UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number: 001-37390
Global Net Lease, Inc.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of incorporation or organization)
405 Park Ave., 14 th Floor New York, NY
(Address of principal executive offices)
45-2771978
(I.R.S. Employer Identification No.)
10022
(Zip Code)
(212) 415-6500
(Registrant’s telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act: Yes
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x
No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o
No x
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. x
Yes ¨
No
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). x
Yes ¨
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large
accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Non-accelerated filer ¨
(Do not check if a smaller reporting company)
Smaller reporting company ¨
Accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨
Yes x
No
The aggregate market value of the registrant's common stock held by non-affiliates of the registrant was $1.3 billion based on the closing sales price on the New York Stock
Exchange as of June 30, 2016 , the last business day of the registrant's most recently completed second fiscal quarter.
On February 15, 2017 , the registrant had 198,807,675 shares of common stock outstanding .
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement to be delivered to stockholders in connection with the registrant’s 2017 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Form 10-K. The registrant intends to file its proxy statement within 120 days after its fiscal year end.
GLOBAL NET LEASE, INC.
FORM 10-K
Year Ended December 31, 2016
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Exhibits and Financial Statement Schedules
SIGNATURES
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Financial statement schedules other than those listed above are omitted because the required information is given in the financial statements, including the notes
thereto, or because the conditions requiring their filing do not exist.
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Forward-Looking Statements
Certain statements included in this Annual Report on Form 10-K are forward-looking statements including statements regarding the intent, belief or current
expectations of Global Net Lease, Inc. (the "Company," "we," "our" or "us"), formerly known as American Realty Capital Global Trust, Inc., 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:
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All of our executive officers are also officers, managers and/or holders of a direct or indirect controlling interest in Global Net Lease Advisors, LLC
(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 AR Global- advised investment programs, the Advisor and its
affiliates face conflicts of interest relating to the purchase of properties and other investments and such conflicts may not be resolved in our favor,
which could reduce the investment return to our stockholders.
The anticipated benefits from the Merger (as defined below) may not be realized or may take longer to realize than expected.
Unexpected costs or unexpected liabilities may arise from the Merger.
We may be unable to pay or maintain cash dividends or increase dividends over time.
We are obligated to pay fees which may be substantial to 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 and limit our ability to pay dividends to our stockholders.
We may be unable to raise additional debt or equity financing on attractive terms or at all.
Adverse changes in exchange rates may reduce the value of our properties located outside of the United States ("U.S.").
We may not generate cash flows sufficient to pay dividends to our stockholders, as such, we may be forced to borrow at unfavorable rates or depend
on the Advisor to waive reimbursement of certain expense and fees to fund our operations. There is no assurance that the Advisor will waive
reimbursement of expenses or fees.
Any of these dividends may reduce the amount of capital we ultimately invest in properties and other permitted investments and negatively impact
the value of our common stock.
We are subject to risks associated with our international investments, including risks associated with compliance with and changes in foreign laws,
fluctuations in foreign currency exchange rates and inflation.
We are subject to risks associated with any dislocations or liquidity disruptions that may exist or occur in the credit markets of the 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 our net asset value and cash available for dividends.
We may be deemed to be an investment company under the Investment Company Act of 1940, as amended ("the Investment Company Act"), and
thus subject to regulation under the Investment Company Act.
We may be exposed to risks due to a lack of tenant diversity, investment types and geographic diversity.
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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
non-binding referendum on June 23, 2016 in which a majority of voters voted to exit the European Union (the “Brexit” vote).
Our ability to refinance or sell properties located in the United Kingdom and continental Europe may be impacted by the economic and political
uncertainty following the Brexit vote.
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 vote.
All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of this annual report on Form 10-K.
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Item 1. Business.
PART I
We were incorporated on July 13, 2011 as a Maryland corporation. We acquired our first property and commenced active operations in October 2012 and
elected and qualified to be taxed as a REIT for U.S. federal income tax purposes beginning with our taxable year ended December 31, 2013. We completed our
initial public offering ("IPO") on June 30, 2014 and on June 2, 2015 we listed our common stock ("Common Stock") on the New York Stock Exchange (the
"NYSE") under the symbol "GNL" (the "Listing").
Our investment strategy is to acquire a diversified portfolio of commercial properties, with an emphasis on sale-leaseback transactions involving single tenant
net-leased commercial properties. As of December 31, 2016 , we owned 310 net leased commercial properties consisting of 22.0 million rentable square feet.
Based on original purchase price or acquisition value, 49.2% of our properties are located in the U.S. and the Commonwealth of Puerto Rico, 28.2% are located in
continental Europe and 22.5% are located in the United Kingdom. The properties were 100% leased, with a weighted average remaining lease term of 9.8 years.
Substantially all of our business is conducted through Global Net Lease Operating Partnership, L.P. (the "OP"), a Delaware limited partnership. In accordance
with the limited partnership agreement of the OP, a holder of units of limited partnership interests ("OP Units") has the right to convert OP Units for a
corresponding number of shares of the Company's Common Stock or the cash value of those corresponding shares, at the Company's option. The remaining rights
of the limited partner interests are limited and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP's
assets. Subsequent to the Listing, all OP Units issued to the Advisor were transferred to individual investors. On September 2, 2016 , 1,264,148 of the OP Units
were converted into Common Stock, of which 916,231 were issued to individual members and employees of AR Global, 347,903 were issued to Moor Park Capital
Partners LLP (the "Service Provider"), and 14 were issued to Global Net Lease Special Limited Partner (the "Special Limited Partner"). There were 545,530 OP
Units outstanding that were held by parties other than the Company as of December 31, 2016 .
We are externally managed by the Advisor and our properties are managed and leased by Global Net Lease Properties, LLC (the "Property Manager"). The
Advisor, Property Manager and Special Limited Partner are considered related parties under common control with the parent of AR Capital Global Holdings, LLC
(the "Sponsor").These entities have received compensation, fees and expense reimbursements for various services provided to us and for the investment and
management of our assets. The Advisor has retained the Service Provider to provide advisory and property management services with respect to investments in
Europe, subject to the Advisor's oversight. These services include, among others, sourcing and structuring of investments, sourcing and structuring of debt
financing, due diligence, property management and leasing.
On August 8, 2016, we entered into an agreement and plan of merger (the “Merger Agreement”) with American Realty Capital Global Trust II, Inc. ("Global
II"). On December 22, 2016 (the "Merger Date"), pursuant to the Merger Agreement, we acquired Global II through the merger of Global II with and into our
wholly-owned subsidiary (the "Merger Sub") a Maryland limited liability company and wholly owned subsidiary of the Company, at which time the separate
existence of Global II ceased and the Company became the parent of the Merger Sub (the "Merger") (see Note 3 — Merger Transaction to our audited consolidated
financial statements in this Annual Report on Form 10-K for further discussion).
In addition, pursuant to the Merger Agreement, American Realty Capital Global II Operating Partnership, L.P., a Delaware limited partnership and the
operating partnership of Global II (the "Global II OP"), merged with our OP, with our OP being the surviving entity (the "Partnership Merger" and together with
the Merger, the "Mergers"). As a result of the Mergers, the Company acquired the business of Global II, which owned a portfolio of commercial properties, with an
emphasis on sale-leaseback transactions involving single tenant net-leases; two properties were located in the U.S., three were located in the United Kingdom and
10 were located in continental Europe.
During the year ended December 31, 2016 , we sold 34 properties pursuant to our asset recycling plan and we intend to use the proceeds for the reduction of
debt, new acquisitions and other corporate uses (see Note 4 — Real Estate Investments, Net to our audited consolidated financial statements in this Annual Report
on Form 10-K for further discussion).
During the year ended December 31, 2016 , the Company entered into an Equity Distribution Agreement with UBS Securities LLC, Robert W. Baird & Co.
Incorporated, Capital One Securities, Inc., Mizuho Securities USA Inc., and FBR Capital Markets & Co. (together, the “Agents”) to sell shares of the Company’s
Common Stock, par value $0.01 per share, having aggregate sales proceeds of $175.0 million from time to time through the Agents, acting as our sales agents, or
directly to one or more of the Agents, acting as principal, pursuant to an “at the market” equity offering program (the “ATM Program”). The shares will be issued
pursuant to our shelf registration statement on Form S-3 (Registration No. 333-214579). We filed a prospectus supplement (the “Prospectus Supplement”), dated
December 12, 2016, with the Securities and Exchange Commission in connection with the offer and sale of the Shares. As of February 28, 2017 , no sales have
been made under the ATM Program.
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Investment Strategy
Our investment strategy is to own and acquire a portfolio of commercial properties that is diversified in terms of geography, industry, and tenants. We have
made approximately 49.2% of our investments in the U.S. and the Commonwealth of Puerto Rico and 50.8% in the United Kingdom and Continental Europe.
Approximately 59.7% of our investments are in office properties, 30.4% of our investments are in industrial/distribution properties, and 9.9% of our investments
are in retail properties. No individual tenant accounted for more than 10% of our annualized rental income at December 31, 2016 .
We seek to:
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support a stable dividend by generating stable, consistent cash flow by acquiring properties with, or entering into new leases with, long lease terms;
facilitate dividend growth by acquiring properties with, or entering into new leases with, contractual rent escalations or inflation adjustments included in
the lease terms; and
enhance the diversity of our asset base by continuously evaluating opportunities in different geographic regions of the U.S. and Europe, leveraging the
market presence of the Advisor in the U.S. and the Service Provider in the United Kingdom and Continental Europe.
Acquisition and Investment Policies
Primary Investment Focus
We focus on acquisitions of net lease properties with existing net leases or we acquire properties pursuant to sale-leaseback transactions. We may in the future
acquire or originate real estate debt such as first mortgage debt loans but may also include bridge loans, mezzanine loans, preferred equity or securitized loans. As
of December 31, 2016 , we have not invested in any preferred equity or securitized loans.
As of December 31, 2016 , we owned 310 properties, including 241 properties located in the U.S. and Puerto Rico, 43 properties located in the United
Kingdom and 26 properties located across continental Europe.
Investing in Real Property
When evaluating prospective investments in real property, our management, the Advisor and, with respect to foreign investments, the Service Provider,
consider relevant real estate and financial factors, including the location of the property, the leases and other agreements affecting the property, the
creditworthiness of major tenants, its income producing capacity, its physical condition, its prospects for appreciation, its prospects for liquidity, tax considerations
and other factors. In this regard, the Advisor and Service Provider have substantial discretion with respect to the selection of specific investments, subject to board
approval.
We did not have any tenants whose total annualized rental income on a straight-line basis was more than 10% for the years ended December 31, 2016 , 2015
and 2014 .
The termination, delinquency or non-renewal of leases by any major tenant may have a material adverse effect on revenues.
Opportunistic Investments
We believe that the Advisor’s and our Service Provider’s presence in the commercial real estate marketplace may present attractive opportunities to invest in
properties other than long-term net leased properties, such as partially leased properties, multi-tenanted properties, vacant or undeveloped properties and properties
subject to short-term net leases. In addition, we may acquire or originate investments in commercial real estate-related debt. Real estate-related debt investments
include first mortgage loans, subordinated interests in first mortgage loans and mezzanine loans related to commercial real estate. We may also invest in real
estate-related securities issued by real estate market participants such as real estate funds or other REITs. Real estate-related securities include commercial
mortgage-backed securities ("CMBS"), preferred equity and other higher-yielding structured debt and equity investments. Investments in these opportunistic
investments would be subject to maintaining the requirements for continued qualification as a REIT and the requirements for our exemption from the Investment
Company Act. As of December 31, 2016 , we do not own any of these types of investments.
