315

 
—

 
10,397

 
—

 
—

 
240

(2) 
Property management fees
 
1,132

 
—

 
1,126

 
620

 
2,303

 
—

 
2,223

 
1,177

 
—

(2) (3) 
59

(2) (3) 
Total related party operational fees and reimbursements
 
$
6,790

 
$
—

 
$
6,333

 
$
620

 
$
13,618

 
$
—

 
$
12,620

 
$
1,177

 
$
49

 
$
348

(4) 
___________________________________________________________________________
(1) 
The Advisor, in accordance with the Advisory Agreement, received asset management fees in cash equal to one quarter of the annual Minimum Base Management Fee for the three and six months ended June 30, 2018, and, the Variable Base Management Fee of $1.1 million and $2.3 million for the three and six months ended June 30, 2018, respectively. The Variable Base Management Fee was $0.7 million and $1.4 million for the three and six months ended June 30, 2017, respectively. No Incentive Compensation was earned for the three and six months ended June 30, 2018 and 2017.
(2) 
Balance included within due to related parties on the consolidated balance sheets as of June 30, 2018 and December 31, 2017.
(3) 
Prepaid property management fees of zero and $0.2 million as of June 30, 2018 and December 31, 2017 are not included in the table above and are included in the prepaid expenses and other assets on the consolidated balance sheets.
(4) 
In addition, as of December 31, 2017 due to related parties includes $0.3 million of costs accrued for Global II Advisor, $0.1 million of costs accrued for transfer agent fees and $0.1 million of costs relating to RCS Advisory (as defined below), all of which are not reflected in the table above.
(5) 
In order to improve operating cash flows and the ability to pay dividends from operating cash flows, the Advisor may forgive certain fees including asset management and property management fees. Because the Advisor may forgive 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 at any point in the future.
Professional Fees and Other Reimbursements
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. Additionally, the Company reimburses the Advisor for expenses of the Advisor and its affiliates incurred on behalf of the Company, except for those expenses that are specifically the responsibility of the Advisor under the Advisory Agreement, such as fees and compensation paid to the Service Provider prior to its termination and the Advisor's overhead expenses, rent and travel expenses, professional services fees incurred with respect to the Advisor for the operation of its business, insurance expenses (other than with respect to the Company's directors and officers) and information technology expenses. No reimbursement was incurred from the Advisor for providing services during the three and six months ended June 30, 2018 and 2017.
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. During the three and six months ended June 30, 2018 and 2017, there were no property operating and general administrative expenses absorbed by the Advisor.
Fees Paid in Connection with the Liquidation of the Company's Real Estate Assets
In connection with any sale or transaction involving any investment, subject to the terms of the Advisory Agreement, the Company will pay to the Advisor a fee in connection with net gain recognized by the Company in connection with the sale or transaction (the "Gain Fee") unless the proceeds of such transaction or series of transactions are reinvested in one or more investments within 180 days thereafter. The Gain Fee is calculated at the end of each month and paid, to the extent due, with the next installment of the Base Management Fee. The Gain Fee is calculated by aggregating all of the gains and losses from the preceding month. During the six months ended June 30, 2017, the Company reinvested proceeds of $30.3 million and sold one property which resulted in the Gain Fee due to the Advisor of $0.6 million. As of June 30, 2018 and December 31, 2017, the Gain Fee due to the Advisor was approximately $49,000. There was no Gain Fee for the three and six months ended June 30, 2018.
Acquired Related Party Receivable
On December 16, 2016, Global II entered into a letter agreement (the “Letter Agreement”) with American Realty Capital Global II Advisors, LLC (“Global II Advisor”), and AR Global, the parent of the Global II Advisor, pursuant to which the Global

31
GLOBAL NET LEASE, INC.

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

II Advisor agreed to reimburse Global II $6.3 million in organization and offering costs incurred by Global II in its IPO (the “Global II IPO”) that exceeded 2.0% of gross offering proceeds in the Global II IPO (the “Excess Amount”). Global II's IPO was suspended in November 2015 and lapsed in accordance with its terms in August 2016. The Letter Agreement was negotiated on behalf of Global II, and approved, by the independent directors of Global II.
The Letter Agreement provided for reimbursement of the Excess Amount to Global II through (1) the tender of 66,344 Class B Units of limited partnership interest of Global II’s OP ("Global II Class B Units"), previously issued to the Global II Advisor for its provision of asset management services, and (2) the payment of the balance of the Excess Amount in equal cash installments over an eight-month period. The value of the Excess Amount was determined using a valuation for each Global II Class B Unit based on 2.27 times the 30-day volume weighted-average price of each share of Common Stock on the date of the Merger.
Upon consummation of the Merger, Class B Units were tendered to the Company and the balance of the excess amount of $5.1 million is payable in eight equal monthly installments beginning on January 15, 2017. Such receivable was acquired by the Company in the Merger. During the six months ended June 30, 2017, the Company received $3.9 million in payments with respect to the excess organization and offering costs incurred by Global II. As of December 31, 2017, the Company had received the full amount of payments with respect to the excess organization and offering costs incurred by Global II.
Note 11 — Economic Dependency
Under various agreements, the Company has engaged or will engage the Advisor, its affiliates and entities under common control with the Advisor, 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 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. 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 12 — Share-Based Compensation
Stock Option Plan
The Company has a stock option plan (the "Plan") which authorizes the grant of nonqualified Common 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 of Common Stock 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 June 30, 2018 and December 31, 2017, 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 of Common Stock ("Restricted Shares") and restricted stock units in respect of shares of Common Stock ("RSUs") to the Company's directors, officers and 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.
Effective upon the Listing Date, independent director compensation is as follows: (i) the annual retainer payable to all independent directors is $100,000 per year, (ii) the annual retainer for the non-executive chair is $105,000, (iii) the annual retainer for independent directors serving on the audit committee, compensation committee or nominating and corporate governance committee is $30,000. All annual retainers are payable 50% in the form of cash and 50% in the form of RSUs 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 RSP, the Company may issue up to 10.0% of its outstanding shares of Common Stock on a fully diluted basis at any time. Restricted Share awards entitle the recipient to receive shares of Common Stock from us under terms that provide for vesting over a specified period of time. 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 to holders of restricted shares payable in shares of Common Stock are subject to the same restrictions as the underlying Restricted Shares.

32
GLOBAL NET LEASE, INC.

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

RSUs represent a contingent right to receive shares of Common Stock at a future settlement date, subject to satisfaction of applicable vesting conditions and/or other restrictions, as set forth in the RSP and an award agreement evidencing the grant of RSUs. RSUs may not, in general, be sold or otherwise transferred until restrictions are removed and the rights to the shares of Common Stock have vested. Holders of RSUs do not have or receive any voting rights with respect to the RSUs or any shares underlying any award of RSUs, but such holders are generally credited with dividend or other distribution equivalents which are subject to the same vesting conditions and/or other restrictions as the underlying RSUs and only paid at the time such RSUs are settled in shares of Common Stock. RSU award agreements generally provide for accelerated vesting of all unvested RSUs in connection with a termination without cause from the Company’s board of directors or a change of control and accelerated vesting of the portion of the unvested RSUs scheduled to vest in the year of the recipient’s voluntary resignation from or failure to be re-elected to the Company’s board of directors.
The following table reflects the amount of RSUs outstanding as of June 30, 2018:
 
 
Number RSUs
 
Weighted-Average Issue Price
Unvested, December 31, 2017
 
49,112

 
$
24.29

Vested
 
(19,384
)
 
24.43

Granted
 
17,039

 
18.34

Forfeitures
 
—

 
—

Unvested, June 30, 2018
 
46,767

 
22.05

The fair value of the RSUs 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 RSUs was $0.2 million and $0.2 million for the three and six months ended June 30, 2018, respectively. Compensation expense related to RSUs was $0.1 million and $0.4 million for the three and six months ended June 30, 2017, respectively. Compensation expense is recorded as equity-based compensation in the accompanying consolidated statements of operations. As of June 30, 2018, the Company had $1.0 million unrecognized compensation costs related to unvested RSUs awards granted under the RSP. The cost is expected to be recognized over a weighted-average period of 2.2 years.
Multi-Year Outperformance Agreement
In connection with the listing of Common Stock on the New York Stock Exchange, on June 2, 2015, the Company entered into the 2015 OPP with the OP and the Advisor. Under the 2015 OPP, the Advisor was issued 3,013,933 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”). Because no performance goals under the 2015 OPP were achieved, no LTIP Units issued under the 2015 OPP were earned and all LTIP Units issued under the 2015 OPP were automatically forfeited without the payment of any consideration by the Company or the OP, effective as of June 2, 2018. On July 19, 2018, the Company and the OP entered into the 2018 OPP with the Advisor, pursuant to which the Advisor was issued 2,554,930 LTIP Units, effective as of June 2, 2018. See Note 14 - Subsequent Events for additional information.
Under the 2015 OPP, the Advisor was 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 June 2, 2015, based on the Company’s achievement of certain levels of absolute TSR and the amount by which the Company’s absolute TSR exceeded the average TSR of a peer group for the three-year performance period commencing on June 2, 2015 (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:


33
GLOBAL NET LEASE, INC.

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

 
 
 
 
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 Gramercy Property Trust Inc., Lexington Realty Trust, Select Income REIT, and W.P. Carey Inc.
The potential outperformance award was 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 was based on a formula 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 was based on a formula less any award earned for the first and second One-Year Period, but not less than zero. Any LTIP Units that were unearned at the end of the Three-Year Period were to be forfeited.
One third of any earned LTIP Units were to vest, subject to the Advisor’s continued service through each vesting date, on each of the third, fourth and fifth anniversaries of the Effective Date. Any earned and vested LTIP Units would have been converted into OP Units in accordance with the terms and conditions of the limited partnership agreement of the OP. The 2015 OPP provided for early calculation of LTIP Units earned and for the accelerated vesting of any earned LTIP Units in the event the Advisor was terminated or in the event the Company incurred a change in control, in either case prior to the end of the Three-Year Period. As of June 2, 2017 (end of the Two-Year Period), June 2, 2016 (end of the first One-Year Period) and June 2, 2018 (end of the Three-Year Period), no LTIP units were earned by the Advisor under the terms of the 2015 OPP. Accordingly, all LTIP Units that had been issued under the 2015 OPP were automatically forfeited without the payment of any consideration by the Company or the OP as of the end of the Three-Year Period.
The Company records equity-based compensation expense associated with the awards over the requisite service period on a graded vesting basis. Under the 2015 OPP, equity-based compensation expense was adjusted each reporting period for changes in the estimated market-related performance. The Company recorded income related to the 2015 OPP of $0.1 million, and $1.1 million for the three and six months ended June 30, 2018, respectively, and income related to the 2015 OPP of $2.2 million and $2.6 million for the three and six months ended June 30, 2017, respectively. There was no cumulative expense related to the 2015 OPP recognized as of June 30, 2018.
One third of any earned LTIP Units, subject to the Advisor’s continued service through each vesting date, was to vest on each of the third, fourth and fifth anniversaries of the Effective Date. The 2015 OPP provided for early calculation of LTIP Units earned and for the accelerated vesting of any earned LTIP Units in the event the Advisor had been terminated by the Company, or in the event the Company incurred a change in control, in either case prior to the end of the Three-Year Period.
The rights of the Advisor as the holder of the LTIP Units (whether issued pursuant to the 2015 OPP or the 2018 OPP) are governed by the terms of the LTIP Units contained in the agreement of limited partnership of the OP. Until an LTIP Unit is earned in accordance with the provisions of the 2018 OPP, the holder of the LTIP Unit will be entitled to distributions on the LTIP Unit equal to 10% of the distributions (other than distributions of sale proceeds) made on an OP Unit. The Company paid $0.2 million and $0.2 million in distributions related to LTIP Units during the six months ended June 30, 2018 and 2017, respectively, which is included in accumulated deficit in the consolidated statement of changes in equity. Distributions paid with respect to an LTIP Unit will not be subject to forfeiture, even if the LTIP Unit is ultimately forfeited because it is not earned in accordance with the terms of the agreement under which it was issued. After an LTIP Unit is earned, the holder will be entitled to a priority catch-up distribution per earned LTIP Unit equal to the accrued distributions on OP Units during the applicable performance period, less distributions already paid on the LTIP Unit during the performance period. As of the valuation date on the final day of the applicable performance period, the earned LTIP Units will become entitled to the same distributions as OP Units. 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

34
GLOBAL NET LEASE, INC.

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

Advisor, in its sole discretion, will be entitled to convert the LTIP Unit into an OP Unit in accordance with the limited partnership agreement of the OP. In accordance with, and subject to the terms of, the limited partnership agreement of the OP, OP Units may be redeemed on a one-for-one basis for, at the Company’s election, shares of Common Stock or the cash equivalent thereof.
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 three months ended June 30, 2018 and 2017.
Note 13 — Earnings Per Share
The following is a summary of the basic and diluted net income per share computation for the periods presented:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands, except share and per share data)
 
2018
 
2017
 
2018
 
2017
Net income attributable to common stockholders
 
$
5,288

 
$
5,200

 
$
7,649

 
$
12,629

Adjustments to net income attributable to common stockholders for common share equivalents (1)
 
(26
)
 
(185
)
 
(210
)
 
(370
)
Adjusted net income attributable to common stockholders
 
$
5,262

 
$
5,015

 
$
7,439

 
$
12,259

 
 
 
 
 
 
 
 
 
Basic and diluted net income per share attributable to common stockholders
 
$
0.08

 
$
0.08

 
$
0.11

 
$
0.18

Weighted average shares outstanding:
 
 
 
 
 
 
 
 
Basic and Diluted
 
67,292,021

 
66,652,221

 
67,289,639

 
66,461,663

Under current authoritative guidance for determining earnings per share, all unvested 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. The Company's unvested RSUs and LTIP Units contain rights to receive non-forfeitable distributions and therefore the Company applies the two-class method of computing earnings per share. The calculation of earnings per share above excludes the non-forfeitable distributions to the unvested RSUs and LTIP Units from the numerator.
Diluted net income (loss) per share assumes the conversion of all Common Stock share equivalents into an equivalent number of shares of Common Stock, unless the effect is anti-dilutive. The Company considers unvested restricted stock, OP Units and LTIP Units to be common share equivalents. For the three and six months ended June 30, 2018 and 2017, the following common share equivalents on a weighted average basis that were excluded from the calculation of diluted earnings per share:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Unvested restricted shares
 
46,767

 
35,666

 
46,767

 
35,666

OP Units (1)
 
—

 
—

 
—

 
—

LTIP Units (2)
 
—

 
3,013,933

 
—

 
3,013,933

Total anti-dilutive common share equivalents
 
46,767

 
3,049,599

 
46,767

 
3,049,599

____________________________________
(1) 
On April 3, 2017, all remaining OP Units were converted into Common Stock.
(2) 
Weighted-average number of LTIP Units outstanding. There were 2,554,930 LTIP Units issued under the 2018 OPP as of June 2, 2018 which were therefore outstanding as of June 30, 2018. The 3,013,933 LTIP Units issued under the 2015 OPP were forfeited as of June 2, 2018 since no LTIP Units were earned under the 2015 OPP. See Note 12 — Share Based Compensation and Note 14 — Subsequent Events for further information.

35
GLOBAL NET LEASE, INC.

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

Conditionally issuable shares relating to the 2018 OPP award (see Note 12 — 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 common share equivalents related to LTIP Units were included in the computation for the three and six months ended June 30, 2018 and 2017 because no LTIP Units would have been earned (and, therefore, no shares of Common Stock could have been issued with respect to LTIP Units) based on the stock price at June 30, 2018 and 2017.
Note 14 — 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 as disclosed below.
Credit Facility
On July 2, 2018, upon the Company's request, the lenders under the Credit Facility increased the aggregate total commitments from $722.2 million to $914.4 million based on prevailing exchange rates on that date, with approximately $132.0 million of the increase allocated to the Revolving Credit Facility and approximately $60.2 million allocated to the Term Loan. The Company used all the proceeds from the increased borrowings under the Term Loan to repay amounts outstanding under the Revolving Credit Facility. Upon the Company's request, subject in all respects to the consent of the lenders in their sole discretion, the aggregate total commitments under the Credit Facility may be increased up to an aggregate additional amount of $35.6 million, allocated to either or both portions of the Credit Facility, with total commitments under the Credit Facility not to exceed $950.0 million. Following these borrowings on July 2, 2018, based on prevailing exchange rates on that date, approximately $401.0 million was outstanding under our Revolving Credit Facility and approximately $286.0 million was outstanding under our Term Loan Facility.
Acquisitions and Dispositions
On July 27, 2018, the Company acquired one property, located in Akron, Ohio, for a purchase price of $21.4 million.
On July 31, 2018, the Company disposed of one property, located in Vandalia, Ohio for a sales price of $5.0 million. Prior to the sale, the Company agreed to terminate the lease with the existing tenant and received a termination fee of $3.0 million in accordance with the terms of the lease.
Multi-Year Outperformance Agreement
On July 19, 2018, the Company and the OP, entered into the 2018 OPP with the Advisor. The 2018 OPP was entered into in connection with the conclusion of the performance period under the 2015 OPP since no LTIP Units had been earned under the 2015 OPP as of June 2, 2018 (the “Effective Date”). The Effective Date is also the final date of the performance period under the 2015 OPP. Because no performance goals under the 2015 OPP were achieved, no LTIP Units issued under the 2015 OPP were earned and all LTIP Units issued under the 2015 OPP were automatically forfeited without the payment of any consideration by the Company or the OP effective as of June 2, 2018. See Note 12 - Share Based Compensation for additional information in the 2015 OPP.
Based on a maximum award value of $50.0 million and $19.57 (the “Initial Share Price”), the closing price of Common Stock on June 1, 2018, the trading day prior to the Effective Date, the Advisor was issued a total of 2,554,930 LTIP Units (the “Award LTIP Units”) pursuant to the 2018 OPP. The Award LTIP Units represent the maximum number of LTIP Units that could be earned by the Advisor based on the Company’s total shareholder return (“TSR”), including both share price appreciation and Common Stock dividends, against the Initial Share Price over a performance period (the “Performance Period”) commencing on the Effective Date and ending on the earliest of (i) June 2, 2021, the third anniversary of the Effective Date, (ii) the effective date of any Change of Control (as defined in the 2018 OPP) and (iii) the effective date of any termination of the Advisor’s service as advisor of the Company.
Half of the Award LTIP Units (the “Absolute TSR LTIP Units”) will be eligible to be earned as of the last day of the Performance Period (the “Valuation Date”) if Company achieves an absolute TSR with respect to threshold, target and maximum performance goals for the Performance Period as follows:

36
GLOBAL NET LEASE, INC.

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

Performance Level (% of Absolute TSR LTIP Units Earned)
 
   Absolute TSR
 
  Number of Absolute TSR LTIP Units Earned
Below Threshold
—
%
 
 Less than
24
%
 
 
—

Threshold
25
%
 
 
24
%
 
 
319,366

Target
50
%
 
 
30
%
 
 
638,733

Maximum
100
%
 
 
36
%
or higher
 
1,277,465

If the Company’s absolute TSR is more than 24% but less than 30%, or more than 30% but less than 36%, the percentage of the Absolute TSR LTIP Units earned will be determined using linear interpolation as between those tiers, respectively.
Half of the Award LTIP Units (the “Relative TSR LTIP Units”) will be eligible to be earned as of the Valuation Date if the amount, expressed in terms of basis points (bps), whether positive or negative, by which the Company’s absolute TSR on the Valuation Date exceeds the average TSR of a peer group consisting of Government Properties Income Trust, Lexington Realty Trust, Select Income REIT and W.P. Carey Inc. as of the Valuation Date as follows:
Performance Level (% of Relative TSR LTIP Units Earned)
 
   Relative TSR Excess
 
  Number of Absolute TSR LTIP Units Earned
Below Threshold
—
%
 
 Less than
-600

basis points
 
—

Threshold
25
%
 
 
-600

basis points
 
319,366

Target
50
%
 
 
—

basis points
 
638,733

Maximum
100
%
 
 
+600

basis points
 
1,277,465

If the relative TSR excess is more than -600 basis points but less than 0 basis points, or more than 0 basis points but less than +600 bps, the percentage of the Relative TSR LTIP Units earned will be determined using linear interpolation as between those tiers, respectively.
If the Valuation Date is the effective date of a Change of Control or a termination of the Advisor for any reason (i.e., with or without cause), then calculations relating to the number of Award LTIP Units earned pursuant to the 2018 OPP will be performed based on actual performance as of (and including) the effective date of the Change of Control or termination (as applicable) based on the performance through the last trading day prior to the effective date of the Change of Control or termination (as applicable), with the hurdles for calculating absolute TSR pro-rated to reflect that the Performance Period lasted less than three years but without pro-rating the number of Absolute TSR LTIP Units or Relative TSR LTIP Units the Advisor would be eligible to earn to reflect the shortened period.
The award of LTIP Units under the 2018 OPP will be administered by the compensation committee of the Company’s board of directors, provided that any of the compensation committee’s powers can be exercised instead by the board if the board so elects. Following the Valuation Date, the compensation committee is responsible for determining the number of Absolute TSR LTIP Units and Relative TSR LTIP Units earned, as calculated by an independent consultant engaged by the compensation committee and as approved by the compensation committee in its reasonable and good faith discretion. The compensation committee also must approve the transfer of any Absolute TSR LTIP Units and Relative TSR LTIP Units (or OP Units into which they may be converted in accordance with the terms of the agreement of limited partnership of the OP).
LTIP Units earned as of the Valuation Date will also become vested as of the Valuation Date. Any LTIP Units that are not earned and vested after the Compensation Committee makes the required determination will automatically and without notice be forfeited without the payment of any consideration by the Company or the OP, effective as of the Valuation Date.
The rights of the Advisor as the holder of the LTIP Units are governed by the terms of the LTIP Units contained in the agreement of limited partnership of the OP. The agreement of limited partnership of the OP was amended in July 2018 in connection with the execution of the 2018 OPP to reflect the issuance of LTIP Units thereunder and to make certain clarifying and ministerial revisions, but these amendments did not alter the terms of the LTIP Units established in connection with the Company’s entry into the 2015 OPP in June 2015. See Note 12 - Share Based Compensation for additional information regarding the terms of LTIP Units and the Advisor's rights as a holder of LTIP Units.
The OP will make a distribution to the Advisor totaling approximately $0.1 million, representing the amount that would have been paid with respect to the Award LTIP Units after the Effective Date but prior to July 19, 2018.