Acquisition Structure
We acquire properties through the OP and its subsidiaries. We have acquired properties through assets purchases and through purchases of the equity of
entities owning properties. We typically acquire fee interests in properties (a “fee interest” is the absolute, legal possession and ownership of land, property, or
rights), although we have acquired 11 leasehold interest properties (a “leasehold interest” is a right to enjoy the exclusive possession and use of an asset or property
for a stated definite period as created by a written lease).
We may enter into joint ventures, partnerships and other co-ownership arrangements (including preferred equity investments) for the purpose of making
investments, provided these investments would not cause us to be required to register as an "investment company" under the Investment Company Act.
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Financing Strategies and Policies
We have a revolving credit facility with JPMorgan Chase Bank. N.A. (the “Credit Facility”) providing for maximum borrowings of $740.0 million . As of
December 31, 2016 , we have $616.6 million drawn on the Credit Facility. The Credit Facility bears interest at a floating rate and fixed rate borrowings after giving
effect to in place interest rate swaps. Due to the Merger with Global II, we assumed a mezzanine facility with M&G Investment Management Limited (the
"Mezzanine Facility") on the Merger Date. On that date, we assumed $107.0 million of principal amount on Mezzanine Facility and paid in full Pound Sterling
("GBP") line of £37.1 million (or $45.8 million ) and subsequently made partial payment on the Euro line for €6.0 million (or $6.3 million). As of December 31,
2016 , we have $55.4 million drawn on the Mezzanine Facility. Our Mezzanine Facility bears interest at a fixed rate (see Note 5 — Credit Borrowings to our
audited consolidated financial statements in this Annual Report on Form 10-K for further information on our Credit Facility and our Mezzanine Facility). In
addition, we have various mortgage loans outstanding, which are secured by our properties. Our mortgage loans typically bear interest at margin plus a floating rate
which is mostly fixed through interest rate swap agreements (see Note 6 — Mortgage Notes Payable to our audited consolidated financial statements in this
Annual Report on Form 10-K for mortgage loans in respective currencies and interest rates details).
We may obtain additional financing for future investments, property improvements, tenant improvements, leasing commissions and other working capital
needs. The form of our indebtedness will vary and could be long-term or short-term, secured or unsecured, or fixed-rate or floating rate. We will not enter into
interest rate swaps or caps, or similar hedging transactions or derivative arrangements for speculative purposes but may do so in order to manage or mitigate our
interest rate risks on variable rate debt. As of December 31, 2016 , our aggregate borrowings are equal to 45.9% of the aggregate purchase price of assets, or 49.1%
of our net assets.
We may reevaluate and change our financing policies without a stockholder vote. Factors that we would consider when reevaluating or changing our debt
policy include: then-current economic conditions, the relative cost and availability of debt and equity capital, our expected investment opportunities, the ability of
our investments to generate sufficient cash flow to cover debt service requirements and other similar factors.
Tax Status
We qualified to be taxed as a REIT for U.S. federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended
(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 continue to qualify as a REIT for U.S. federal income tax
purposes, but no assurance can be given that we will operate in a manner so as to 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.
Competition
The commercial real estate market is highly competitive. We compete for tenants in all of our markets with other owners and operators of real estate. Factors
affecting competition for tenants include location, rental rates, security, suitability of the property’s design to prospective tenants’ needs and the manner in which
the property is operated and marketed. Competition may have a material effect on our occupancy levels, rental rates or on the operating expenses of our properties.
In addition, we compete with other entities engaged in real estate investment activities to locate suitable properties to acquire and to locate tenants and
purchasers for our properties. These competitors include American Finance Trust, Inc., a REIT sponsored by an affiliate of our Sponsor, with an investment
strategy similar to our investment strategy with respect to properties located in the U.S., other REITs, specialty finance companies, savings and loan associations,
banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, governmental bodies and other entities.
There are also other REITs with asset acquisition objectives similar to ours and others may be organized in the future. Some of these competitors, including larger
REITs, have substantially greater marketing and financial resources than we have and generally may be able to accept more risk than we can prudently manage,
including risks with respect to the creditworthiness of tenants. In addition, these same entities seek financing through similar channels to our company. Therefore,
we compete for financing in a market where funds for real estate investment may decrease.
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Competition from these and other real estate investors may limit the number of suitable investment opportunities available to us. It also may result in higher
prices, lower yields and a narrower spread of yields over our borrowing costs, making it more difficult for us to acquire new investments on attractive terms. In
addition, competition for desirable investments could delay investments in desirable assets, which may in turn reduce our earnings per share and negatively affect
our ability to maintain dividends to stockholders.
Regulations
Our investments are subject to various federal, state, local and foreign laws, ordinances and regulations, including, among other things, zoning regulations,
land use controls, environmental controls relating to air and water quality, noise pollution and indirect environmental impacts such as increased motor vehicle
activity. We believe that we have all permits and approvals necessary under current law to operate our investments.
Environmental
As an owner of real estate, we are subject to various environmental laws of federal, state and local governments and foreign governments at various levels.
Compliance with existing laws has not had a material adverse effect on our financial condition or results of operations, and management does not believe it will
have such an impact in the future. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on
properties in which we hold an interest, or on properties that may be acquired directly or indirectly in the future. As part of our efforts to mitigate these risks, we
typically engage third parties to perform assessments of potential environmental risks when evaluating a new acquisition of property, and we frequently require
sellers to address them before closing or obtain contractual protection (indemnities, cash reserves, letters of credit, or other instruments) from property sellers,
tenants, a tenant’s parent company, or another third party to address known or potential environmental issues.
Advisory Agreement
We are externally managed by our Advisor pursuant to the terms of the Fourth Amended and Restated Advisory Agreement (the “Advisory Agreement”) with
the Advisor. The Advisory Agreement requires us to pay a base management fee (the “Base Management Fee”) of $18.0 million per annum, payable in cash on a
pro rata monthly basis at the beginning of each month, a variable fee (the “Incentive Compensation”) equal to 1.25% of net proceeds raised from additional equity
issuances, including issuances of OP Units, and an incentive fee, payable 50% in cash and 50% in shares of Common Stock, equal to 15% of our Core AFFO (as
defined in the Advisory Agreement) in excess of $0.78 per share plus 10% of our Core AFFO in excess of $1.02 per share. The $0.78 and $1.02 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.
We reimburse the Advisor or its affiliates for expenses of the Advisor and its affiliates incurred on behalf of us, 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 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.
The Advisory Agreement has an initial term expiring June 1, 2035 , with automatic renewals for consecutive 5-year terms unless terminated in accordance
with the terms of the Advisory Agreement with payments of a termination fee of up to 2.5 times the compensation paid to the Advisor in the previous year, plus
expenses.
Employees
As of December 31, 2016 , we have one employee based in Europe. The employees of our Advisor, Property Manager, other affiliates of our Sponsor and
Service Provider perform a full range of real estate services for us, including acquisitions, property management, accounting, legal, asset management, wholesale
brokerage, transfer agent and investor relations services.
We are dependent on these third parties and affiliates for services that are essential to us, including asset acquisition decisions, property management and other
general administrative responsibilities. In the event that any of these companies were unable to provide these services to us, we would be required to provide such
services ourselves or obtain such services from other sources at potentially higher cost.
Financial Information About Industry Segments
Our current business consists of owning, managing, operating, leasing, acquiring, investing in and disposing of real estate assets. All of our consolidated
revenues are derived from our consolidated real estate properties. We internally evaluate operating performance on an individual property level and view all of our
real estate assets as one industry segment, and, accordingly, all of our properties are aggregated into one reportable segment.
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Available Information
We electronically file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and
proxy statements, with the SEC. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington,
D.C. 20549, or you may obtain information by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet address at http://www.sec.gov that contains
reports, proxy statements and information statements, and other information, which you may obtain free of charge. In addition, copies of our filings with the SEC
may be obtained from the website maintained for us and our affiliates at www.globalnetlease.com. Access to these filings is free of charge. We are not
incorporating our website or any information from the website into this Form 10-K.
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Item 1A. Risk Factors
Set forth below are the risk factors that we believe are material to our investors. The occurrence of any of the risks discussed in this Annual Report on Form 10-K
could have a material adverse effect on our business, financial condition, results of operations and ability to pay dividends.
Risk Factors Relating to the Company Following the Merger and the Company’s Operations Generally
The Company has incurred substantial expenses related to the Merger and may be unable to realize the anticipated benefits of the Merger or do so within the
anticipated timeframe.
The Company has incurred substantial expenses in connection with completing the Merger and these expenses could, particularly in the near term, exceed the
savings that the Company expects to achieve following the completion of the Merger.
The Merger involved the combination of two companies that previously operated as independent public companies. Even though the companies were
operationally similar, the Company is required to devote management attention and resources to integrating the properties and operations of the Company and
Global II, which could prevent the Company from fully achieving the anticipated benefits of the Merger, including the expected annual general and administrative
cost savings of up to $4.1 million .
The Company’s Credit Facility contains provisions that could limit its ability to pay certain restricted payments, including, dividends and other distributions in
respect of the Company’s Common Stock.
The Company’s Credit Facility imposes limitations on the Company’s ability to make certain payments referred to as "restricted payments." Payment of
dividends and other distributions in respect of the Company’s Common Stock are considered restricted payments under this Credit Facility. Specifically, restricted
payments may not exceed 95% of modified funds from operations (as defined consistent with the Investment Program Association’s Guideline 2010-01,
Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations) and there may not be a continuing default under
the Credit Facility at the time of payment or a default resulting from such payment.
At the time dividends or other distributions to holders of the Company’s Common Stock become payable, the Company may be unable to satisfy the conditions
required to make such a restricted payment under its Credit Facility and, therefore, may be unable to fund such an obligation from borrowings under such Credit
Facility or at all without the approval of the lenders thereunder. If the Company makes such a restricted payment, the Company’s ability to make other restricted
payments will be further constrained and an event of default may result.
There is no assurance that the Company will be able to continue paying distributions at the current rate or increase distributions over time, which would
adversely affect the return on an investment in our shares.
The Company’s stockholders may not receive the same distributions in the future for various reasons, including the following:
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•
•
the total amount of cash required for the Company to pay distributions at its current rate has increased as a result of the issuance of shares of the
Company’s Common Stock in connection with the Merger;
the Company may not have enough cash to pay such distributions due to changes in the Company’s cash requirements, capital spending plans, cash
flow or financial position;
cash available for distributions may vary substantially from estimates;
rents from properties may not increase, and future acquisitions of properties, real estate-related debt or real estate-related securities may not increase
the Company’s cash available for distributions to stockholders;
decisions on whether, when and in which amounts to make any future distributions will remain at all times entirely at the discretion of the Company’s
board of directors, which reserves the right to change the Company’s dividend practices at any time and for any reason;
the Company may desire to retain cash to maintain or improve its credit ratings; and
the amount of distributions that the Company’s subsidiaries may distribute to the Company may be subject to restrictions imposed by state law,
restrictions that may be imposed by state regulators and restrictions imposed by the terms of any current or future indebtedness that these subsidiaries
may incur.
The Company’s stockholders have no contractual or other legal right to dividends or distributions that have not been declared. Moreover, failure to meet the
market's expectations with regard to future earnings and cash dividends likely would adversely affect the market price of our Common Stock.
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The future results of the Company will suffer if the Company does not effectively manage its expanded portfolio and operations following the Merger.
As a result of the Merger, the Company's portfolio and operations have expanded and will likely continue to expand through additional acquisitions and other
strategic transactions, some of which may involve complex challenges. The future success of the Company will depend, in part, upon its ability to manage its
expansion opportunities, integrate new operations into its existing business in an efficient and timely manner, successfully monitor its operations, costs, regulatory
compliance and service quality, and maintain other necessary internal controls. The Company cannot assure you that expansion or acquisition opportunities will be
successful, or that the Company will realize operating efficiencies, cost savings, revenue enhancements, synergies or other benefits.
The Company may incur adverse tax consequences if Global II failed to qualify as a REIT for U.S. federal income tax purposes.
If Global II failed to qualify as a REIT for U.S. federal income tax purposes at any time prior to the Merger, the Company could inherit significant tax
liabilities and could lose its REIT status should disqualifying activities continue after the Merger.
The Company has incurred operating losses and cannot assure you that the it will achieve profitability.
Risks Related to Our Properties and Operations
Since its inception in July 2011, the Company has incurred cumulative net losses (calculated in accordance with accounting principles generally accepted in
the U.S. of America ("GAAP")) equal to $15.9 million . The extent of the Company's future operating losses and the timing of the profitability are highly
uncertain, and the Company may never achieve or sustain profitability.
The Company's capital resources may be insufficient to support its operations. If the Company’s capital resources are not sufficient, the Company may not be
able to, among other things:
•
•
•
identify and acquire investments that further its investment strategies;
respond to competition for its targeted real estate properties and other investments as well as for potential investors; and;
continue to build and expand its operations structure to support its business.
The Company cannot guarantee that it will succeed in achieving these goals.
If the Advisor loses or is unable to obtain key personnel, including in the event another AR Global-sponsored program internalizes an entity whose employees
overlap with those of the Advisor, the Company’s ability to implement its investment strategies could be delayed or hindered, which could adversely affect the
Company’s ability to pay dividends and the value of the Company’s Common Stock.
The Company’s success depends to a significant degree upon the contributions of our executive officers and other key personnel of the Advisor. Neither the
Company nor the Advisor has an employment agreement with any of these key personnel, except for the agreement between Mr. Bowman and the Advisor, and the
Company cannot guarantee that all, or any particular one, will remain affiliated with the Company or the Advisor. If any of the Company's key personnel were to
cease their affiliation with the Advisor, the Company's operating results could suffer. Further, the Company does not separately maintain key person life insurance
on any person. The Company believes that its future success depends, in large part, upon the ability of the Advisor to hire, retain or contract services of highly
skilled managerial, operational and marketing personnel. Competition for skilled personnel is intense, and there can be no assurance that the Advisor will be
successful in attracting and retaining skilled personnel. If the Advisor loses or is unable to obtain the services of key personnel, the Advisor's ability to implement
the Company's investment strategies could be delayed or hindered, and the value of an investment in the Company's shares may decline.
In addition, the Advisor depends upon the fees and other compensation received from the Company to fund their respective operations. Any adverse changes
in the financial condition of, or the Company's relationship with, the Advisor could hinder the Company's operations and portfolio of investments. Additionally,
changes in ownership or management practices, the occurrence of adverse events affecting the Advisor or its affiliates or other companies advised by the Advisor
and its affiliates could create adverse publicity and adversely affect the Company and its relationship with lenders, tenants or counterparties.
The Company may terminate the Advisory Agreement with the Advisor in only limited circumstances, with payment of a termination fee.
The Company has limited rights to terminate the Advisor. The initial term of the Advisory Agreement expires on June 1, 2035 , but is automatically renewed
for consecutive five-year terms unless notice of termination is provided by either party to the agreement 365 days in advance of the expiration of the term. Further,
the Company may terminate the agreement only under limited circumstances, such as a change in control of the Company or the Advisor, for cause, or for failure
to meet performance standards in the prior year. In the event of such a termination, the Company would be required to pay a termination fee of up to 2.5 times the
compensation paid to the Advisor in the previous year, plus expenses. The limited termination rights of the Advisory Agreement
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will make it difficult for the Company to renegotiate the terms of the Advisory Agreement or replace the Advisor even if the terms of our agreement are no longer
consistent with the terms offered to other externally-managed REITs.
Dividends paid from sources other than the Company's cash flows from operations will result in the Company having fewer funds available for the acquisition
of properties and other real estate-related investments.
The Company's cash flows provided by operations were $114.4 million for the year ended December 31, 2016 , however dividends paid to common
stockholders and distributions to the Company's OP Unit holders and long term incentive plan units holders were $122.4 million . The dividends and the deficit of
$8.0 million , were funded from cash flows from operations and previous cash on hand originally derived from undistributed cash flows from operations.
If the Company does not generate sufficient cash flows from its operations to fund dividends, the Company may have to reduce or suspend dividend payments,
or pay dividends from other sources, such as from borrowings, the sale of additional securities, advances from the Advisor, or the Advisor's deferral, suspension or
waiver of its fees and expense reimbursements.
Funding dividends from borrowings could restrict the amount the Company can borrow for investments. Funding dividends with the sale of assets, or using the
proceeds from issuance of the Company's Common Stock to fund dividends rather than invest in assets, may affect the Company's ability to generate cash flows.
Funding dividends from the sale of additional securities could dilute a stockholder's interest in the Company if the Company sell shares of its Common Stock or
securities that are convertible or exercisable into shares of Common Stock to third party investors.
The vote by the United Kingdom to exit the European Union could adversely affect us.
On June 23, 2016, the United Kingdom held a referendum in which a majority of voters approved an exit from the European Union, commonly referred to as
“Brexit.” The referendum was voluntary and not mandatory and, as a result of the referendum, it is expected that the British government will begin negotiating the
terms of the United Kingdom’s withdrawal from the European Union The announcement of Brexit caused significant volatility in global stock markets and
currency exchange fluctuations, including a sharp decline in the value of the British pound sterling as compared to the U.S. dollar and other currencies. The Brexit
vote may:
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adversely affect European and worldwide economic and market conditions;
adversely affect commercial property market rental rates in the United Kingdom and continental Europe;
adversely affect commercial property market values in the United Kingdom and continental Europe;
result in foreign currency exchange rate fluctuations, especially if the Company is unable to maintain currency exchange rate hedges;
adversely affect the availability of financing for commercial properties in the United Kingdom and continental Europe, which could impair the Company's
ability to acquire properties and may reduce the price for which they are able to sell properties they have acquired; and
create further instability in global financial and foreign exchange markets, including volatility in the value of the sterling and euro.
The long-term effects of Brexit are expected to depend on, among other things, any agreements the United Kingdom makes to retain access to European Union
markets either during a transitional period or more permanently. Brexit could adversely affect European or worldwide economic or market conditions and could
contribute to instability in global financial and real estate markets. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and
regulations as the United Kingdom determines which European Union laws to replace or replicate. Until the terms and timing of the United Kingdom’s exit from
the European Union become more clear, it is not possible to determine the impact that the referendum, the United Kingdom’s departure from the European Union
and/or any related matters may have on us; however, any of these effects of Brexit, and others we cannot anticipate, could adversely affect us.
Our rights and the rights of our stockholders to recover claims against our officers, directors and our Advisor are limited, which could reduce recoveries
against them if they cause us to incur losses.
Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably
believes to be in the corporation’s best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In
addition, subject to certain limitations set forth therein or under Maryland law, our charter provides that no director or officer will be liable to us or our
stockholders for monetary damages and requires us to indemnify our directors, our officers and our Advisor and our Advisor’s affiliates and permits us to
indemnify our employees and agents. We and our stockholders also may have more limited rights against our directors, officers, employees and agents, and our
Advisor and its affiliates, than might otherwise exist under common law, which could reduce recoveries against them. In addition, we may be obligated to fund the
defense costs incurred by our directors, officers, employees and agents or our Advisor and its affiliates in some cases.
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The Company relies significantly on major tenants and therefore is subject to tenant credit concentrations that make the Company more susceptible to adverse
events with respect to those tenants.
As of December 31, 2016 , the Company derived 5.0% of its consolidated annualized rental income on a straight-line basis from the Government Services
Administration (GSA I - IX) or GSA. Reductions or revisions in GSA’s budget may adversely affect its ability to make payments pursuant to the terms or its lease.
The value of the Company's investment in a real estate asset is historically driven by the credit quality of the underlying tenant, and an adverse change in a major
tenant’s financial condition or a decline in the credit rating of such tenant may result in a decline in the value of the Company's investments.
A high concentration of the Company's properties in a particular geographic area magnifies the effects of downturns in that geographic area and could have a
disproportionate adverse effect on the value of the Company's investments.
A concentration of properties in any particular geographic area, any adverse situation that disproportionately affects that geographic area would have a
magnified adverse effect on the Company's portfolio. As of December 31, 2016 , the Company derived 5.0% or more of its consolidated annualized rental income
on a straight-line basis from the following countries and states:
Country
United Kingdom
Germany
The Netherlands
Finland
United States & Puerto Rico
Texas
Michigan
California
Other states and Puerto Rico
United States and Puerto Rico
Other European countries
Total
December 31, 2016
21.9%
8.1%
6.5%
5.9%
9.3%
7.7%
5.5%
28.5%
51.0%
6.6%
100.0%
Any adverse situation that disproportionately affects the states and countries listed above may have a magnified adverse effect on the Company. Factors that
may negatively affect economic conditions in these states or countries include:
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restrictions on international trade;
business layoffs, downsizing or relocations;
industry slowdowns;
changing demographics;
increased telecommuting and use of alternative work places;
infrastructure quality;
any oversupply of, or reduced demand for, real estate;
concessions or reduced rental rates under new leases for properties where tenants defaulted; and
increased insurance premiums.
The Company is subject to additional risks from its international investments.
Based on original purchase price, approximately 49.2% of the Company's properties are located in the U.S. and the Commonwealth of Puerto Rico and
approximately 50.8% are in Europe, primarily in the United Kingdom, France, Germany, Luxembourg, The Netherlands and Finland. The Company may purchase
other properties and may make additional investments in Europe or elsewhere. These investments may be affected by factors peculiar to the laws and business
practices of the jurisdictions in which the properties are located. These laws and business practices may expose the Company to risks that are different from and in
addition to those commonly found in the U.S. Foreign investments pose several risks, including the following:
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the burden of complying with a wide variety of foreign laws;
changing governmental rules and policies, including changes in land use and zoning laws, more stringent environmental laws or changes in such laws;
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existing or new laws relating to the foreign ownership of real property or loans and laws restricting the ability of foreign persons or companies to remove
profits earned from activities within the country to the person's or company's country of origin;
the potential for expropriation;
possible currency transfer restrictions;
imposition of adverse or confiscatory taxes;
changes in real estate and other tax rates and changes in other operating expenses in particular countries;
possible challenges to the anticipated tax treatment of the structures that allow us to acquire and hold investments;
adverse market conditions caused by terrorism, civil unrest and changes in national or local governmental or economic conditions;
the willingness of domestic or foreign lenders to make loans in certain countries and changes in the availability, cost and terms of loan funds resulting
from varying national economic policies;
general political and economic instability in certain regions;
the potential difficulty of enforcing obligations in other countries;
our limited experience and expertise in foreign countries relative to our experience and expertise in the U.S.; and
our dependence on the Service Provider.
Investments in properties or other real estate investments outside the U.S. subject the Company to foreign currency risks.
Investments the Company makes outside the U.S. generally subject to foreign currency risk due to fluctuations in exchange rates between foreign currencies
and the U.S. dollar. Revenues generated from properties or other real estate investments acquired are generally denominated in the local currency. The Company
may also borrow in local currencies when purchasing properties outside the Unites States. As a result, changes in exchange rates of any such foreign currency to
U.S. dollars may affect the Company's revenues, operating margins and dividends and may also affect the book value of our assets and the amount of stockholders'
equity.
Changes in foreign currency exchange rates used to value a REIT's foreign assets may be considered changes in the value of the REIT's assets. These changes
may adversely affect the Company's status as a REIT.
Foreign exchange rates may be influenced by many factors, including:
changing supply and demand for a particular currency;
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• monetary policies of governments (including exchange control programs, restrictions on local exchanges or markets and limitations on foreign investment
in a country or an investment by residents of a country in other countries);
changes in balances of payments and trade;
trade restrictions; and
currency devaluations and revaluations.