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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, Global Net Lease Operating Partnership, L.P., a Delaware limited partnership, which we refer to as the "OP," and its subsidiaries. The Company is externally managed by Global Net Lease Advisors, LLC (the "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 Global Net Lease, Inc. (the "Company," "we," "our" or "us") 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, managers, employees or holders of a direct or indirect controlling interest in the Advisor and other entities affiliated with AR Global Investments, LLC (the successor business to AR Capital LLC, "AR Global"). As a result, our executive officers, the Advisor and its affiliates face conflicts of interest, including significant conflicts created by the Advisor's compensation arrangements with us and other investment programs advised by AR Global 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 investment programs advised by affiliates of AR Global, the Advisor and its affiliates face conflicts of interest relating to the purchase of properties and other investments and these conflicts may not be resolved in our favor.
•
We are obligated to pay fees which may be substantial to the 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.
•
We may be unable to repay, refinance, restructure or extend our indebtedness as it becomes due.
•
Adverse changes in exchange rates may reduce the value of our properties located outside of the United States ("U.S.").
•
The Advisor may not be able to identify a sufficient number of property acquisitions satisfying our investment objectives on acceptable terms and prices, or at all.
•
We may be unable to continue to raise additional debt or equity financing on attractive terms, or at all, and there can be no assurance we will be able to fund the acquisitions contemplated by our investment objectives.
•
Provisions in in our revolving credit facility (our “Revolving Credit Facility”) and the related term loan facility (our “Term Loan Facility”), which together comprise our senior unsecured multi-currency credit facility (our ‘‘Credit Facility’’), may limit our ability to pay dividends on our common stock, $0.01 par value per share ("Common Stock"), our 7.25% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share ("Series A Preferred Stock") or any other stock we may issue.
•
We may be unable to pay or maintain cash dividends or increase dividends over time.
•
We may not generate cash flows sufficient to pay dividends to our stockholders or fund operations, and, as such, we may be forced to borrow at unfavorable rates to pay dividends to our stockholders or fund our operations.
•
Any dividends that we pay on our Common Stock, our Series A Preferred Stock, or any other stock we may issue, may exceed cash flow from operations, reducing the amount of capital available to invest in properties and other permitted investments.
•
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.

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•
We are subject to risks associated with any dislocations or liquidity disruptions that may exist or occur in the credit markets of the U.S. and Europe from time to time.
•
We may fail to continue to qualify as a real estate investment trust for U.S. federal income tax purposes ("REIT"), which would result in higher taxes, may adversely affect operations, and would reduce the trading price of our Common Stock and Series A Preferred Stock, and our cash available for dividends.
•
We may be exposed to risks due to a lack of tenant diversity, investment types and geographic diversity.
•
The revenue derived from, and the market value of, properties located in the United Kingdom and continental Europe may decline as a result of the U.K.'s discussions with respect to exiting the European Union (the “Brexit Process”).
•
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 U.S. or international lending, capital and financing markets, including as a result of the Brexit Process.



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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 the taxable year ended December 31, 2013. On June 2, 2015 (the "Listing Date"), we listed shares of our Common Stock on the New York Stock Exchange ("NYSE") under the symbol "GNL" (the "Listing"). We invest in commercial properties, with an emphasis on sale-leaseback transactions involving single tenant net-leased commercial properties.
As of June 30, 2018, we owned 333 properties consisting of 25.0 million rentable square feet, which were 99.5% leased, with a weighted-average remaining lease term of 8.5 years. Based on the percentage of annualized rental income on a straight-line basis, as of June 30, 2018, 51.4% of our properties are located in the U.S. and 48.6% of our properties are located in Europe. We may also originate or acquire first mortgage loans, mezzanine loans, preferred equity or securitized loans (secured by real estate). As of June 30, 2018, we did not own any first mortgage loans, mezzanine loans, preferred equity or securitized loans.
Substantially all of our business is conducted through the OP. We have retained the Advisor to manage our affairs on a day-to-day basis. Our properties are managed and leased by Global Net Lease Properties, LLC (the "Property Manager"). The Advisor and the Property Manager are under common control with AR Global. These related parties receive compensation and fees for various services provided to us.
Following the termination of Moor Park Capital Partners LLP (the "Service Provider"), effective as of March 17, 2018, the Advisor, together with its service providers, assumed full management responsibility of our European real estate portfolio. Prior to the termination of the Service Provider, the Service Provider provided, subject to the Advisor's oversight, certain real estate related services, as well as sourcing and structuring of investment opportunities, performance of due diligence, and arranging debt financing and equity investment syndicates, solely with respect to investments in Europe Since the termination of the Service Provider, the Advisor has built a European-focused management team and engaged third-party service providers to assume certain duties previously performed by the Service Provider. See Note 1, Organization, and Part II, Item 3. Legal Proceedings.
During the six months ended June 30, 2018, we sold one property for a sales price of $20.3 million and acquired thirteen properties for an aggregate purchase price of $161.8 million (see Note 3 — Real Estate Investments, Net to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for further discussion).

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Significant Accounting Estimates and Critical Accounting Policies
For a discussion about our significant accounting estimates and critical accounting policies, see the “Significant Accounting Estimates and Critical Accounting Policies” section of our 2017 Annual Report on Form 10-K. There have been no material changes from these significant accounting estimates and critical accounting policies.
Recently Issued Accounting Pronouncements
See Note 2 — Summary of Significant Accounting Policies - Recently Issued Accounting Pronouncements to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for further discussion.

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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 June 30, 2018:
Portfolio
 
Acquisition Date
 
Country
 
Number of Properties
 
Square Feet
 
Average Remaining Lease Term (1)
McDonald's
 
Oct. 2012
 
UK
 
1
 
9,094

 
5.7
Wickes Building Supplies I
 
May 2013
 
UK
 
1
 
29,679

 
6.3
Everything Everywhere
 
Jun. 2013
 
UK
 
1
 
64,832

 
9.0
Thames Water
 
Jul. 2013
 
UK
 
1
 
78,650

 
4.2
Wickes Building Supplies II
 
Jul. 2013
 
UK
 
1
 
28,758

 
8.5
PPD Global Labs
 
Aug. 2013
 
US
 
1
 
76,820

 
6.5
Northern Rock
 
Sep. 2013
 
UK
 
2
 
86,290

 
5.2
Wickes Building Supplies III
 
Nov. 2013
 
UK
 
1
 
28,465

 
10.4
Con-way Freight
 
Nov. 2013
 
US
 
7
 
105,090

 
5.4
Wolverine
 
Dec. 2013
 
US
 
1
 
468,635

 
4.6
Encanto
 
Dec. 2013
 
PR
 
18
 
65,262

 
7.0
Rheinmetall
 
Jan. 2014
 
GER
 
1
 
320,102

 
5.5
GE Aviation
 
Jan. 2014
 
US
 
1
 
369,000

 
7.5
Provident Financial
 
Feb. 2014
 
UK
 
1
 
117,003

 
17.4
Crown Crest
 
Feb. 2014
 
UK
 
1
 
805,530

 
20.6
Trane
 
Feb. 2014
 
US
 
1
 
25,000

 
5.4
Aviva
 
Mar. 2014
 
UK
 
1
 
131,614

 
11.0
DFS Trading I
 
Mar. 2014
 
UK
 
5
 
240,230

 
11.7
GSA I
 
Mar. 2014
 
US
 
1
 
135,373

 
4.1
National Oilwell Varco I
 
Mar. 2014
 
US
 
1
 
24,450

 
5.1
Talk Talk
 
Apr. 2014
 
UK
 
1
 
48,415

 
6.7
OBI DIY
 
Apr. 2014
 
GER
 
1
 
143,633

 
5.6
GSA II
 
Apr. 2014
 
US
 
2
 
24,957

 
4.7
DFS Trading II
 
Apr. 2014
 
UK
 
2
 
39,331

 
11.7
GSA III
 
Apr. 2014
 
US
 
2
 
28,364

 
7.0
GSA IV
 
May 2014
 
US
 
1
 
33,000

 
7.1
Indiana Department of Revenue
 
May 2014
 
US
 
1
 
98,542

 
4.5
National Oilwell Varco II
 
May 2014
 
US
 
1
 
23,475

 
10.9
Nissan
 
May 2014
 
US
 
1
 
462,155

 
10.3
GSA V
 
Jun. 2014
 
US
 
1
 
26,533

 
5.3
Lippert Components
 
Jun. 2014
 
US
 
1
 
539,137

 
8.2
Select Energy Services I
 
Jun. 2014
 
US
 
3
 
135,877

 
8.6
Bell Supply Co I
 
Jun. 2014
 
US
 
6
 
79,829

 
10.5
Axon Energy Products (2)
 
Jun. 2014
 
US
 
3
 
213,634

 
9.7
Lhoist
 
Jun. 2014
 
US
 
1
 
22,500

 
4.5
GE Oil & Gas
 
Jun. 2014
 
US
 
2
 
69,846

 
5.2
Select Energy Services II
 
Jun. 2014
 
US
 
4
 
143,417

 
8.6
Bell Supply Co II
 
Jun. 2014
 
US
 
2
 
19,136

 
10.5
Superior Energy Services
 
Jun. 2014
 
US
 
2
 
42,470

 
6.0
Amcor Packaging
 
Jun. 2014
 
UK
 
7
 
294,580

 
6.4
GSA VI
 
Jun. 2014
 
US
 
1
 
6,921

 
5.8
Nimble Storage
 
Jun. 2014
 
US
 
1
 
164,608

 
3.3
FedEx -3-Pack
 
Jul. 2014
 
US
 
3
 
338,862

 
4.2
Sandoz, Inc.
 
Jul. 2014
 
US
 
1
 
154,101

 
8.1
Wyndham
 
Jul. 2014
 
US
 
1
 
31,881

 
6.8
Valassis
 
Jul. 2014
 
US
 
1
 
100,597

 
4.8

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Table of Contents

Portfolio
 
Acquisition Date
 
Country
 
Number of Properties
 
Square Feet
 
Average Remaining Lease Term (1)
GSA VII
 
Jul. 2014
 
US
 
1
 
25,603

 
6.4
AT&T Services
 
Jul. 2014
 
US
 
1
 
401,516

 
8.1
PNC - 2-Pack
 
Jul. 2014
 
US
 
2
 
210,256

 
11.1
Fujitisu
 
Jul. 2014
 
UK
 
3
 
162,888

 
11.8
Continental Tire
 
Jul. 2014
 
US
 
1
 
90,994

 
4.1
Achmea
 
Jul. 2014
 
NETH
 
2
 
190,252

 
5.5
BP Oil
 
Aug. 2014
 
UK
 
1
 
2,650

 
7.3
Malthurst
 
Aug. 2014
 
UK
 
2
 
3,784

 
7.4
HBOS
 
Aug. 2014
 
UK
 
3
 
36,071

 
7.1
Thermo Fisher
 
Aug. 2014
 
US
 
1
 
114,700

 
6.2
Black & Decker
 
Aug. 2014
 
US
 
1
 
71,259

 
3.6
Capgemini
 
Aug. 2014
 
UK
 
1
 
90,475

 
4.8
Merck & Co.
 
Aug. 2014
 
US
 
1
 
146,366

 
7.2
Dollar Tree - 65-Pack
 
Aug. 2014
 
US
 
58
 
485,992

 
11.2
GSA VIII
 
Aug. 2014
 
US
 
1
 
23,969

 
6.1
Waste Management
 
Sep. 2014
 
US
 
1
 
84,119

 
4.5
Intier Automotive Interiors
 
Sep. 2014
 
UK
 
1
 
152,711

 
5.9
HP Enterprise Services
 
Sep. 2014
 
UK
 
1
 
99,444

 
7.7
Shaw Aero Devices, Inc.
 
Sep. 2014
 
US
 
1
 
130,581

 
4.3
FedEx II
 
Sep. 2014
 
US
 
1
 
11,501

 
5.8
Dollar General - 39-Pack
 
Sep. 2014
 
US
 
21
 
199,946

 
9.7
FedEx III
 
Sep. 2014
 
US
 
2
 
221,260

 
5.8
Mallinkrodt Pharmaceuticals
 
Sep. 2014
 
US
 
1
 
89,900

 
6.2
Kuka
 
Sep. 2014
 
US
 
1
 
200,000

 
6.0
CHE Trinity
 
Sep. 2014
 
US
 
2
 
373,593

 
4.4
FedEx IV
 
Sep. 2014
 
US
 
2
 
255,037

 
4.6
GE Aviation
 
Sep. 2014
 
US
 
1
 
102,000

 
4.5
DNV GL
 
Oct. 2014
 
US
 
1
 
82,000

 
6.7
Bradford & Bingley
 
Oct. 2014
 
UK
 
1
 
120,618

 
11.3
Rexam
 
Oct. 2014
 
GER
 
1
 
175,615

 
6.7
FedEx V
 
Oct. 2014
 
US
 
1
 
76,035

 
6.0
C&J Energy
 
Oct. 2014
 
US
 
1
 
96,803

 
5.3
Dollar Tree II
 
Oct. 2014
 
US
 
34
 
282,730

 
11.3
Panasonic
 
Oct. 2014
 
US
 
1
 
48,497

 
10.1
Onguard
 
Oct. 2014
 
US
 
1
 
120,000

 
5.5
Metro Tonic
 
Oct. 2014
 
GER
 
1
 
636,066

 
7.3
Axon Energy Products
 
Oct. 2014
 
US
 
1
 
26,400

 
6.3
Tokmanni
 
Nov. 2014
 
FIN
 
1
 
800,834

 
15.2
Fife Council
 
Nov. 2014
 
UK
 
1
 
37,331

 
5.6
Dollar Tree III
 
Nov. 2014
 
US
 
2
 
16,442

 
11.2
GSA IX
 
Nov. 2014
 
US
 
1
 
28,300

 
3.8
KPN BV
 
Nov. 2014
 
NETH
 
1
 
133,053

 
8.5
RWE AG
 
Nov. 2014
 
GER
 
3
 
594,415

 
6.4
Follett School
 
Dec. 2014
 
US
 
1
 
486,868

 
6.5
Quest Diagnostics
 
Dec. 2014
 
US
 
1
 
223,894

 
6.2
Diebold
 
Dec. 2014
 
US
 
1
 
158,330

 
3.5
Weatherford Intl
 
Dec. 2014
 
US
 
1
 
19,855

 
7.3
AM Castle
 
Dec. 2014
 
US
 
1
 
127,600

 
6.3
FedEx VI
 
Dec. 2014
 
US
 
1
 
27,771

 
6.2
Constellium Auto
 
Dec. 2014
 
US
 
1
 
320,680

 
11.4

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Table of Contents

Portfolio
 
Acquisition Date
 
Country
 
Number of Properties
 
Square Feet
 
Average Remaining Lease Term (1)
C&J Energy II
 
Mar. 2015
 
US
 
1
 
125,000

 
5.3
Fedex VII
 
Mar. 2015
 
US
 
1
 
12,018

 
6.3
Fedex VIII
 
Apr. 2015
 
US
 
1
 
25,852

 
6.3
Crown Group I
 
Aug. 2015
 
US
 
3
 
295,974

 
17.1
Crown Group II
 
Aug. 2015
 
US
 
3
 
642,595

 
17.1
Mapes & Sprowl Steel, Ltd.
 
Sep. 2015
 
US
 
1
 
60,798

 
11.5
JIT Steel Services
 
Sep. 2015
 
US
 
2
 
126,983

 
11.5
Beacon Health System, Inc.
 
Sep. 2015
 
US
 
1
 
49,712

 
7.8
Hannibal/Lex JV LLC
 
Sep. 2015
 
US
 
1
 
109,000

 
11.3
FedEx Ground
 
Sep. 2015
 
US
 
1
 
91,029

 
7.0
Office Depot
 
Sep. 2015
 
NETH
 
1
 
206,331

 
10.7
Finnair
 
Sep. 2015
 
FIN
 
4
 
656,275

 
6.2
Auchan
 
Dec. 2016
 
FR
 
1
 
152,235

 
5.1
Pole Emploi
 
Dec. 2016
 
FR
 
1
 
41,452

 
5.0
Veolia Water
 
Dec. 2016
 
US
 
1
 
70,000

 
7.5
Sagemcom
 
Dec. 2016
 
FR
 
1
 
265,309

 
5.6
NCR Dundee 
 
Dec. 2016
 
UK
 
1
 
132,182

 
8.4
FedEx Freight I
 
Dec. 2016
 
US
 
1
 
68,960

 
5.2
DB Luxembourg 
 
Dec. 2016
 
LUX
 
1
 
156,098

 
5.5
ING Amsterdam 
 
Dec. 2016
 
NETH
 
1
 
509,369

 
7.0
Worldline 
 
Dec. 2016
 
FR
 
1
 
111,338

 
5.5
Foster Wheeler 
 
Dec. 2016
 
UK
 
1
 
365,832

 
6.1
ID Logistics I 
 
Dec. 2016
 
GER
 
1
 
308,579

 
6.3
ID Logistics II 
 
Dec. 2016
 
FR
 
2
 
964,489

 
6.4
Harper Collins
 
Dec. 2016
 
UK
 
1
 
873,119

 
7.2
DCNS
 
Dec. 2016
 
FR
 
1
 
96,995

 
6.3
Cott Beverages Inc
 
Feb. 2017
 
US
 
1
 
170,000

 
8.6
FedEx Ground - 2 Pack
 
Mar. 2017
 
US
 
2
 
157,660

 
8.0
Bridgestone Tire
 
Sep. 2017
 
US
 
1
 
48,300

 
9.1
GKN Aerospace
 
Oct. 2017
 
US
 
1
 
97,864

 
8.5
NSA-St. Johnsbury I
 
Oct. 2017
 
US
 
1
 
87,100

 
14.3
NSA-St. Johnsbury II
 
Oct. 2017
 
US
 
1
 
84,949

 
14.3
NSA-St. Johnsbury III
 
Oct. 2017
 
US
 
1
 
40,800

 
14.3
Tremec North America
 
Nov. 2017
 
US
 
1
 
127,105

 
9.3
Cummins
 
Dec. 2017
 
US
 
1
 
58,546

 
6.9
GSA X
 
Dec. 2017
 
US
 
1
 
25,604

 
11.5
NSA Industries
 
Dec. 2017
 
US
 
1
 
82,862

 
14.5
Chemours
 
Feb. 2018
 
US
 
1
 
300,000

 
9.6
Fiat Chrysler
 
Mar. 2018
 
US
 
1
 
127,974

 
9.7
Lee Steel
 
Mar. 2018
 
US
 
1
 
114,042

 
10.3
LSI Steel - 3 Pack
 
Mar. 2018
 
US
 
3
 
217,924

 
9.3
Contractors Steel Company
 
May 2018
 
US
 
5
 
1,392,000

 
9.6
FedEx Freight II
 
June 2018
 
US
 
1
 
21,574

 
14.2
DuPont Pioneer
 
June 2018
 
US
 
1
 
200,000

 
10.5
Total
 
 
 
 
 
333
 
24,984,510

 
8.5
_____________________________________
(1) 
If the portfolio has multiple properties with varying lease expirations, average remaining lease term is calculated on a weighted-average basis. Weighted- average remaining lease term in years is calculated based on square feet as of June 30, 2018.
(2) 
Of the three properties, one location is vacant while the other two properties remain in use.
Asset Impairment

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Table of Contents

The Company allocates a portion of the fair value of real estate acquired to identified intangible assets and liabilities, consisting of the value of origination costs (tenant improvements, leasing commissions, and legal and marketing costs), the value of above-market and below-market leases, and the value of tenant relationships, if applicable, based in each case on their relative fair values. The Company periodically assesses whether there are any indicators that the value of either the real estate assets or the related intangible assets may be impaired by performing a net present value analysis of future cash flows, discounted for inherent risk associated with each investment. During the three and six months ended June 30, 2018, we did not record any impairment charges for either the real estate assets or the related intangible assets associated with our real estate investments.

Results of Operations
Comparison of the Three Months Ended June 30, 2018 and 2017
Rental Income
Rental income was $65.6 million and $60.2 million for the three months ended June 30, 2018 and 2017, respectively. The increase in rental income was primarily driven by our net acquisition of 21 properties since June 30, 2017. The increase was also driven, in part, by a rise in the value of the GBP and Euro in the second quarter of 2018 from the second quarter of 2017 compared to the USD.
Operating Expense Reimbursements
Operating expense reimbursements were $5.4 million and $4.8 million for the three months ended June 30, 2018 and 2017, respectively. 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 us. Operating expense reimbursements primarily reflect insurance costs and real estate taxes incurred by us and subsequently reimbursed by the tenant. The increase in operating expense reimbursements was primarily due to the impact of our net acquisition of 21 properties since June 30, 2017.
Property Operating Expenses
Property operating expenses were $8.2 million and $7.6 million for the three months ended June 30, 2018 and 2017, respectively. These costs primarily relate to insurance costs and real estate taxes on our properties, which are generally reimbursable by our tenants. The main exceptions are GSA properties for which certain expenses are not reimbursable by tenants. Property operating expense also includes provisions for bad debt expense associated with receivables we believe are doubtful of collection. The increase in property operating expenses was due to the impact of our net acquisition of 21 properties since June 30, 2017 and, in part, by a rise in the value of the GBP and Euro compared to the USD in the second quarter of 2018 from the second quarter of 2017.
During the three months ended June 30, 2018 we recognized bad debt expense of $61,000. During the three months ended June 30, 2017 we recognized bad debt expense of $0.2 million for receivables related to one of our tenants that vacated its space and ceased making rental payments.
Operating Fees to Related Parties
Operating fees paid to related parties were $7.1 million and $5.7 million for the three months ended June 30, 2018 and 2017, respectively. Operating fees to related parties represent compensation to the Advisor for asset management services, as well as property management fees paid to the Advisor and Property Manager, including amounts subsequently paid by the Advisor and the Property Manager to the Service Provider for our European investments, prior to the termination of the Service Provider effective in March 2018. Our Advisory Agreement requires us to pay a Base Management Fee of $18.0 million per annum ($4.5 million per quarter) and a Variable Base Management Fee, both payable in cash, and Incentive Compensation, payable in cash and shares, if the applicable hurdles are met (see Note 10 — Related Party Transactions to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for additional details). The increase to operating fees between the periods in part results from an increase in the amount of the payments of the Variable Base Management Fee in connection with public offerings of Series A Preferred Stock and issuances of Common Stock pursuant to the ATM Program. The Variable Base Management Fee would also increase in connection with other offerings or issuances of equity securities. The increase during the period was also due to an increase in the property management fees incurred from our net acquisition of 21 properties. No Incentive Compensation was earned for the three months ended June 30, 2018 and 2017.
Our Property Manager is 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 June 30, 2018 and 2017, property management fees were $1.1 million and $1.1 million, respectively. The Property Manager elected to forgive $0.6 million of the property management fees for the three months ended June 30, 2017. No property management fees were forgiven during the three months ended June 30, 2018.