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Also, governments from time to time intervene in the currency markets, directly and by regulation, in order to influence prices. These events and actions are
unpredictable. In particular, sovereign debt issues in Europe could lead to further significant, and potentially longer-term, devaluation of the Euro or British Pounds
against the U.S. dollar ("USD"), which could adversely impact the Company's European investments and revenue, operating expenses, and net income related to
such European investments as expressed in U.S. dollars.
If the Company is unsuccessful in hedging these, or any other potential losses related to its exposure to foreign currencies, the Company's operating results
could be negatively impacted and cash flows could be reduced. In some cases, as part of our risk management strategies, we may choose not to hedge such risks.
The commercial real estate industry may be adversely affected by economic conditions in the European, U.S. and global financial markets generally.
The Company's business and operations are dependent on the commercial real estate industry generally, which in turn is dependent upon global economic
conditions. Issues with the instability of credit and financial markets, actions by governments or central banks, weak consumer confidence in many markets and
geopolitical or economic instability in certain countries continues to put pressure on European economies. Instability or volatility of certain countries in the
European Union may create risks for stronger countries within the European Union and globally. Global economic and political headwinds, along with global
market instability and the risk of maturing commercial real estate debt that may have difficulties being refinanced, may continue to cause periodic volatility in the
commercial real estate market for some time. Adverse economic conditions could harm the Company's business and financial condition by, among other factors,
reducing the value of our existing investments, limiting access to debt and equity capital and otherwise negatively impacting the Company's operations.
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Challenging economic and financial market conditions could significantly reduce the amount of income the Company earns on its investments and further
reduce the value of investments.
Challenging economic and financial market conditions may cause the Company to experience an increase in the number of investments that result in losses,
including delinquencies, non-performing investments and a decrease in the value of the Company's property, all of which could adversely affect results of
operations. The Company may incur substantial losses and need to establish significant provision for losses or impairment.
Continuing concerns regarding European debt, market perceptions concerning the instability of the Euro and recent volatility and price movements in the rate
of exchange between the USD and the Euro could adversely affect the Company's business, results of operations and financing.
Concerns persist regarding the debt burden of certain Eurozone countries and their potential inability to meet their future financial obligations, the overall
stability of the Euro, given the diverse economic and political circumstances in individual Eurozone countries and recent declines and volatility in the value of the
Euro. These concerns could lead to the re-introduction of individual currencies in one or more Eurozone countries, or, in more extreme circumstances, the possible
dissolution of the Euro currency entirely. If the European Union dissolves, the legal and contractual consequences for holders of Euro-denominated obligations
would be uncertain. Such uncertainty would extend to, among other factors, whether obligations previously expressed to be owed and payable in Euros would be
re-denominated in a new currency (with considerable uncertainty over the conversion rates), what laws would govern and which country’s courts would have
jurisdiction. These potential developments, or market perceptions concerning these and related issues, could materially adversely affect the value of the Company's
Euro-denominated investments and obligations.
Furthermore, market concerns about economic growth in the Eurozone relative to the U.S. and speculation surrounding the potential impact on the Euro of a
possible Greek or other country sovereign default or exit from the Eurozone may continue to exert downward pressure on the rate of exchange between the USD
and the Euro, which may adversely affect the Company's results of operations.
Inflation may have an adverse effect on the Company's investments.
Certain countries have in the past experienced extremely high rates of inflation. Inflation, along with governmental measures to curb inflation, coupled with
public speculation about the possible future governmental measures to be adopted, has had significant negative effects on these international economies in the past
and this could occur again in the future.
High inflation could erode the value of long-term leases that do not contain indexed escalation provisions. High inflation in the countries in which we purchase
real estate or make other investments could also increase expenses, and we may not be able to pass these increased costs onto the Company's tenants. An increase
in the Company's expenses or a decrease in revenues could adversely impact results of operations. As of December 31, 2016 , some of the Company's leases for
properties in foreign countries contain upward adjustments to fair market value every five years or contain capped indexed escalation provisions, but there can be
no assurance that future leases on properties in foreign countries will contain such provisions or that such provisions will protect the Company from all potential
adverse effects of inflation.
Conversely, the current low inflation across Europe has raised the fear of deflation, or an outright decline in prices. Deflation can lead to a negative cycle
where consumers delay purchases in anticipation of lower prices, causing businesses to stop hiring and postpone investments as sales weaken. Deflation would
have a serious impact on economic growth and may adversely affect the financial condition of our tenants and the rental rates at which we renew or enter into
leases.
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A high concentration of tenants of the Company's properties in a similar industry magnifies the effects of downturns in that industry and would have a
disproportionate adverse effect on the value of investments.
If tenants of the Company's properties are concentrated in a certain industry category, any adverse effect to that industry generally would have a
disproportionately adverse effect on the Company's portfolio. For the year ended December 31, 2016 , the following industries had concentrations of properties
where annualized rental income on a straight-line basis represented 5.0% or greater of the Company's consolidated annualized rental income on a straight-line
basis:
Industry
Financial Services
Technology
Discount Retail
Aerospace
Healthcare
Telecommunications
Government Services
Energy
Freight
Utilities
December 31, 2016
13.4%
7.3%
6.6%
6.0%
5.9%
5.8%
5.6%
5.5%
5.1%
5.0%
Any adverse situation that disproportionately affects the industries listed above may have a magnified adverse effect on the Company's portfolio.
The Company's bank deposits in excess of insured limits expose the Company to risk of failure of any bank in which the Company deposits its funds.
The Company holds cash and cash equivalents at several banking institutions. These institutions are generally insured by the Federal Deposit Insurance
Corporation, or “FDIC,” or other entities in Europe, and each of these entities generally only insure limited amounts per depositor per insured bank. The Company
has cash and cash equivalents and restricted cash deposited in interest bearing accounts at certain financial institutions exceeding these insured levels. If any of the
banking institutions in which the Company has deposited funds ultimately fails, the Company may lose the portion of the deposits that exceed the insured levels.
The Company's business and operations could suffer in the event the Advisor or any other party that provides us with services essential to operations,
experiences system failures or cyber incidents or a deficiency in cyber security.
Despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan for the internal information technology
systems of the Advisor and other parts that provide us with services essential to the Company's operations are vulnerable to damages from any number of sources,
including computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Any system failure or accident
that causes interruptions in the Company's operations could results in a material disruption to the Company's business. We may also incur additional costs to
remedy damages caused by such disruptions.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of information resources. More specifically, a
cyber incident is an intentional attack or an unintentional event that can include gaining unauthorized access to systems to disrupt operations, corrupt data or steal
confidential information. As reliance on technology in the Company's industry has increased, so have the risks posed to the Company's systems, both internal and
those we have outsourced. In addition, the risk of a cyber incident, including by computer hackers, foreign governments and cyber terrorists, has generally
increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Even the most well protected
information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted attacks and intrusions evolve and
generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected.
The remediation costs and lost revenues experienced by a victim of a cyber incident may be significant and significant resources may be required to repair
system damage, protect against the threat of future security breaches or to alleviate problems, including reputational harm, loss of revenues and litigation, caused
by any breaches.
In addition, a security breach or other significant disruption involving the IT networks and related systems of the Advisor or any other party that provides us
with services essential to the Company's operations could:
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result in misstated financial reports, violations of loan covenants, missed reporting deadlines and/or missed permitting deadlines;
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affect the Company's ability to properly monitor the Company's compliance with the rules and regulations regarding the Company's qualification as a
REIT;
result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of, proprietary, confidential, sensitive or otherwise valuable
information (including information about tenants), which others could use to compete against us or for disruptive, destructive or otherwise harmful
purposes and outcomes;
result in the Company's inability to maintain the building systems relied upon by its tenants for the efficient use of their leased space;
require significant management attention and resources to remedy any damages that result;
subject us to claims for breach of contract, damages, credits, penalties or termination of leases or other agreements; or
adversely impact the Company's reputation among its tenants and investors generally.
Although the Advisor and other parties that provide us with services essential to the Company's operations intend to continue to implement industry-standard
security measures, there can be no assurance that those measures will be sufficient, and any material adverse effect experienced by the Advisor and other parties
that provide us with services essential to the Company's operations could, in turn, have an adverse impact on us.
Risks Related to Conflicts of Interest
The Advisor faces conflicts of interest relating to the purchase and leasing of properties, and such conflicts may not be resolved in the Company's favor, which
could adversely affect the Company's investment opportunities.
We rely on the Sponsor and the executive officers and other key real estate professionals at the Advisor to identify suitable investment opportunities for us.
Several of the other key real estate professionals of the Advisor are also the key real estate professionals at the parent of the Sponsor and their other public
programs. Many investment opportunities that are suitable for us may also be suitable for other programs sponsored directly or indirectly by the parent of the
Sponsor. For example, American Finance Trust, Inc. seeks, like us, to invest in a diversified portfolio of commercial properties, with an emphasis on sale-leaseback
transactions involving single tenant net-leased commercial properties, in the U.S. Thus, the executive officers and real estate professionals of the Advisor could
direct attractive investment opportunities to other entities or investors.
We and other programs sponsored directly or indirectly by the parent of the Sponsor also rely on these real estate professionals , to supervise the property
management and leasing of properties. The Company's executive officers and key real estate professionals, and the Sponsor , are not prohibited from engaging,
directly or indirectly, in any business or from possessing interests in other business venture or ventures, including businesses and ventures involved in the
acquisition, development, ownership, leasing or sale of real estate investments.
The Advisor faces conflicts of interest relating to joint ventures, which could result in a disproportionate benefit to the other venture partners at the Company's
expense and adversely affect the value of Common Stock.
We may enter into joint ventures with other AR Global-sponsored programs for the acquisition, development or improvement of properties. The Advisor may
have conflicts of interest in determining which AR Global-sponsored program should enter into any particular joint venture agreement. The co-venturer may have
economic or business interests or goals that are or may become inconsistent with the Company's business interests or goals. In addition, the Advisor may face a
conflict in structuring the terms of the relationship between the Company's interests and the interest of the affiliated co-venturer and in managing the joint venture.
Because the Advisor and its affiliates will control both the affiliated co-venturer and, to a certain extent, us, agreements and transactions between the co-venturers
with respect to any such joint venture will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers, which
may result in the co-venturer receiving benefits greater than the benefits that we receive. In addition, we may assume liabilities related to the joint venture that
exceeds the percentage of the Company's investment in the joint venture.
The Company's officers and directors face conflicts of interest related to the positions they hold with related parties, which could hinder the Company's ability
to successfully implement its business strategy and to generate returns to you.
Certain of the Company's executive officers, including Scott Bowman, chief executive officer and president, and Nicholas Radesca, chief financial officer,
treasurer and secretary, also are officers of the Advisor, the Property Manager and other related parties. Nicholas Radesca is the chief financial officer, treasurer
and secretary of American Finance Trust, Inc., which is a non-traded REIT sponsored by the parent of our Sponsor that has investment objectives similar to our
U.S. investment objectives. The Company's directors also are directors of other traded and non-traded REITs sponsored by the parent of the Sponsor. As a result,
these individuals owe fiduciary duties to these other entities which may conflict with the duties that they owe to us.
These conflicting duties could result in actions or inactions that are detrimental to the Company's business. Conflicts with the Company's business and
interests are most likely to arise from involvement in activities related to (a) allocation of new investments and management time and services between us and the
other entities, (b) our purchase of properties from, or sale of properties, to
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entities sponsored by or affiliated with the Sponsor, (c) the timing and terms of the investment in or sale of an asset, (d) development of our properties by affiliates
of the Sponsor, (e) investments with affiliates of the Advisor, and (f) compensation to the Advisor and its affiliates including the Property Manager.