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Acquisition and Transaction Related Costs
We recognized $2.4 million of acquisition and transaction costs during the three months ended June 30, 2018, related to litigation costs, prepayment charges on our mortgage associated with our one property disposition in the second quarter of 2018 and costs to refinance foreign debt. During the three months ended June 30, 2018, we incurred $0.9 million of litigation costs related to the termination of the Service Provider and $1.3 million of debt prepayment costs associated with the sale of Western Digital.
Acquisition and transaction related expenses for the three months ended June 30, 2017 of $0.4 million were related to our merger (the "Merger"), which closed in December 2016, with American Realty Capital Global Trust II, Inc., which was sponsored and advised by affiliates of AR Global.
General and Administrative Expense
General and administrative expenses were $2.6 million and $2.1 million for the three months ended June 30, 2018 and 2017, respectively, and primarily consist of professional fees including audit and taxation services, board member compensation and directors' and officers' liability insurance. The increase for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 was primarily due to the increase in directors and officer's liability insurance premiums and professional fees.
Equity-Based Compensation Expense
During the three months ended June 30, 2018 and 2017, we recognized income of $23,000 and $2.2 million, respectively, for equity-based compensation related changes in the fair value of our multi-year outperformance agreement with the Advisor and the amortization of restricted stock units in respect of shares of Common Stock, or RSUs, granted to our independent directors. The income was primarily due to a decrease in the valuation under the previous multi-year outperformance agreement with the Advisor (the "2015 OPP"), which was no longer effective as of June 2, 2018. See Note 12 — Share-Based Compensation to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for details regarding the 2015 OPP. The 2015 OPP was replaced by a new multi-year outperformance agreement (the "2018 OPP"), entered into with the Advisor in July 2018, effective as of June 2, 2018. See Note 14 — Subsequent Events to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for details regarding the 2018 OPP.
Depreciation and Amortization
Depreciation and amortization expense was $29.8 million and $27.5 million for the three months ended June 30, 2018 and 2017, respectively. The increase in the second quarter of 2018 compared to the second quarter of 2017 is due to additional depreciation and amortization expense incurred for the net acquisition of 21 properties since June 30, 2017. During the three months ended June 30, 2018, the average exchange rate for GBP to USD increased by 6.1%, and the average exchange rate for Euro to USD increased by 8.2%, when compared to the same period last year.
Interest Expense
Interest expense was $14.4 million and $11.6 million for the three months ended June 30, 2018 and 2017, respectively. The increase was primarily related to an increase in average borrowings. The amount of our total debt outstanding increased from $1.5 billion as of June 30, 2017 to $1.7 billion as of June 30, 2018 and the weighted-average effective interest rate of our total debt increased from 2.7% as of June 30, 2017 to 3.1% as of June 30, 2018. During the three months ended June 30, 2018, the average exchange rate for GBP to USD increased by 6.1%, and the average exchange rate for Euro to USD increased by 8.2%, when compared to the same period last year.
We view a mix of secured and unsecured financing sources as an efficient and accretive means to acquire properties and manage working capital. Our interest expense in future periods will vary based on our level of future borrowings, which will depend on our refinancing needs and our acquisition activity.
Gain (Loss) on derivative instruments
The gain of $6.3 million and loss of $3.0 million on derivative instruments for the three months ended June 30, 2018 and 2017, respectively, reflect the marked-to-market impact from foreign currency and interest rate derivative instruments used to hedge the investment portfolio from currency and interest rate movements, and was mainly driven by rate changes in the GBP and EUR compared to the USD.
The losses of $47,000 and $3.0 million on undesignated foreign currency advances and other hedge ineffectiveness for the three months ended June 30, 2018 and 2017, respectively. The loss during the three months ended June 30, 2018 primarily related to the marked-to-market adjustments on the excess foreign currency draws over our net investments in the United Kingdom and Europe which are not designated as hedges, and these were driven in part by a rise in the value of the GBP and Euro throughout 2017 and early 2018 compared to the USD. Effective on July 24, 2017, in connection with the refinancing of our then-existing credit facility (the "Prior Credit Facility"), our GBP-denominated borrowings were substantially reduced, and there were no undesignated excess foreign advances in GBP thereafter. Accordingly, we do not expect charges/gains on excess amounts in the future.

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Changes in the rates of exchange for the Euro and GBP currencies compared to the USD may affect costs and cash flows in our functional currency, the USD. We generally manage foreign currency exchange rate movements by matching our debt service obligation to the lender and the tenant’s rental obligation to us in the same currency. This helps us manage the risk of our overall exposure to currency fluctuations. In addition, we may use currency hedging to further reduce the exposure risk to our net cash flow. We generally are a net receiver of these currencies (we receive more cash than we pay out), and therefore our results of operations of our foreign properties benefit from a weaker USD, and are adversely affected by a stronger USD, relative to the relevant foreign currency. During the three months ended June 30, 2018, the average exchange rate for GBP to USD increased by 6.1%, and the average exchange rate for Euro to USD increased by 8.2%, when compared to the same period last year.
Income Tax Expense
We recognize income tax (expense) benefit for state and local income tax incurred, if any, including foreign jurisdictions in which we own properties. In addition, we perform an analysis of potential deferred tax or future tax benefit as a result of timing differences in taxation across jurisdictions. Income tax expense was $1.2 million and $0.5 million for the three months ended June 30, 2018 and 2017, respectively.
Comparison of the Six Months Ended June 30, 2018 and 2017
Rental Income
Rental income was $129.4 million and $118.7 million for the six months ended June 30, 2018 and 2017, respectively. The increase in rental income was primarily driven by our net acquisition of 21 properties since June 30, 2017. The increase was also driven, in part, by a rise in the value of the GBP and Euro in the first six months of 2018 from the first six months of 2017 compared to the USD.
Operating Expense Reimbursements
Operating expense reimbursements were $9.7 million and $9.1 million for the six months ended June 30, 2018 and 2017, respectively. 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 us. Operating expense reimbursements increased due to the net acquisition of 21 properties since June 30, 2017 and certain adjustments for real estate taxes for several European properties relating to operations during the year ended December 31, 2017.
Property Operating Expenses
Property operating expenses were $15.7 million and $14.8 million for the six months ended June 30, 2018 and 2017, respectively. These costs primarily relate to insurance costs and real estate taxes on our properties, which are generally reimbursable by our tenants. The main exceptions are GSA properties for which certain expenses are not reimbursable by tenants. Property operating expense also includes provisions for bad debt expense associated with receivables we believe are doubtful of collection. Operating expense reimbursements increased due to the impact of our net acquisition of 21 properties since June 30, 2017 and, in part, by a rise in the value of the GBP and Euro compared to the USD in the first six months of 2018 from the first six months of 2017.
During the six months ended June 30, 2018 we recognized bad debt expense of $0.1 million. During the six months ended June 30, 2017 we recognized bad debt expense of $0.6 million for receivables related to one of our tenants that vacated its space and ceased making rental payments.
Operating Fees to Related Parties
Operating fees paid to related parties were $14.0 million and $11.4 million for the six months ended June 30, 2018 and 2017, respectively. Operating fees to related parties represent compensation to the Advisor for asset management services, as well as property management fees paid to the Advisor and Property Manager, including amounts subsequently paid by the Advisor and the Property Manager to the Service Provider for our European investments, prior to the termination of the Service Provider effective in March 2018. Our Advisory Agreement requires us to pay a Base Management Fee of $18.0 million per annum ($4.5 million per quarter) and a Variable Base Management Fee, both payable in cash, and Incentive Compensation, payable in cash and shares, if the applicable hurdles are met (see Note 10 — Related Party Transactions to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for additional details). The increase to operating fees between the periods in part results from an increase in the amount of the payments of the Variable Base Management Fee in connection with public offerings of Series A Preferred Stock and issuances of Common Stock pursuant to the ATM Program. The Variable Base Management Fee would also increase in connection with other offerings or issuances of equity securities. The increase during the period was also due to an increase in the property management fees incurred from our net acquisition of 21 properties. No Incentive Compensation was earned for the six months ended June 30, 2018 and 2017.

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Our Property Manager is entitled to fees for the management of our properties. Property management fees are calculated as a percentage of gross revenues. During the six months ended June 30, 2018 and 2017, property management fees were $2.3 million and $2.2 million, respectively. The Property Manager elected to forgive $1.2 million of the property management fees for the six months ended June 30, 2017. No property management fees were forgiven during the six months ended June 30, 2018.
Acquisition and Transaction Related Costs
We recognized $3.7 million of acquisition and transaction costs during the six months ended June 30, 2018, related to litigation costs, prepayment charges on our mortgage associated with our one property disposition in the second quarter of 2018 and costs to refinance foreign debt. During the six months ended June 30, 2018, the Company incurred $1.4 million of litigation costs related to the termination of the Service Provider, $0.5 million costs to refinance foreign debt and $1.3 million of debt prepayment costs associated with the sale of Western Digital.
Acquisition and transaction related expenses for the six months ended June 30, 2017 of $1.1 million were related to the Merger, which closed in 2016.
General and Administrative Expense
General and administrative expenses were $4.6 million and $3.8 million for the six months ended June 30, 2018 and 2017, respectively, and primarily consist of professional fees including audit and taxation services, board member compensation and directors' and officers' liability insurance. The increase for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 was primarily due to the increase in directors and officer's liability insurance premiums and professional fees.
Equity-Based Compensation Expense
During the six months ended June 30, 2018 and 2017, we recognized income of $0.9 million and $2.2 million, respectively, for equity-based compensation related changes in the fair value of our multi-year outperformance agreement with the Advisor and amortization of restricted stock units in respect of shares of Common Stock, or RSUs, granted to our independent directors. The income was primarily due to a decrease in the valuation under the 2015 OPP, which was no longer effective as of June 2, 2018. See Note 12 — Share-Based Compensation to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for details regarding the 2015 OPP. The 2015 OPP was replaced by the 2018 OPP in July 2018, effective as of June 2, 2018. See Note 14 — Subsequent Events to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for details regarding the 2018 OPP.
Depreciation and Amortization
Depreciation and amortization expense was $59.3 million and $54.6 million for the six months ended June 30, 2018 and 2017, respectively. The increase in the first six months of 2018 compared to the first six months of 2017 is due to additional depreciation and amortization expense incurred for the net acquisition of 21 properties since June 30, 2017. During the six months ended June 30, 2018, the average exchange rate for GBP to USD increased by 9.1%, and the average exchange rate for Euro to USD increased by 11.2%, when compared to the same period last year.
Interest Expense
Interest expense was $27.4 million and $23.2 million for the six months ended June 30, 2018 and 2017, respectively. The increase was primarily related to an increase in average borrowings. The amount of our total debt outstanding increased from $1.5 billion as of June 30, 2017 to $1.7 billion as of June 30, 2018 and the weighted-average effective interest rate of our total debt increased from 2.7% as of June 30, 2017 to 3.1% as of June 30, 2018. During the six months ended June 30, 2018, the average exchange rate for GBP to USD increased by 9.1%, and the average exchange rate for Euro to USD increased by 11.2%, when compared to the same period last year.
We view a mix of secured and unsecured financing sources as an efficient and accretive means to acquire properties and manage working capital. Our interest expense in future periods will vary based on our level of future borrowings, which will depend on our refinancing needs and our acquisition activity.
Gain (Loss) on derivative instruments
The gain of $3.4 million and loss of $3.5 million on derivative instruments for the six months ended June 30, 2018 and 2017, respectively, reflect the marked-to-market impact from foreign currency and interest rate derivative instruments used to hedge the investment portfolio from currency and interest rate movements, and was mainly driven by rate changes in the GBP and EUR compared to the USD.
During the six months ended June 30, 2018 and 2017, losses on undesignated foreign currency advances and other hedge ineffectiveness were $90,000 and $3.9 million, respectively. The loss during the six months ended June 30, 2018 primarily related to the marked-to-market adjustments on the excess foreign currency draws over our net investments in the United Kingdom and Europe which are not designated as hedges, and these were driven in part by a rise in the value of the GBP and Euro throughout 2017 and early 2018 compared to the USD. Effective on July 24, 2017, in connection with the refinancing of the Prior Credit

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Facility, our GBP-denominated borrowings were substantially reduced, and there were no undesignated excess foreign advances in GBP thereafter. Accordingly, we do not expect charges/gains on excess amounts in the future.
Changes in the rates of exchange for the Euro and GBP currencies compared to the USD may affect costs and cash flows in our functional currency, the USD. We generally manage foreign currency exchange rate movements by matching our debt service obligation to the lender and the tenant’s rental obligation to us in the same currency. This helps us manage the risk of our overall exposure to currency fluctuations. In addition, we may use currency hedging to further reduce the exposure risk to our net cash flow. We generally are a net receiver of these currencies (we receive more cash than we pay out), and therefore our results of operations of our foreign properties benefit from a weaker USD, and are adversely affected by a stronger USD, relative to the relevant foreign currency. During the six months ended June 30, 2018, the average exchange rate for GBP to USD increased by 9.1%, and the average exchange rate for Euro to USD increased by 11.2%, when compared to the same period last year.
Income Tax Expense
We recognize income tax (expense) benefit for state and local income tax incurred, if any, including foreign jurisdictions in which we own properties. In addition, we perform an analysis of potential deferred tax or future tax benefit as a result of timing differences in taxation across jurisdictions. Income tax expense was $2.3 million and $1.4 million for the six months ended June 30, 2018 and 2017, respectively.
Cash Flows From Operating Activities
During the six months ended June 30, 2018, net cash provided by operating activities was $69.7 million. The level of cash flows provided by operating activities is driven by, among other things, rental income received, operating fees paid to related parties for asset and property management and interest payments on outstanding borrowings. Cash flows provided by operating activities during the six months ended June 30, 2018 reflect net income of $12.6 million adjusted for non-cash items of $59.2 million (primarily depreciation, amortization of intangibles, amortization of deferred financing costs, amortization of mortgage premium/discount, amortization of above- and below-market lease and ground lease assets and liabilities, bad debt expense, unbilled straight-line rent, and equity-based compensation). In addition, working capital items decreased operating cash flow by $2.3 million.
During the six months ended June 30, 2017, net cash provided by operating activities was $68.9 million. The level of cash flows provided by operating activities is driven by, among other things, rental income received, operating fees to related parties paid for asset and property management, and the amount of interest payments on outstanding borrowings. Cash flows used in operating activities during the six months ended June 30, 2017 reflect net income of $12.7 million adjusted for non-cash items of $49.1 million (primarily depreciation, amortization of intangibles, amortization of deferred financing costs, amortization of mortgage premium/discount, amortization of mezzanine discount, amortization of above/below-market lease and ground lease assets and liabilities, bad debt expense, unbilled straight-line rent, and equity based compensation) and working capital items of $0.8 million.
Cash Flows From Investing Activities
Net cash used in investing activities during the six months ended June 30, 2018 of $168.1 million was driven by property acquisitions of $161.8 million, property acquisition deposits of $24.6 million and capital expenditures of $0.5 million. These cash uses were partially offset by cash from asset dispositions of $19.4 million during the six months ended June 30, 2018.
Net cash used in investing activities during the six months ended June 30, 2017 of $18.4 million was related to the acquisition of three properties with an aggregate base purchase price of $30.3 million, which were funded by cash on hand, and capital expenditures of $0.5 million, partially offset by proceeds from the sale of real estate investments of $12.4 million for the disposition of Kulicke & Soffa.
Cash Flows From Financing Activities
Net cash provided by financing activities of $92.4 million during the six months ended June 30, 2018 related to net borrowings on our Revolving Credit Facility of $162.0 million and proceeds from mortgage notes payable of $32.8 million, partially offset by payments on mortgage notes payable of $25.4 million, dividends paid to common stockholders of $71.7 million and dividends paid to preferred stockholders of $4.9 million.
Net cash used in financing activities of $58.0 million during the six months ended June 30, 2017 related to repayments on the credit facility of $5.1 million, the mezzanine facility of $56.5 million, and mortgage notes payable of $21.8 million. In addition, cash used in financing activities consisted of payments made for dividends to stockholders of $70.8 million, payment of deferred financing costs of $0.9 million and distributions to non-controlling interest holders of $0.4 million. These cash outflows were partially offset by additional borrowings on the credit facility of $75.3 million, related party notes receivable acquired in Merger of $3.9 million, and net proceeds from the issuance of Common Stock of $18.3 million.

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Liquidity and Capital Resources
As of June 30, 2018, the Company had cash and cash equivalents of $93.3 million. Principal future demands on cash and cash equivalents 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 holders of our Common Stock and Series A Preferred Stock, as well as any future class or series of preferred stock we may issue. Management expects that operating income from our properties should cover operating expenses and the payment of our monthly dividend to our common stockholders and the quarterly dividend payable to holders of our Series A Preferred Stock, but in certain periods we have needed to fund, and may need to continue to fund, from cash on hand generated from other sources.
During the six months ended June 30, 2018, cash used to pay our dividends was generated mainly from cash flows provided by operations and cash on hand generated from other sources of capital. These other sources of capital, which we expect to continue to use for dividends and other capital needs, include proceeds received from our common and preferred stock ATM Programs (or any similar future program), proceeds from our Revolving Credit Facility, proceeds from secured or unsecured financings from banks or other lenders, proceeds from future offerings of debt or equity securities (including preferred equity securities), proceeds from the sale of properties, and undistributed funds from operations, if any.
Acquisitions and Dispositions
We are in the business of acquiring real estate properties and leasing the properties to tenants. Our goal is to acquire $500.0 million of properties during the year ending December 31, 2018. Generally, we fund our acquisitions through a combination of cash and cash equivalents and mortgage or other debt, but we also may acquire assets free and clear of permanent mortgage or other indebtedness (see Note 4 — Mortgage Notes Payable, Net and Note 5 — Credit Facilities to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for further discussion). We may also use proceeds from future offerings of equity securities (including preferred equity securities) to fund acquisitions. During the six months ended June 30, 2018, we acquired thirteen properties for an aggregate purchase price of $161.8 million.
During the three months ended March 31, 2018, we acquired six properties for a purchase price of $63.4 million. During the three months ended June 30, 2018, we acquired seven properties for an aggregate purchase price of $97.6 million. To fund these amounts and closing costs, we borrowed approximately $40.0 million and $122.0 million under the Revolving Credit Facility during three months ended March 31, 2018 and the three months ended June 30, 2018, respectively, and added the acquired properties to the pool of eligible unencumbered real estate assets owned by us in order to increase the availability of borrowings under our Revolving Credit Facility which is based on, among other things, the value of this pool of assets. In addition, during June 2018, we sold one property for gross proceeds of $20.3 million, which resulted in net proceeds of $1.3 million after repayment of mortgage debt. As of June 30, 2018, included in other assets is $24.6 million in deposits on acquisitions for two properties with an aggregate acquisition price of $146.2 million. On July 27, 2018, we acquired one property, located in Akron, Ohio, for a purchase price of $21.4 million. On July 31, 2018, we disposed of one property, located in Vandalia, Ohio, for a sales price of $5.0 million. In addition, we have signed definitive agreements to acquire three net lease office and distribution properties, all located in the United States, for an aggregate purchase price of $189.9 million (the ‘‘Pending Acquisitions’’). The Pending Acquisitions are expected to close in stages by October 2018. The Pending Acquisitions are subject to conditions, and there can be no assurance they will be completed on their current terms, or at all. We expect to fund the Pending Acquisitions with cash on hand and proceeds from our Revolving Credit Facility or other financings (including refinancings).
Equity Offerings
On September 12, 2017, we completed the initial issuance and sale of 4,000,000 shares of Series A Preferred Stock, which generated gross proceeds of $100.0 million and net proceeds of $96.3 million, after deducting underwriting discounts and offering costs paid by us. On October 11, 2017, the underwriters exercised an option to purchase additional shares of Series A Preferred Stock, and we sold an additional 259,650 shares of Series A Preferred Stock, which generated gross proceeds of $6.5 million after adjusting for the amount of dividends declared per share for the period from September 12, 2017 to September 30, 2017 and payable to holders of record as of October 6, 2017, and resulted in net proceeds of $6.3 million, after deducting underwriting discounts and offering costs paid by us.
On October 11, 2017, the underwriters exercised an option to purchase additional shares of Series A Preferred Stock, and we sold an additional 259,650 shares of Series A Preferred Stock, which generated gross proceeds of $6.5 million after adjusting for the amount of dividends declared per share for the period from September 12, 2017 to September 30, 2017 and payable to holders of record as of October 6, 2017, and resulted in net proceeds of $6.3 million, after deducting underwriting discounts and offering costs paid by us.
On December 19, 2017, we completed the sale of 1,150,000 additional shares of Series A Preferred Stock in an underwritten public offering at an offering price of $25.00 per share, which generated gross proceeds of $28.8 million and net proceeds of $27.8 million. These additional shares of shares of Series A Preferred Stock have been consolidated to form a single series, and are fully