Moreover, the management of multiple REITs by certain of the officers and other key personnel of the Advisor may significantly reduce the amount of time
they are able to spend on activities related to us, which may cause our operating results to suffer.
Our Advisor and our Service Provider face conflicts of interest relating to the structure of the fees they may receive.
Under the Advisory Agreement, the partnership agreement of the OP, and the OPP (as defined in “ Item 5 . Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities-Share-Based Compensation-Multi-Year Outperformance Agreement”), our Advisor is entitled to
substantial minimum compensation regardless of performance. Further, because our Advisor does not maintain a significant equity interest in us and is entitled to
receive fees and earn LTIP Units (as defined in “ Item 5 . Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities-Share-Based Compensation-Multi-Year Outperformance Agreement”) based on performance, our Advisor may be incentivized to recommend
investments that are riskier or more speculative than investments recommended by an advisor with a more significant investment in the Company.
Risks Related to the Company's Corporate Structure and Common Stock
The trading price of our Common Stock has declined since the Listing and may continue to decline.
The trading price of our Common Stock is impacted by a number of factors, many of which are outside our control. Among the factors that could affect the
price of our Common Stock are:
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our financial condition and performance;
our ability to realize the operating efficiencies, cost savings, revenue enhancements, synergies and other anticipated benefits of the Merger;
the financial condition of our tenants, including the extent of tenant bankruptcies or defaults;
actual or anticipated quarterly fluctuations in our operating results and financial condition;
our dividend policy;
the reputation of REITs and real estate investments generally and the attractiveness of REIT equity securities in comparison to other equity securities,
including securities issued by other real estate companies, and fixed income securities;
our reputation and the reputation of our Sponsor, its affiliates or entities sponsored by our Sponsor;
uncertainty and volatility in the equity and credit markets;
fluctuations in interest rates;
changes in revenue or earnings estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies
with respect to our securities or those of other REITs;
failure to meet analysts’ revenue or earnings estimates;
strategic actions by us or our competitors, such as acquisitions or restructurings;
the extent of institutional investor interest in us;
the extent of short-selling of our Common Stock;
general financial and economic market conditions and, in particular, developments related to market conditions for REITs and other real estate related
companies;
domestic and international economic factors unrelated to our performance; and
all other risk factors addressed elsewhere in this Annual Report on the Form 10-K.
We depend on our OP and its subsidiaries for cash flow and are structurally subordinated in right of payment to the obligations of our OP and its subsidiaries.
Our only significant asset is the partnership interest we own in our OP. We conduct, and intend to continue conducting, all of our business operations through
our OP. Accordingly, our only source of cash to pay our obligations is dividends from our OP and its subsidiaries. The limited partnership units of the OP Units
held by the Advisor, the Service Provider and their respective affiliates are also entitled to distributions from the OP in the same amount as shares of Common
Stock. Until such time as the LTIP Units held by the Advisor are fully earned in accordance with the provisions of the OPP, the LTIP Units are entitled to
dividends equal to 10% of the dividends made on the OP Units. After the LTIP Units are fully earned, they are entitled to a catch-up distribution and then receive
the same distribution as the OP Units.
There is no assurance that our OP or its subsidiaries will be able to, or be permitted to, pay dividends to us that will enable us to pay dividends to our
stockholders, holders of OP Units and holders of LTIP Units from cash flows from operations or otherwise
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pay any other obligations. Each of our OP's subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our
ability to obtain cash from these entities. In addition, any claims we may have will be structurally subordinated to all existing and future liabilities and obligations
of our operating partnership and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our OP and its
subsidiaries will be available to satisfy the claims of our creditors or to pay dividends to our stockholders only after all the liabilities and obligations of our OP and
its subsidiaries have been paid in full.
A stockholder's interest in us will be diluted if we issue additional shares, which could adversely affect the value of the Company's Common Stock.
Existing stockholders do not have preemptive rights to any shares issued by us in the future. The Company's charter currently authorizes us to issue 350
million shares of stock, of which 300 million shares are classified as Common Stock and 50 million are classified as preferred stock. The Company's board of
directors may amend our charter from time to time to increase or decrease the aggregate number of authorized shares of stock, or the number of authorized shares
of any class or series of stock, or may classify or reclassify any unissued shares into the classes or series of stock without the necessity of obtaining stockholder
approval. All of our shares may be issued in the discretion of our board of directors. Existing stockholders will suffer dilution of their equity investment in us, if
we: (a) sell additional shares of our Common Stock, including pursuant to stock awards granted to our officers and directors; (b) sell securities that are convertible
into shares of our Common Stock; or (c) issue shares to the Advisor or its affiliates, successors or assigns, in payment of an outstanding fee obligation as set forth
under the Advisory Agreement or other agreements.
In addition, we may issue shares of our Common Stock in connection with an exchange of OP Units and earnings of LTIP Units. As of December 31, 2016 ,
the Advisor and its affiliates, including certain of our current and former directors and executive officers, owned 545,530 OP Units, representing 0.3% of our fully
diluted Common Stock outstanding. After owning an OP Unit for one year, OP Unit holders generally may, subject to certain restrictions, exchange OP Units for
the cash value of a corresponding number of shares of our Common Stock or a corresponding number of shares of our Common Stock, at the Company's option.
As of December 31, 2016 , no LTIP Units have been earned. LTIP Units are convertible into OP Units subject to being earned and vested and several other
conditions. We may also issue OP Units to sellers of properties acquired by us.
Thus, our stockholders bear the risk of our future offerings reducing the value of our Common Stock and diluting the interest of existing stockholders.
The limit on the number of shares a person may own may discourage a takeover that could otherwise result in a premium price to our stockholders.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless
exempted by our board of directors, no person may own more than 9.8% in value of the aggregate of the outstanding shares of our stock or more than 9.8% (in
value or in number of shares, whichever is more restrictive) of any class or series of shares of our stock. This restriction may have the effect of delaying, deferring
or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all our assets) that might
provide a premium price for holders of our Common Stock.
Our charter permits our board of directors to issue stock with terms that may subordinate the rights of common stockholders or discourage a third party from
acquiring us in a manner that might result in a premium price to our stockholders.
Our charter permits our board of directors to issue up to 350.0 million shares of stock including 50 million shares of preferred stock. In addition, our board of
directors, without any action by our stockholders, may amend our charter from time to time to increase or decrease the aggregate number of shares or the number
of shares of any class or series of stock that we have authority to issue. Our board of directors may classify or reclassify any unissued Common Stock or preferred
stock and establish the preferences, conversion or other rights, voting powers, restrictions and limitations as to dividends or other dividends, qualifications and
terms or conditions of redemption of any such stock. Thus, our board of directors could authorize the issuance of preferred stock with terms and conditions that
could have a priority as to dividends and amounts payable upon liquidation over the rights of the holders of our Common Stock. Preferred stock could also have the
effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or
substantially all our assets) that might provide a premium price for holders of our Common Stock.
We disclose Funds from Operations ("FFO"), as defined by the National Association of Real Estate Investment Trusts ("NAREIT"), Core Funds from
Operations ("Core FFO") and Adjusted Funds from Operations ("AFFO"). These are non-GAAP financial measures and are not equivalent to our net
income or loss as determined under GAAP, and stockholders should consider GAAP measures to be more relevant to our operating performance.
We use and disclose FFO, as defined by NAREIT, Core FFO and AFFO. All of these are non-GAAP measures and none of them are equivalent to our net
income or loss or cash flow from operations as determined under GAAP. Stockholders should consider GAAP measures to be more relevant to evaluating our
operating performance or our ability to pay dividends. FFO, Core
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FFO and AFFO and GAAP net income differ because FFO, Core FFO and AFFO exclude gains or losses from sales of property and asset impairment write-downs,
and add back depreciation and amortization, adjusts for unconsolidated partnerships and joint ventures, and further excludes acquisition-related expenses,
amortization of above- and below-market leases, fair value adjustments of derivative financial instruments, deferred rent receivables and the adjustments of such
items related to non-controlling interests. Because of these differences, FFO, Core FFO and AFFO may not be accurate indicators of our operating performance,
especially with respect to the impact of acquisition expenses. FFO, Core FFO and AFFO are not necessarily indicative of cash flow available to fund cash needs
and stockholders should not consider FFO, Core FFO and AFFO as alternatives to cash flows from operations as an indication of our liquidity, or indicative of
funds available to fund our cash needs, including our ability to pay dividends to our stockholders.
Maryland law prohibits certain business combinations, which may make it more difficult for us to be acquired and may discourage a takeover that could
otherwise result in a premium price to our stockholders.
Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are
prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a
merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An
interested stockholder is defined as:
•
•
any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the corporation’s outstanding voting stock; or
an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner, directly or
indirectly, of 10% or more of the voting power of the then outstanding stock of the corporation.
A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which he or she otherwise would
have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or
after the time of approval, with any terms and conditions determined by the board.
After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by
the board of directors of the corporation and approved by the affirmative vote of at least:
•
•
80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and
two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or
with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.
These super-majority vote requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under Maryland law, for
their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. The business combination
statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors prior to the time that the
interested stockholder becomes an interested stockholder. Pursuant to the statute, our board of directors has exempted any business combination involving the
Advisor or any affiliate of the Advisor. Consequently, the five-year prohibition and the super-majority vote requirements will not apply to business combinations
between us and the Advisor or any affiliate of the Advisor. As a result, the Advisor and any affiliate of the Advisor may be able to enter into business combinations
with us that may not be in the best interest of our stockholders, without compliance with the super-majority vote requirements and the other provisions of the
statute. The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
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Maryland law limits the ability of a third-party to buy a large stake in us and exercise voting power in electing directors, which may discourage a takeover that
could otherwise result in a premium price to our stockholders.
The Maryland Control Share Acquisition Act provides that holders of “control shares” of a Maryland corporation acquired in a “control share acquisition”
have no voting rights except to the extent approved by stockholders by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to
be cast on the matter. Shares of stock owned by the acquirer, by officers or by employees who are directors of the corporation, are excluded from shares entitled to
vote on the matter. “Control shares” are voting shares of stock which, if aggregated with all other shares of stock owned by the acquirer or in respect of which the
acquirer can exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in
electing directors within specified ranges of voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having
previously obtained stockholder approval or shares acquired directly from the corporation. A “control share acquisition” means the acquisition of issued and
outstanding control shares. The control share acquisition statute does not apply (a) to shares acquired in a merger, consolidation or share exchange if the
corporation is a party to the transaction, or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation. Our bylaws contain a provision
exempting from the Maryland Control Share Acquisition Act any and all acquisitions of our stock by any person. There can be no assurance that this provision will
not be amended or eliminated at any time in the future.
Our stockholders' investment return may be reduced if we are required to register as an investment company under the Investment Company Act.
We are not registered, and do not intend to register ourselves or any of our subsidiaries, as an investment company under the Investment Company Act. If we
become obligated to register ourselves or any of our subsidiaries as an investment company, the registered entity would have to comply with a variety of
substantive requirements under the Investment Company Act imposing, among other things:
•
•
•
•
limitations on capital structure;
restrictions on specified investments;
prohibitions on transactions with affiliates; and
compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations.
We conduct, and intend to continue conducting, our operations, directly and through wholly or majority-owned subsidiaries, so that we and each of our
subsidiaries are exempt from registration as an investment company under the Investment Company Act. Under Section 3(a)(1)(A) of the Investment Company
Act, a company is an “investment company” if it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing,
reinvesting or trading in securities. Under Section 3(a)(1)(C) of the Investment Company Act, a company is deemed to be an “investment company” if it is
engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment
securities” having a value exceeding 40% of the value of its total assets (exclusive of government securities and cash items) on an unconsolidated basis, or the 40%
test. “Investment securities” excludes U.S. Government securities and securities of majority-owned subsidiaries that are not themselves investment companies and
are not relying on the exception from the definition of investment company set forth in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.