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fungible with the outstanding Series A Preferred Stock. We reserve the right to further reopen this series and issue additional shares of Series A Preferred Stock either through public or private sales at any time.
During the year ended December 31, 2017, we sold 820,988 shares of Common Stock through the ATM Program and collected net proceeds of $18.3 million, after issuance costs of $0.4 million. These fees were charged to additional paid-in capital on the accompanying audited consolidated balance sheet during the ATM Program as of December 31, 2017. There were no shares sold in the fourth quarter of 2017 or the first six months of 2018.
In March 2018, the Company entered into an equity distribution agreement with Ladenburg Thalmann & Co. Inc., BMO Capital Markets Corp. and B. Riley FBR, Inc. to raise aggregate sales proceeds of $200.0 million from time to time pursuant to an ATM Program for its Series A Preferred Stock (the "Preferred Stock ATM Program"). During the three months ended June 30, 2018, the Company sold 2,339 shares of Series A Preferred Stock through the Preferred Stock ATM Program for net proceeds of $58,668, after commissions paid of $880 and additional issuance costs of $24,819. During the six months ended June 30, 2018, the Company sold an 4,015 shares of Series A Preferred Stock through the Preferred Stock ATM Program for net proceeds of $0.1 million, after commissions paid of $1,509 and additional issuance costs of $0.3 million.
Borrowings
As of June 30, 2018 we had total debt outstanding of $1.7 billion, with a weighted-average interest rate per annum equal to 3.1%, representing secured mortgage notes payable net of mortgage discount of $1.0 billion and outstanding advances under our credit facility, (the "Credit Facility"), comprised of the Revolving Credit Facility and a term loan facility (the "Term Facility") of $683.4 million. Our debt leverage ratio was 50.1% (total debt as a percentage of total purchase price of real estate investments, based on the exchange rate at the time of purchase) as of June 30, 2018. See Note 6 — Fair Value of Financial Instruments to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for fair value of such debt as of December 31, 2017. As of June 30, 2018, the weighted-average maturity of our indebtedness was 3.3 years.
On January 26, 2018, the Company entered into a multi-tenant mortgage loan, yielding gross proceeds of $32.8 million with a fixed interest rate of 4.32%, and with a 10-year maturity. The multi-tenant mortgage loan is secured by eight properties in six states totaling approximately 627,500 square feet. Proceeds were used to pay down approximately $30.0 million of outstanding indebtedness under the Revolving Credit Facility, and may also be used for general corporate purposes and future acquisitions.
Future scheduled principal payments on our mortgage notes payable for the remainder of 2018 and the year ended December 31, 2019 are $124.3 million and $286.1 million, respectively.
Credit Facility
On July 24, 2017, the Company, through the OP, entered into a credit agreement with Key Bank National Association ("KeyBank") for the Credit Facility refinancing our prior credit facility. The aggregate total commitments under the Credit Facility are $725.0 million based on USD equivalents at closing. Upon request of the Company, subject in all respects to the consent of the lenders in their sole discretion, these aggregate total commitments may be increased up to an aggregate additional amount of $225.0 million, allocated to either or among both portions of the Credit Facility, with total commitments under the Credit Facility not to exceed $950.0 million. As of June 30, 2018 and based on prevailing exchange rates on that date, approximately $458.9 million was outstanding under the Revolving Credit Facility and approximately $224.5 million was outstanding under the Term Loan Facility.
The Credit Facility consists of two components, a Revolving Credit Facility and a Term Facility. The Revolving Credit Facility is interest-only and matures on July 24, 2021, subject to one one-year extension at the Company’s option. The Term Facility portion of the Credit Facility requires interest-only payments and matures on July 24, 2022. Borrowings under the Credit Facility bear interest at a variable rate per annum based on an applicable margin that varies based on the ratio of consolidated total indebtedness to the consolidated total asset value of the Company, plus either (i) LIBOR, as applicable to the currency being borrowed, or (ii) a “base rate” equal to the greatest of (a) KeyBank’s “prime rate,” (b) 0.5% above the Federal Funds Effective Rate, or (c) 1.0% above one-month LIBOR. The range of applicable interest rate margins is from 0.60% to 1.20% per annum with respect to base rate borrowings, and 1.60% to 2.20% per annum with respect to LIBOR borrowings. As of June 30, 2018, the Credit Facility had a weighted-average effective interest rate of 3.1% after giving effect to the Company's interest rate swaps in place.
The Credit Facility requires the Company, through the OP, to pay an unused fee per annum of 0.25% of the unused balance of the Revolving Credit Facility if the unused balance exceeds or is equal to 50% of the total commitment, or a fee per annum of 0.15% of the unused balance of the Revolving Credit Facility if the unused balance is less than 50% of the total commitment. From and after the time the Company obtains an investment grade credit rating, the unused fee will be replaced with a facility fee based on the total commitment under the Revolving Credit Facility multiplied by 0.30%, decreasing further as the Company’s credit rating increases.

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The availability of borrowings under the Revolving Credit Facility is based on the value of a pool of eligible unencumbered real estate assets owned by the Company and compliance with various ratios related to those assets. As of June 30, 2018, approximately $14.2 million was available for future borrowings under the Revolving Credit Facility. Any future borrowings may, at the option of the Company, be denominated in USD, EUR, Canadian Dollars, British Pounds Sterling ("GBP") or Swiss Francs. Amounts borrowed may not, however, be converted to, or repaid in, another currency once borrowed.
On July 2, 2018, upon our request, the lenders under our Credit Facility increased the aggregate total commitments from $722.2 million to $914.4 million based on prevailing exchange rates on that date, with approximately $132.0 million of the increase allocated to our Revolving Credit Facility and approximately $60.2 million allocated to our Term Loan Facility. We used all the proceeds from the increased borrowings under our Term Loan Facility to repay amounts outstanding under our Revolving Credit Facility. Upon our request, subject in all respects to the consent of the lenders in their sole discretion, the aggregate total commitments under our Credit Facility may be increased up to an aggregate additional amount of $35.6 million, allocated to either or both portions of our Term Facility, with total commitments under our Credit Facility not to exceed $950.0 million. Following these borrowings on July 2, 2018, based on prevailing exchange rates on that date, approximately $401.0 million was outstanding under our Revolving Credit Facility and approximately $286.0 million was outstanding under our Term Loan Facility.
Loan Obligations
Our loan obligations generally require principal and interest amounts to be paid monthly or quarterly with all unpaid principal and interest due at maturity. Our loan agreements (including the Credit Facility) stipulate compliance with specific financial covenants. Our mortgage notes payable agreements require compliance with certain property-level financial covenants including debt service coverage ratios. We were in compliance with the covenants under our loan agreements (including the Credit Facility) as of June 30, 2018.
Non-GAAP Financial Measures
This section includes non-GAAP financial measures, including Funds from Operations ("FFO"), Core Funds from Operations ("Core FFO") and Adjusted Funds from Operations ("AFFO"). A description of these non-GAAP measures and reconciliations to the most directly comparable GAAP measure, which is net income, is provided below.
Caution on Use of Non-GAAP Measures
FFO, Core FFO, and AFFO 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. 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, or may calculate Core FFO 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, Core FFO and AFFO calculations exclude such factors as depreciation and amortization of real estate assets and gain or loss 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, Core FFO and AFFO presentations facilitate comparisons of operating performance between periods and between other REITs in our peer group.
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 including relative to our peers and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. However, FFO, Core FFO and AFFO are not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions. Investors are cautioned that FFO, Core FFO and AFFO should only be used to assess the sustainability of our operating performance excluding these activities, as they exclude certain costs that have a negative effect on our operating performance during the periods in which these costs are incurred.
Funds from Operations, Core Funds from Operations and Adjusted Funds from Operations
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 FFO, which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. FFO is not equivalent to net income or loss as determined under 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 gain or loss from sales of property but including asset impairment write-downs, 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.

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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, 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.
Core Funds From Operations
In calculating Core FFO, we start with FFO, then we exclude certain non-core items such as acquisition- and transaction-related costs, as well as certain other costs that are considered to be non-core, such as fire loss and other costs related to damages at our properties. The purchase of properties, and the corresponding expenses associated with that process, is a key operational feature of our core 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.
Adjusted Funds From Operations
In calculating AFFO, we start with Core FFO, then 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 early extinguishment of debt and unrealized gain and loss, which may not ultimately be realized, such as gain or loss on derivative instruments, gain or loss on foreign currency transactions, and gain or loss on investments. 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 a direct impact on our ongoing operating performance. We also include the realized gain or loss on foreign currency exchange contracts for AFFO as such items are part of our ongoing operations and affect the current operating performance of the Company. By providing AFFO, we believe we are presenting useful information that can be used 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. AFFO presented by us may not be comparable to AFFO reported by other REITs that define AFFO differently.
In calculating AFFO, we exclude certain expenses which under GAAP are characterized as operating expenses in determining operating net income. 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, but are not reflective of our on-going performance. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income. In addition, as discussed above, we view gain and loss from fair value adjustments as items which are unrealized and may not ultimately be realized and 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 Company. 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 gain or loss, we believe AFFO provides useful supplemental information. We believe that in order to facilitate a clear understanding of our operating results, AFFO should be examined in conjunction with net income (loss) as presented in our consolidated financial statements. AFFO should not be considered as an alternative to net income (loss) as an indication of our performance or to cash flows as a measure of our liquidity or ability to make distributions.


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The table below reflects the items deducted from or added to net income (loss) attributable to common stockholders in our calculation of FFO, Core FFO and AFFO for the periods indicated.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands)
 
2018
 
2017
 
2018
 
2017
Net income attributable to stockholders (in accordance with GAAP)
 
$
5,288

 
$
5,200

 
$
7,649

 
$
12,629

Depreciation and amortization
 
29,813

 
27,497

 
59,309

 
54,611

Loss (gain) on dispositions of real estate investments
 
3,818

 
143

 
3,818

 
(814
)
Proportionate share of adjustments for non-controlling interest to arrive at FFO
 
—

 
(4
)
 
—

 
(75
)
FFO (as defined by NAREIT) attributable to common stockholders
 
38,919

 
32,836

 
70,776

 
66,351

Acquisition and transaction fees (1)
 
2,399

 
443

 
3,724

 
1,139

Fire recovery
 
(1
)
 
500

 
(80
)
 
500

Proportionate share of adjustments for non-controlling interest to arrive at Core FFO
 
—

 
—

 
—

 
(2
)
Core FFO attributable to common stockholders
 
41,317

 
33,779

 
74,420

 
67,988

Non-cash equity-based compensation
 
(23
)
 
(2,235
)
 
(855
)
 
(2,219
)
Non-cash portion of interest expense
 
1,499

 
943

 
2,400

 
1,823

Amortization of above- and below- market leases and ground lease assets and liabilities, net
 
500

 
504

 
1,052

 
908

Straight-line rent
 
(1,833
)
 
(3,039
)
 
(3,336
)
 
(6,917
)
Unrealized loss on undesignated foreign currency advances and other hedge ineffectiveness
 
47

 
2,971

 
90

 
3,853

Eliminate unrealized (gain) loss on foreign currency transactions (2)
 
(6,256
)
 
3,111

 
(3,706
)
 
4,903

Amortization of mortgage discounts and premiums, net and mezzanine discount
 
263

 
151

 
530

 
304

Proportionate share of adjustments for non-controlling interest to arrive at AFFO
 
—

 
(3
)
 
—

 
(4
)
AFFO attributable to common stockholders
 
$
35,514

 
$
36,182

 
$
70,595

 
$
70,639

 
 
 
 
 
 
 
 
 
Summary
 
 
 
 
 
 
 
 
FFO (as defined by NAREIT) attributable to common stockholders
 
$
38,919

 
$
32,836

 
$
70,776

 
$
66,351

Core FFO attributable to common stockholders
 
$
41,317

 
$
33,779

 
$
74,420

 
$
67,988

AFFO attributable to common stockholders
 
$
35,514

 
$
36,182

 
$
70,595

 
$
70,639

______________________________
(1) 
For the three and six months ended June 30, 2018, acquisition and transaction fees primarily related to litigation costs, costs to refinance foreign debt, and debt prepayment costs associated with the sale of Western Digital were $1.3 million.
For the three and six months ended June 30, 2017, costs related to the Merger were $0.1 million and $0.8 million, respectively.
(2) 
For AFFO purposes, we add back unrealized (gain) loss. For the three months ended June 30, 2018, gains on derivative instruments were $6.3 million which were primarily comprised of unrealized gains. For the six months ended June 30, 2018, gains on derivative instruments were $3.4 million, which were comprised of unrealized gains of $3.7 million and realized losses of $0.3 million. For the three and six months ended June 30, 2017, losses on foreign currency transactions were $3.0 million and $3.5 million, which were comprised of unrealized losses of $3.1 million and $4.9 million, offset by realized gains of $0.1 million and $1.4 million, respectively.
Dividends
We generally pay dividends on our Common Stock on the 15th day of each month in an amount equal to $0.1775 per share to common stockholders of record as of close of business on, commencing with the dividend payable in July 2018, the 13th day of the month. Prior to July 2018, the record date for our regular monthly dividend was generally the 8th day of the applicable month. The amount of dividends payable to our common 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 distribution requirements needed to maintain our status as a REIT for U.S. federal income tax purposes under the Internal Revenue Code of 1986, as amended (the "Code").
Dividends on our Series A Preferred Stock accrue in an amount equal to $0.453125 per share per quarter to Series A Preferred Stock holders, which is equivalent to 7.25% of the $25.00 liquidation preference per share of Series A Preferred Stock per annum. Dividends on the Series A Preferred Stock are payable quarterly in arrears on the 15th day of January, April, July and October of each year (or, if not on a business day, on the next succeeding business day) to holders of record on the close of business on the record date set by our board of directors, which must be not more than 30 nor fewer than 10 days prior to the applicable payment