Because we are primarily engaged in the business of acquiring real estate, we believe that we and most, if not all, of our wholly and majority-owned
subsidiaries will not be considered investment companies under either Section 3(a)(1)(A) or Section 3(a)(1)(C) of the Investment Company Act. If we or any of our
wholly or majority-owned subsidiaries would ever inadvertently fall within one of the definitions of “investment company,” we intend to rely on the exception
provided by Section 3(c)(5)(C) of the Investment Company Act.
Under Section 3(c)(5)(C), the SEC staff generally requires us to maintain at least 55% of our assets directly in qualifying assets and at least 80% of the entity’s
assets in qualifying assets and in a broader category of real estate-related assets to qualify for this exception. Mortgage-related securities may or may not constitute
such qualifying assets, depending on the characteristics of the mortgage-related securities, including the rights that we have with respect to the underlying loans.
Our ownership of mortgage-related securities, therefore, is limited by provisions of the Investment Company Act and SEC staff interpretations.
The method we use to classify our assets for purposes of the Investment Company Act will be based in large measure upon no-action positions taken by the
SEC staff in the past. These no-action positions were issued in accordance with factual situations that may be substantially different from the factual situations we
may face, and a number of these no-action positions were issued more than ten years ago. No assurance can be given that the SEC staff will concur with our
classification of our assets. In addition, the SEC staff may, in the future, issue further guidance that may require us to re-classify our assets for purposes of
qualifying for an exclusion from regulation under the Investment Company Act. If we are required to re-classify our assets, we may no longer be in compliance
with the exclusion from the definition of an “investment company” provided by Section 3(c)(5)(C) of the Investment Company Act.
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A change in the value of any of our assets could cause us or one or more of our wholly or majority-owned subsidiaries to fall within the definition of
“investment company” and negatively affect our ability to maintain our exemption from regulation under the Investment Company Act. To avoid being required to
register the Company or any of its subsidiaries as an investment company under the Investment Company Act, we may be unable to sell assets we would otherwise
want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional income- or loss-generating assets that we
might not otherwise have acquired or may have to forgo opportunities to acquire interests in companies that we would otherwise want to acquire and would be
important to our investment strategy.
If we were required to register the Company as an investment company but failed to do so, we would be prohibited from engaging in our business, and civil
actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to
take control of us and liquidate our business.
Rapid changes in the values of our investments in real estate-related investments may make it more difficult for us to maintain our continued qualification as a
REIT and our exception from the Investment Company Act.
If the market value or income generated by our real estate-related investments declines, including as a result of increased interest rates, or other factors, we
may need to increase our real estate investments and income or liquidate our non-qualifying assets in order to maintain our REIT qualification or our exception
from registration under the Investment Company Act. If the decline in real estate asset values or income occurs quickly, this may be especially difficult to
accomplish. This difficulty may be exacerbated by the illiquid nature of any non-real estate assets that we may own. We may have to make investment decisions
that we otherwise would not make absent REIT and Investment Company Act considerations.
Our board of directors may change our investment policies without stockholder approval, which could alter the nature of our portfolio.
Our charter requires that our independent directors review our investment policies at least annually to determine that the policies we are following are in the
best interest of the stockholders. These policies may change over time. The methods of implementing our investment policies also may vary, as new real estate
development trends emerge and new investment techniques are developed. Our investment policies, the methods for their implementation, and our other objectives,
policies and procedures may be altered by our board of directors without the approval of our stockholders. As a result, the nature of a stockholder's investment
could change without the consent of stockholders.
Payment of fees to the Advisor and our Service Provider and their affiliates reduces cash available for investment and other uses including payment of
dividends to our stockholders.
The Advisor and our Service Provider and their affiliates perform services for us in connection with the selection and acquisition of our investments, the
management of our properties, the servicing of our debt, and the administration of our investments. They are paid substantial fees for these services, which reduces
cash available for investment, other corporate purposes including payment of and dividends to our stockholders.
The inability of tenant in single tenant properties to pay rent will materially reduce our revenues.
Risks Related to Net Lease Sale-Leaseback Investments
Substantially all of our properties are occupied by a single tenant and, therefore, the success of our investments is materially dependent on the financial
stability of these individual tenants. A default of any tenant on its lease payments to us would cause us to lose the revenue from the property and cause us to have
to find an alternative source of revenue to meet any mortgage payment and prevent a foreclosure if the property is subject to a mortgage. In the event of a default,
we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and reletting our property. If a lease is
terminated, there is no assurance that we will be able to lease the property for the rent previously received or sell the property without incurring a loss. A default by
a tenant, the failure of a guarantor to fulfill its obligations or other premature termination of a lease, or a tenant’s election not to extend a lease upon its expiration,
could have an adverse effect.
Acquisitions of properties in sale-leaseback transactions could be recharacterized in a tenant’s bankruptcy proceeding, which could adversely affect our
financial condition and ability to pay dividends.
We may enter into sale-leaseback transactions whereby we would purchase a property and then lease the same property back to the person from whom we
purchased it. In the event of the bankruptcy, the transaction may be re-characterized as either a financing or a joint venture. If the sale-leaseback was re-
characterized as a financing, we might not be considered the owner of the property, and as a result would have the status of a creditor, not a property owner. In that
event, we would no longer have the right to sell or encumber our ownership interest in the property. Instead, we would have a claim against the tenant for the
amounts owed under the lease. The tenant/debtor might have the ability to propose a plan restructuring the term, interest rate and amortization schedule of its
outstanding balance. If such a plan is confirmed by the bankruptcy court, we could be bound by the new terms. If the sale-leaseback were characterized as a joint
venture, our lessee and we could be treated as co-venturers with regard to the property. As a result, we could be held liable, under some circumstances, for debts
incurred by the lessee relating to the property.
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Highly leveraged tenants may have a higher possibility of filing for bankruptcy or insolvency.
Highly leveraged tenants that experience downturns in their operating results due to adverse changes to their business or economic conditions may have a
higher possibility of filing for bankruptcy or insolvency. In bankruptcy or insolvency, a tenant may have the option of vacating a property instead of paying rent.
Until such a property is released from bankruptcy, our revenues may be reduced.
If a tenant declares bankruptcy or becomes insolvent, we may be unable to collect balances due under relevant leases.
Any of our tenants, or any guarantor of a tenant’s lease obligations, could become insolvent or be subject to a bankruptcy proceeding pursuant to Title 11 of
the bankruptcy laws of the United States. A bankruptcy filing of our tenants or any guarantor of a tenant’s lease obligations would bar all efforts by us to collect
pre-bankruptcy debts from these entities or their assets, unless we receive an enabling order from the bankruptcy court. If a lease is assumed by the tenant, all pre-
bankruptcy balances owing under it must be paid in full. If a lease is rejected by a tenant in bankruptcy, we would have a general unsecured claim for damages. If a
lease is rejected, it is unlikely we would receive any payments from the tenant because our claim is capped at the rent reserved under the lease, without
acceleration, for the greater of one year or 15% of the remaining term of the lease, but not greater than three years, plus rent already due but unpaid. This claim
could be paid only if funds were available, and then only in the same percentage as that realized on other unsecured claims.
A tenant or lease guarantor bankruptcy could delay efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection
of these sums. A tenant or lease guarantor bankruptcy could cause a decrease or cessation of rental payments that would mean a reduction in our cash flow and the
amount available for dividends to our stockholders. In the event of a bankruptcy, there can be no assurance that the tenant or its trustee will assume our lease.
The credit profile of our tenants may create a higher risk of lease defaults and therefore lower revenues.
Based on annualized rental income, 27.7% of our tenants are not evaluated or ranked by credit rating agencies, or are ranked below "investment grade". Our
long-term leases with certain of these tenants may therefore pose a higher risk of default than would long-term leases with tenants who have investment grade
ratings.
Net leases may not result in fair market lease rates over time, which could negatively impact our income.
As of December 31, 2016 , all of our rental income was generated from net leases, which generally provide the tenant greater discretion in using the leased
property than ordinary property leases, such as the right to freely sublease the property, to make alterations in the leased premises and to terminate the lease prior to
its expiration under specified circumstances. Net leases may not result in fair market lease rates over time, which could negatively impact our income.
Long term leases may result in income lower than short term leases.
We generally seek to enter into long term leases with our tenants. As of December 31, 2016 , 24.0% of our annualized rental income was generated from net
leases, with remaining lease term of more than 10 years. Leases of long duration, or with renewal options that specify a maximum rate increase, may not result in
fair market lease rates over time if we do not accurately judge the potential for increases in market rental rates.
Certain of our leases do not contain any rent escalation provisions. As a result, our income may be lower than it would otherwise be if we did not lease
properties through long term leases. Further, if our properties are leased for long term leases at below market rental rates, our properties will be less attractive to
potential buyers, which could affect our ability to sell the property at an advantageous price.
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General Risks Related to Investments in Real Estate
Our operating results are affected by economic and regulatory changes that have an adverse impact on the real estate market in general. These changes affect
our profitability and ability to realize growth in the value of our real estate properties.
Our operating results are subject to risks generally incident to the ownership of real estate, including:
•
•
•
•
changes in general economic and local economic conditions;
changes in supply of and demand for, similar or competing properties in the areas in which our properties are located;
changes in interest rates and availability of debt financing; and
changes in tax, real estate, environmental and zoning laws
These and other factors may affect the profitability and the value of our properties.
Our discount retail tenants face competition with other retail channels, which may affect our tenants ability to pay rent.
Our discount retail tenants may face potentially changing consumer preferences and increasing competition from other forms of retailing, such as e-commerce,
discount shopping centers, outlet centers, upscale neighborhood strip centers, catalogues and other forms of direct marketing, discount shopping clubs and
telemarketing. Such factors may affect our tenants and their ability to pay rent.
Properties that have vacancies for a significant period of time could be difficult to sell, which could diminish the return on your investment.
A property may experience vacancies either by the continued default of tenants under their leases or the expiration of tenant leases. Properties that are vacant
will produce no revenue, and the cost of owning the property may be substantial. Vacancies will result in less cash being available to be distributed to stockholders.
In addition, because properties’ market values depend principally upon the value of the properties’ leases, the resale value of properties with prolonged vacancies
would be lower.
We generally obtain only limited warranties when we purchase a property and therefore have only limited recourse if our due diligence does not identify any
issues that lower the value of our property, which could adversely affect our financial condition and ability to pay dividends to you.
We have acquired, and may continue to acquire, properties in “as is” condition on a “where is” basis and “with all faults,” without any warranties of
merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and
indemnifications that will only survive for a limited period after the closing. The purchase of properties with limited warranties increases the risk that we may lose
some or all of our invested capital in the property as well as the loss of rental income from that property.
We may be unable to secure funds for future tenant improvements or capital needs, which could impact the value of the applicable property or our ability to
lease the applicable property on favorable terms.
If a tenant does not renew its lease or otherwise vacate its space, we likely will be required to expend substantial funds for tenant improvements and tenant
refurbishments to the vacated space. In addition, we will likely be responsible for any major structural repairs, such as repairs to the foundation, exterior walls and
rooftops, even if our leases with tenants require tenants to pay routine property maintenance costs. We will have to obtain financing from sources, such as cash
flow from operations, borrowings, property sales or future equity offerings to fund these capital requirements. These sources of funding may not be available on
attractive terms or at all. If we cannot procure additional funding for capital improvements, the value of the applicable property or our ability to lease the applicable
property on favorable terms could be adversely impacted.
We may not be able to sell a property when we desire to do so.