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date. Any accrued and unpaid dividends payable with respect to the Series A Preferred Stock become part of the liquidation preference thereof.
Dividend payments are dependent on the availability of funds. Our board of directors may alter 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 and pay dividends at the current rates. Provisions in our Credit Facility restrict our ability to pay distributions, including cash dividends or other distributions payable with respect to Series A Preferred Stock and Common Stock. If we are not able to increase the amount of cash we have available to pay dividends and distributions, including through additional cash flows we expect to generate from completing the Pending Acquisitions, our ability to comply with the restriction on our ability to pay distributions in our Credit Facility may be adversely affected. The Pending Acquisitions are subject to conditions and there can be no assurance they will be completed on their current terms, or at all. See “Item 1A. Risk Factors - If we are not able to increase the amount of cash we have available to pay dividends and distributions, including through additional cash flows we expect to generate from completing the Pending Acquisitions, our ability to comply with the restriction on our ability to pay distributions in our Credit Facility may be adversely affected, and we may have to reduce or suspend dividend payments or identify other sources to fund the payment of dividends at their current levels.”
During the six months ended June 30, 2018, the Company paid total dividends of $76.7 million, inclusive of dividends paid to holders of Common Stock of $71.7 million, dividends paid to holders of Series A Preferred Stock of $4.9 million and distributions paid to holders of OP Units and LTIP Units of $0.2 million. Cash used to pay dividends was generated from cash flows from operations and cash available on hand, consisting of proceeds from borrowings. The following table shows the sources for the payment of dividends to holders of Common Stock and Series A Preferred Stock for the period indicated:
 
 
Three Months Ended
 
 Six Months Ended June 30, 2018
 
 
March 31, 2018
 
June 30, 2018
 
(In thousands)
 
 
 
Percentage of Dividends
 
 
 
Percentage of Dividends
 
 
 
Percentage of Dividends
Dividends:
 
 
 
 
 
 
 
 
 
 
 
 
Dividends paid to holders of Common Stock
 
$
35,833

 
 
 
$
35,828

 
 
 
$
71,661

 
 
Dividends paid to holders of Series A Preferred Stock
 
2,451

 
 
 
2,455

 
 
 
4,906

 
 
Other
 
158

 
 
 
—

 
 
 
158

 
 
Total dividends
 
$
38,442

 
 
 
$
38,283

 
 
 
$
76,725

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Source of dividend coverage:
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows provided by operations
 
$
40,677

 
 
 
$
29,011

 
 
 
$
69,688

 


Dividends paid to holders of Series A Preferred Stock
 
(2,451
)
 
 
 
(2,455
)
 
 
 
(4,906
)
 
 
Cash flows provided by operations - after payment of Series A Preferred Stock dividends
 
38,226

 
99.4
%
 
26,556

 
69.4
%
 
64,782

 
84.4
%
Available cash on hand
 
216

 
0.6
%
 
11,727

 
30.6
%
 
11,943

 
15.6
%
Total sources of dividend coverage
 
$
38,442

 
100.0
%
 
$
38,283

 
100.0
%
 
$
76,725

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows provided by operations (GAAP basis) (1)
 
$
40,677

 
 
 
$
29,011

 
 
 
$
69,688

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to common stockholders (in accordance with GAAP)
 
$
2,361

 
 
 
$
5,288

 
 
 
$
7,649

 
 
______________________________
(1) 
Cash flows provided by operations for the three and six months ended June 30, 2018 reflect acquisition and transaction related expenses of $2.4 million and $3.7 million, respectively.
Foreign Currency Translation
Our reporting currency is the USD. 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 changes in equity.

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We are exposed to fluctuations in foreign currency exchange rates on property investments in foreign countries which pay rental income, incur property related expenses and hold debt instruments in currencies other than our functional currency, the USD. We use foreign currency derivatives including foreign currency put options, foreign currency forward contracts and cross-currency swap agreements to manage our exposure to fluctuations in foreign currency exchange rates, such as the GBP-USD and EUR-USD exchange rates (see Note 7 — Derivatives and Hedging Activities to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for further discussion).
Contractual Obligations
There were no material changes in the Company's contractual obligations at June 30, 2018, as compared to those reported in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.
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, but no assurance can be given that we will operate in a manner so as to 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 continue to 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.
Inflation
We may be adversely impacted by inflation on any leases that do not contain index-linked 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
See Note 10 — 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 June 30, 2018 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 noncancellable operating ground leases (see Note 9 — Commitments and Contingencies to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q and Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations-Contractual Obligations for details).
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There has been no material change in our exposure to market risk during the six months ended June 30, 2018. For a discussion of our exposure to market risk, refer to Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
In accordance with Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (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 our disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting

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During the quarter ended June 30, 2018, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
Service Provider Complaint
On January 25, 2018, the Service Provider filed a complaint against (i) GNL and the OP; (ii) the Property Manager, Global Net Lease Special Limited Partner, LLC (the "Special Limited Partner"), an affiliate of AR Global that directly owns the Advisor and the Property Manager, and the Advisor (collectively, the “GNL Advisor Defendants”); and (iii) AR Capital Global Holdings, LLC, and AR Global (together, the “AR Defendants”), in the Supreme Court of the State of New York, County of New York ("New York Supreme Court"). The complaint alleges that the notice sent to the Service Provider by GNL on January 15, 2018, terminating the Service Provider Agreement, was a pretext to enable the AR Defendants to seize the Service Provider's business. The complaint alleges breach of contract against GNL, the OP and the GNL Advisor Defendants, and tortious interference against the AR Defendants. The complaint seeks: (i) monetary damages against the defendants, (ii) to enjoin the termination of the Service Provider Agreement, and (iii) judgment declaring the termination to be void. The defendants believe the allegations in the complaint are without merit, and intend to defend against them vigorously. On January 26, 2018, the Service Provider made a motion seeking to preliminarily enjoin the defendants from terminating the Service Provider Agreement pending resolution of the lawsuit. On February 13, 2018, the defendants responded and moved to dismiss.
At a hearing on March 15, 2018, the New York Supreme Court issued a ruling (i) denying the Service Provider’s request for a preliminary injunction preventing defendants from terminating the Service Provider, (ii) dismissing the Service Provider’s claim for a declaratory judgment that the termination is void and of no force and effect, and (iii) allowing the Service Provider’s remaining claims to proceed.  On April 16, 2018, the defendants filed answers and counterclaims against the Service Provider alleging damages resulting from the Service Provider’s underperformance of its duties, as well as damages related to the Service Provider’s retention of approximately $91,000 in pre-paid fees for the post-termination period. The New York Supreme Court held a preliminary conference on April 17, 2018 at which it set a discovery schedule, and the parties have begun discovery. During the three and six months ended June 30, 2018, we incurred $0.9 million and $1.4 million, respectively, of litigation costs relating to the matter which are included in acquisition and transaction related costs in our Consolidated Statement of Operations.
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, 2017. There have been no material changes from these risk factors, except for the items described below.

If we are not able to increase the amount of cash we have available to pay dividends and distributions, including through additional cash flows we expect to generate from completing the Pending Acquisitions, our ability to comply with the restriction on our ability to pay distributions in our Credit Facility may be adversely affected, and we may have to reduce or suspend dividend payments or identify other sources to fund the payment of dividends at their current levels.

We cannot guarantee that we will be able to pay dividends with respect to the Series A Preferred Stock, Common Stock, or any or other classes or series of preferred stock we may issue in a future offering, on a regular basis in the future. Moreover, our board of directors may change our dividend policy, in its sole discretion, at any time. Any accrued and unpaid dividends payable with respect to the Series A Preferred Stock become part of the liquidation preference thereof.

Pursuant to our Credit Facility, we may not pay distributions, including cash dividends payable with respect to Series A Preferred Stock, Common Stock, or any or other classes or series of preferred stock we may issue in a future offering, or redeem or otherwise repurchase shares of our capital stock, Series A Preferred Stock, Common Stock, or any or other classes or series of preferred stock we may issue in a future offering, in an aggregate amount exceeding 95% of our Adjusted FFO as defined in our Credit Facility (which is different from AFFO as discussed and analyzed in this Quarterly Report on Form 10-Q) for any period of four consecutive fiscal quarters, except in limited circumstances, including that for one fiscal quarter in each calendar year, we may pay cash dividends, make redemptions and make repurchases in an aggregate amount equal to no more than 100% of our Adjusted FFO. We may not pay dividends and distributions in an aggregate amount exceeding 95% of our Adjusted FFO in either the quarter ending September 30, 2018 or the quarter ending December 31, 2018. The agreements governing our future debt instruments may also include restrictions on our ability to pay dividends.


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Our ability to pay dividends in the future is dependent on our ability to operate profitably and to generate cash flows from our operations. Our cash flows provided by operations were $69.7 million for the six months ended June 30, 2018. During the six months ended June 30, 2018, we paid dividends of $4.9 million to holders of our Series A Preferred Stock using cash flows provided by operations. During the six months ended June 30, 2018, we paid dividends of $71.7 million to holders of our Common Stock, inclusive of $0.2 million of distributions paid to holders of LTIP Units, of which $64.8 million, or 84.4%, was funded from cash flows provided by operations, $10.7 million, or 13.9%, was funded from available cash on hand, consisting of proceeds from borrowings. If we are not able to increase the amount of cash we have available to pay dividends and distributions, including through additional cash flows we expect to generate from completing the Pending Acquisitions, our ability to comply with the restriction on our ability to pay distributions in our Credit Facility may be adversely affected. The Pending Acquisitions are subject to conditions and there can be no assurance they will be completed on their current terms, or at all. If we are not able to complete the Pending Acquisition, we may have to reduce or suspend dividend payments or identify other sources to fund the payment of dividends at their current levels. There can be no assurance that other sources will be available on favorable terms, or at all. Funding dividends from borrowings restricts the amount we can borrow for property acquisitions and investments. Using proceeds from the sale of assets or the issuance of our Common Stock, Series A Preferred Stock or other equity securities to fund dividends rather than invest in assets will likewise reduce the amount available to invest.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds of Registered Securities.
Recent Sale of Unregistered Securities
There were no recent sales of unregistered securities.
Purchases of Equity Securities by the Issuer and Related Purchasers
There were no recent repurchases of our equity securities.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.
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.

59
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/ James L. Nelson
 
 
James L. Nelson
 
 
Chief Executive Officer and President
(Principal Executive Officer)
 
 
 
 
By:
/s/ Christopher J. Masterson
 
 
Christopher J. Masterson
 
 
Chief Financial Officer, Treasurer, and Secretary
(Principal Financial Officer and Principal Accounting Officer)

Dated: August 8, 2018

60
EXHIBITS INDEX



The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit No.
 
Description
10.1 (1)
 
Fifth Amendment, dated as of July 19, 2018, to the Second Amended and Restated Agreement of Limited Partnership of Global Net Lease Operating Partnership, L.P., dated June 2, 2015.
10.2 (1)
 
2018 Advisor Multi-Year Outperformance Award Agreement, dated as of July 19, 2018, between Global Net Lease, Inc., Global Net Lease Operating Partnership, L.P. and Global Net Lease Advisors, LLC.
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 Global Net Lease, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, formatted in XBRL: (i) the Consolidated Balance Sheets at June 30, 2018 and December 31, 2017, (ii) the Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017, (iii) the Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2018 and 2017, (iv) the Consolidated Statement of Changes in Equity for the six months ended June 30, 2018, (v) the Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017, and (vi) the Notes to the Consolidated Financial Statements.
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Filed herewith

(1) Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on July 23, 2018.




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