The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including
supply and demand, that are beyond our control. In addition, we may not have funds available to correct defects or make improvements that are necessary or
desirable before the sale of a property. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price
or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close
the sale of a property. In addition, our ability to sell properties that have been held for less than two years is limited as any gain recognized on the sale or other
disposition of such property could be subject to the 100% prohibited transaction tax, as discussed in more detail below.
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We may acquire or finance properties with lock-out provisions which may prohibit us from selling a property, or may require us to maintain specified debt
levels for a period of years on some properties.
Lock-out provisions could materially restrict us from selling or otherwise disposing of or refinancing properties. Lock out provisions may prohibit us from
reducing the outstanding indebtedness with respect to any properties, refinancing such indebtedness on a non-recourse basis at maturity, or increasing the amount
of indebtedness with respect to such properties. Lock-out provisions could impair our ability to take other actions during the lock-out period that could be in the
best interests of our stockholders. In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of
our assets or a change in control.
Rising expenses could reduce cash flow and could adversely affect our ability to make future acquisitions.
Any properties that we own now or buy in the future are and will be subject to operating risks common to real estate in general, any or all of which may
negatively affect us. If any property is not fully occupied or if rents are being paid in an amount that is insufficient to cover operating expenses, we could be
required to expend funds with respect to that property for operating expenses. The properties will be subject to increases in tax rates, utility costs, operating
expenses, insurance costs, repairs and maintenance and administrative expenses. Renewals of leases or future leases may not be negotiated on that basis, in which
event we may have to pay those costs. If we are unable to lease properties on a triple-net-lease basis or on a basis requiring the tenants to pay all or some of such
expenses, or if tenants fail to pay required tax, utility and other impositions, we could be required to pay those costs which would, among other things, adversely
affect funds available for future acquisitions.
Real estate-related taxes may increase and if these increases are not passed on to tenants, our income will be reduced.
Some local real property tax assessors may seek to reassess some of our properties as a result of our acquisition of the property. Generally, from time to time
our property taxes increase as property values or assessment rates change or for other reasons deemed relevant by the assessors. An increase in the assessed
valuation of a property for real estate tax purposes will result in an increase in the related real estate taxes on that property. There is no assurance that renewal
leases or future leases will be negotiated on the same basis. Increases not passed through to tenants will adversely affect our income.
Our properties and our tenants may face competition that may affect tenants’ ability to pay rent.
Our properties typically are, and we expect properties we acquire in the future will be, located in developed areas. Therefore, there are and will be numerous
other properties within the market area of each of our properties that will compete with us for tenants. The number of competitive properties could have a material
effect on our ability to rent space at our properties and the amount of rents charged. We could be adversely affected if additional competitive properties are built in
locations competitive with our properties, causing increased competition for customer traffic and creditworthy tenants. Tenants may also face competition from
such properties if they are leased to tenants in a similar industry. For example, retail tenants face competition from numerous retail channels such as discount or
value retailers, factory outlet centers and wholesale clubs. Retail tenants may additional face competition from alternative retail channels as mail order catalogs and
operators, television shopping networks and shopping via the Internet. Competition that we face from other properties within our market areas, and competition our
tenants face from tenants in such properties could result in decreased cash flow from tenants and may require us to make capital improvements.
Costs of complying with governmental laws and regulations, including those relating to environmental matters, may adversely affect our income and the cash
available for any dividends.
All real property and the operations conducted on real property are subject to federal, state and local laws and regulations, and various foreign laws and
regulations, relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions,
the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous
materials, and the remediation of contamination associated with disposals. Environmental laws and regulations may impose joint and several liability on tenants,
owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal.
This liability could be substantial. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may adversely affect our
ability to sell, rent or pledge such property as collateral for future borrowings.
Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with
new or more stringent laws or regulations or stricter interpretation of existing laws may require material expenditures by us. State and federal laws in this area are
constantly evolving. Future laws, ordinances or regulations may impose material environmental liability. Additionally, our tenants’ operations, the existing
condition of land when we buy it, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third
parties may affect our properties. In addition, there are various local, state and federal fire, health, life-safety and similar regulations with which we may be
required to comply, and that may subject us to liability in the form of fines or damages for noncompliance.
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Although we generally hire third parties to conduct environmental reviews of the real property that we purchase, we may not obtain an independent third-party
environmental assessment for every property we acquire. In addition, any assessment that we do obtain may not reveal all environmental liabilities or that a prior
owner of a property did not create a material environmental condition not known to us.
If we sell properties by providing financing to purchasers, we will be exposed to defaults by the purchasers.
In some instances we may sell our properties by providing financing to purchasers. If we provide financing to purchasers, we will bear the risk that the
purchaser may default, which could negatively impact our cash dividends to stockholders. Even in the absence of a purchaser default, the distribution of the
proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the promissory notes or other property we may accept upon the sale
are actually paid, sold, refinanced or otherwise disposed of. In some cases, we may receive initial down payments in cash and other property in the year of sale in
an amount less than the selling price and subsequent payments will be spread over a number of years.
Our recovery of an investment in a mortgage, bridge or mezzanine loan that has defaulted may be limited, resulting in losses to us.
There is no guarantee that the mortgage, loan or deed of trust securing an investment will, following a default, permit us to recover the original investment and
interest that would have been received absent a default. The security provided by a mortgage, deed of trust or loan is directly related to the difference between the
amount owed and the appraised market value of the property. Although we intend to rely on a current real estate appraisal when we make the investment, the value
of the property is affected by factors outside our control, including general fluctuations in the real estate market, rezoning, neighborhood changes, highway
relocations and failure by the borrower to maintain the property. In addition, we may incur the costs of litigation in our efforts to enforce our rights under defaulted
loans.
Our costs associated with complying with the Americans with Disabilities Act may affect cash available for dividends.
Our domestic properties are subject to the Americans with Disabilities Act of 1990 (the "Disabilities Act"). Under the Disabilities Act, all places of public
accommodation are required to comply with federal requirements related to access and use by disabled persons. The Disabilities Act has separate compliance
requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services, including restaurants and retail stores, be
made accessible and available to people with disabilities. The Disabilities Act’s requirements could require removal of access barriers and could result in the
imposition of injunctive relief, monetary penalties, or, in some cases, an award of damages. However, there can be no assurance that we will be able to acquire
properties or allocate responsibilities in this manner.
Terrorist attacks and other acts of violence, civilian unrest, or war may affect the markets in which we operate our business and our profitability.
We own and acquire real estate assets located in major metropolitan areas as well as densely populated sub-markets that are susceptible to terrorist attack. In
addition, any kind of terrorist activity or violent criminal acts, including terrorist acts against public institutions or buildings or modes of public transportation
(including airlines, trains or buses) could have a negative effect on our business. These events may directly impact the value of our assets through damage,
destruction, loss or increased security costs. Although we may obtain terrorism insurance, we may not be able to obtain sufficient coverage to fund any losses we
may incur. The TRIA, which was designed for a sharing of terrorism losses between insurance companies and the federal government, will expire on December 31,
2020, and there can be no assurance that Congress will act to renew or replace it.
More generally, any terrorist attack, other act of violence or war, including armed conflicts, could result in increased volatility in, or damage to, the worldwide
financial markets and economy. Increased economic volatility could adversely affect our properties’ ability to conduct their operations profitably or our ability to
borrow money or issue capital stock at acceptable prices.
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Market and economic challenges experienced by the U.S. and global economies may adversely impact aspects of our operating results and operating condition.
Our business may be affected by market and economic challenges experienced by the U.S. and global economies. Countries with high levels of sovereign debt
have had difficulty refinancing their debt, leading to concerns that have created volatility in various currencies. In addition, many governments around the world,
including the U.S. government, are operating at very large financial deficits. Disruptions in the economies of such governments could cause, contribute to or be
indicative of, deteriorating macroeconomic conditions. These conditions may materially affect the value and performance of our properties, and may affect our
ability to pay dividends, the availability or the terms of financing that we have or may anticipate utilizing, and our ability to make principal and interest payments
on, or refinance, any outstanding debt when due. These challenging economic conditions may also impact the ability of certain of our tenants to enter into new
leasing transactions or satisfy rental payments under existing leases. Specifically, global market and economic challenges may have adverse consequences,
including:
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decreased demand for our properties due to significant job losses that occur or may occur in the future, resulting in lower occupancy levels, which
decreased demand will result in decreased revenues and which could diminish the value of our portfolio, which depends, in part, upon the cash flow
generated by our properties;
an increase in the number of bankruptcies or insolvency proceedings of our tenants and lease guarantors, which could delay or preclude our efforts to
collect rent and any past due balances under the relevant leases;
widening credit spreads for major sources of capital as investors demand higher risk premiums, resulting in lenders increasing the cost for debt financing;
reduction in the amount of capital that is available to finance real estate, which, in turn, could lead to a decline in real estate values generally, slow real
estate transaction activity, a reduction the loan-to-value ratio upon which lenders are willing to lend, and difficulty refinancing our debt;
a decrease in the market value of our properties, which would reduce the value of our portfolio and limit our ability to obtain debt financing securing by
our properties;
reduction in the value and liquidity of our short-term investments and increased volatility in market rates for such investments; and
reduction in cash flows from our operations as a result of foreign currency losses resulting from our operations in continental Europe and the United
Kingdom if we are unsuccessful in hedging these potential losses or if, as part of our risk management strategies, we choose not to hedge such risks.
If economic conditions deteriorate, our board of directors may reduce payment of dividends in order to conserve cash.
Disruptions in the economies of various European countries could negatively impact our business, results of operations and financial condition.
Countries with high levels of sovereign debt have had difficulty refinancing their debt, leading to concerns that have created volatility in various currencies. In
addition, many governments around the world, including the U.S. government, are operating at very large financial deficits. Disruptions in the economies of such
governments could cause, contribute to or be indicative of, deteriorating macroeconomic conditions. Furthermore, governmental austerity measures aimed at
reducing deficits could impair the economic recovery.
We may be exposed to foreign currency gains and losses resulting from our operations in continental Europe and the United Kingdom. If we are unsuccessful
in hedging these potential losses, our operating results could be negatively impacted and our cash flows could be significantly reduced. In some cases, as part of
our risk management strategies, we may choose not to hedge such risks.
Foreign exchange rates are influenced by: changing supply and demand for a particular currency, monetary policies of governments (including exchange
control programs, restrictions on local exchanges or markets and limitations on foreign investment in a country or on investment by residents of a country in other
countries), changes in balances of payments and trade, trade restrictions, and currency devaluations and revaluations. Also, governments from time to time
intervene in the currency markets, directly and by regulation, in order to influence prices directly. These events and actions are unpredictable and not within our
control.
Our real estate investments may include special use single tenant properties that may be difficult to sell or re-lease upon tenant defaults or early lease
terminations.
We focus our investments on commercial properties, including special use single tenant properties. If a lease is terminated or not renewed or, in the case of a
mortgage loan, if we take such property in foreclosure, we may be required to renovate the property or to make rent concessions in order to lease the property to
another tenant or sell the property. Special use single tenant properties may be relatively illiquid compared to other types of real estate and financial assets. This
illiquidity will limit our ability to quickly change our portfolio in response to changes in economic or other conditions. In addition, in the event we are forced to
sell the
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property, we may have difficulty selling it to a party other than the tenant or borrower due to the special purpose for which the property may have been designed.
These and other limitations may affect our ability to re-lease or sell properties.
Upcoming changes in U.S. accounting standards regarding operating leases may make the leasing of our properties less attractive to our potential tenants,
which could reduce overall demand for our properties.
Under current authoritative accounting guidance for leases, a lease is classified by a tenant as a capital lease if the significant risks and rewards of ownership
are considered to reside with the tenant. Under capital lease accounting for a tenant, both the leased asset and liability are reflected on their balance sheet. If the
lease does not meet any of the criteria for a capital lease, the lease is considered an operating lease by the tenant, and the obligation does not appear on the tenant’s
balance sheet, rather, the contractual future minimum payment obligations are only disclosed in the footnotes thereto. Thus, entering into an operating lease can
appear to enhance a tenant’s balance sheet in comparison to direct ownership. The upcoming standard, which is expected to become effective in 2019, could affect
both our accounting for leases as well as that of our current and potential tenants. These changes may affect how the real estate leasing business is conducted. For
example, as a result of the revised accounting standards regarding the financial statement classification of operating leases, companies may be less willing to enter
into leases in general or desire to enter into leases with shorter terms because the apparent benefits to their balance sheets could be reduced or eliminated.
We may incur mortgage indebtedness and other borrowings, which may increase our business risks.
Risks Associated with Debt Financing and Investments
We generally acquire real properties by using either existing financing or borrowing new funds. In addition, we typically incur mortgage debt and may pledge
all or some of our real properties as security for that debt to obtain funds to acquire additional real properties or fund working capital. We may borrow if we need
funds to continue to satisfy the REIT tax qualification requirement that we generally distribute annually at least 90% of our REIT taxable income (which does not
equal net income as calculated in accordance with GAAP) to our stockholders, determined without regard to the deduction for dividends paid and excluding net
capital gain. We also may borrow if we otherwise deem it necessary or advisable to assure that we maintain our qualification as a REIT.
If there is a shortfall between the cash flow from a property and the cash flow required to service mortgage debt on a property, then we must identify other
sources to fund the payment or risk defaulting on the indebtedness. In addition, incurring mortgage debt increases the risk of loss because defaults on indebtedness
secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default. For U.S.
federal income tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance
of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize
taxable income on foreclosure, but would not receive any cash proceeds. In such event, we may be unable to pay the amount of dividends required in order to
maintain our REIT status. We may give full or partial guarantees to lenders of mortgage debt to the entities that own our properties. If we provide a guaranty on
behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgages
contain cross-collateralization or cross-default provisions, a default on a single property could affect multiple properties.
Changes in the debt markets could have a material adverse impact on our earnings and financial condition.
The domestic and international commercial real estate debt markets are subject to changing levels of volatility, resulting in, from time to time, the tightening of
underwriting standards by lenders and credit rating agencies. If our overall cost of borrowings increase, either by increases in the index rates or by increases in
lender spreads, we will need to factor such increases into the economics of future acquisitions. This may result in future acquisitions generating lower overall
economic returns. If these disruptions in the debt markets persist, our ability to borrow monies to finance the purchase of, or other activities related to, real estate
assets will be negatively impacted.
If we are unable to borrow monies on terms and conditions that we find acceptable, we likely will have to reduce the number of properties we can purchase,
and the return on the properties we do purchase may be lower. In addition, we may find it difficult, costly or impossible to refinance maturing indebtedness.
In addition, the state of the debt markets could have an impact on the overall amount of capital investing in real estate, which may result in price or value
decreases of real estate assets. This could negatively impact the value of our assets after the time we acquire them.
Increases in mortgage rates may make it difficult for us to finance or refinance properties.
If we place mortgage debt on properties, we run the risk of being unable to refinance the properties when the loans come due, or of being unable to refinance
on favorable terms. If interest rates are higher when the properties are refinanced, we may not be able to refinance the properties and we may be required to obtain
equity financing to repay the mortgage or the property may be subject to foreclosure.
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Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to pay dividends to you.
In connection with providing us financing, a lender could impose restrictions on us that affect our dividend and operating policies and our ability to incur
additional debt. Loan documents we enter into may contain covenants that limit our ability to further mortgage the property, discontinue insurance coverage or
replace the Advisor. These or other limitations may adversely affect our flexibility and our ability to achieve our investment and operating objectives.
Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to pay dividends to you.
We have and expect that we will continue to incur indebtedness in the future. We have incurred variable-rate debt. Increases in interest rates on our variable-
rate debt would increase our interest cost. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one
or more of our investments in properties at times that may not permit realization of the maximum return on such investments.
U.S. Federal Income Tax Risks
Our failure to remain qualified as a REIT would subject us to U.S. federal income tax and potentially state and local tax, and would adversely affect our
operations and the market price of our Common Stock.
We qualified to be taxed as a REIT for U.S. federal income tax purposes, commencing with our taxable year ended December 31, 2013 and intend to operate
in a manner that would allow us to continue to qualify as a REIT for U.S. federal income tax purposes. However, we may terminate our REIT qualification, if our
board of directors determines that not qualifying as a REIT is in the best interests of our stockholders, or inadvertently. Our qualification as a REIT depends upon
our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. We have structured and
intend to continue structuring our activities in a manner designed to satisfy all the requirements for qualification as a REIT. However, the REIT qualification
requirements are extremely complex and interpretation of the U.S. federal income tax laws governing qualification as a REIT is limited. Furthermore, any opinion
of our counsel, including tax counsel, as to our eligibility to remain qualified as a REIT is not binding on the Internal Revenue Service (the "IRS") and is not a
guarantee that we will continue to qualify as a REIT. Accordingly, we cannot be certain that we will be successful in operating so we can remain qualified as a
REIT. Our ability to satisfy the asset tests depends on our analysis of the characterization and fair market values of our assets, some of which are not susceptible to
a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income or quarterly asset requirements also
depends on our ability to successfully manage the composition of our income and assets on an ongoing basis. Accordingly, if certain of our operations were to be
recharacterized by the IRS, such recharacterization would jeopardize our ability to continue to satisfy all the requirements for continued qualification as a REIT.
Furthermore, future legislative, judicial or administrative changes to the U.S. federal income tax laws could be applied retroactively, which could result in our
disqualification as a REIT.
If we fail to continue to qualify as a REIT for any taxable year, and we do not qualify for certain statutory relief provisions, we will be subject to U.S. federal
income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following
the year of losing our REIT qualification. Losing our REIT qualification would reduce our net earnings available for investment or distributions to stockholders
because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the dividends paid deduction, and we would no longer
be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.
Even if we continue to qualify as a REIT, in certain circumstances, we may incur tax liabilities that would reduce our cash available for distribution to you.
Even if we maintain our status as a REIT, we may be subject to U.S. federal, state and local income taxes. For example, net income from the sale of properties
that are “dealer” properties sold by a REIT (a “prohibited transaction” under the Code) will be subject to a 100% tax. We may not make sufficient distributions to
avoid excise taxes applicable to REITs. Similarly, if we were to fail an income test (and did not lose our REIT status because such failure was due to reasonable
cause and not willful neglect) we would be subject to tax on the income that does not meet the income test requirements. We also may decide to retain net capital
gain we earn from the sale or other disposition of our property and pay U.S. federal income tax directly on such income. In that event, our stockholders would be
treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would
have no benefit from their deemed payment of such tax liability unless they file U.S. federal income tax returns and thereon seek a refund of such tax. We also will
be subject to corporate tax on any undistributed REIT taxable income. We also may be subject to state and local taxes on our income or property, including
franchise, payroll and transfer taxes, either directly or at the level of our operating partnership or at the level of the other companies through which we indirectly
own our assets, such as our taxable REIT subsidiaries, which are subject to full U.S. federal, state, local and foreign corporate-level income taxes.
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To continue to qualify as a REIT we must meet annual distribution requirements, which may force us to forgo otherwise attractive opportunities or borrow
funds during unfavorable market conditions. This could delay or hinder our ability to meet our investment objectives.
In order to continue to qualify as a REIT, we must distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net
income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. We will be subject
to U.S. federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which
distributions we make with respect to any calendar year are less than the sum of (a) 85% of our ordinary income, (b) 95% of our capital gain net income and (c)
100% of our undistributed income from prior years. These requirements could cause us to distribute amounts that otherwise would be spent on investments in real
estate assets and it is possible that we might be required to borrow funds, possibly at unfavorable rates, or sell assets to fund these distributions. Although we
intend to make distributions sufficient to meet the annual distribution requirements and to avoid U.S federal income and excise taxes on our earnings while we
continue to qualify as a REIT, it is possible that we might not always be able to do so.
Recharacterization of sale-leaseback transactions may cause us to lose our REIT status.
With respect to properties acquired in sale-leaseback transactions, we will use commercially reasonable efforts to structure any such sale-leaseback transaction
such that the lease will be characterized as a "true lease" for U.S. federal income tax purposes, thereby allowing us to be treated as the owner of the property for
U.S. federal income tax purposes. However, the IRS may challenge such characterization. In the event that any such sale-leaseback transaction is challenged and
recharacterized as a financing transaction or loan for U.S. federal income tax purposes, deductions for depreciation and cost recovery relating to such property
would be disallowed. If a sale-leaseback transaction were so recharacterized, we might fail to continue to satisfy the REIT qualification "asset tests" or "income
tests" and, consequently, lose our REIT status effective with the year of recharacterization. Alternatively, the amount of our REIT taxable income could be
recalculated which might also cause us to fail to meet the dividend requirement for a taxable year.
Certain of our business activities are potentially subject to the prohibited transaction tax.
For so long as we continue to qualify as a REIT, our ability to dispose of property during the first few years following acquisition may be restricted to a
substantial extent as a result of our REIT qualification. Under applicable provisions of the Code regarding prohibited transactions by REITs, while we qualify as a
REIT, we will be subject to a 100% penalty tax on any gain recognized on the sale or other disposition of any property (other than foreclosure property) that we
own, directly or indirectly through any subsidiary entity, including our operating partnership, but generally excluding taxable REIT subsidiaries, that is deemed to
be inventory or property held primarily for sale to customers in the ordinary course of a trade or business. Whether property is inventory or otherwise held
primarily for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances surrounding each property. We intend
to avoid the 100% prohibited transaction tax by (1) conducting activities that may otherwise be considered prohibited transactions through a taxable REIT
subsidiary (but such taxable REIT subsidiary will incur corporate rate income taxes with respect to any income or gain recognized by it), (2) conducting our
operations in such a manner so that no sale or other disposition of an asset we own, directly or through any subsidiary, will be treated as a prohibited transaction or
(3) structuring certain dispositions of our properties to comply with the requirements of the prohibited transaction safe harbor available under the Code for
properties that, among other requirements, have been held for at least two years. Despite our present intention, no assurance can be given that any particular
property we own, directly or through any subsidiary entity, including our operating partnership, but generally excluding taxable REIT subsidiaries, will not be
treated as inventory or property held primarily for sale to customers in the ordinary course of a trade or business.
Our taxable REIT subsidiaries are subject to corporate-level taxes and our dealings with our taxable REIT subsidiaries may be subject to 100% excise tax.
A REIT may own up to 100% of the stock of one or more taxable REIT subsidiaries. Both the subsidiary and the REIT must jointly elect to treat the subsidiary
as a taxable REIT subsidiary. A corporation of which a taxable REIT subsidiary directly or indirectly owns more than 35% of the voting power or value of the
stock will automatically be treated as a taxable REIT subsidiary. Overall, no more than 25% (20% for taxable years beginning after December 31, 2017) of the
gross value of a REIT’s assets may consist of stock or securities of one or more taxable REIT subsidiaries. A taxable REIT subsidiary may hold assets and earn
income that would not be qualifying assets or income if held or earned directly by a REIT, including gross income from operations pursuant to management
contracts. Accordingly, we may use taxable REIT subsidiaries generally to hold properties for sale in the ordinary course of a trade or business or to hold assets or
conduct activities that we cannot conduct directly as a REIT. A taxable REIT subsidiary will be subject to applicable U.S. federal, state, local and foreign income
tax on its taxable income. In addition, the rules, which are applicable to us as a REIT, also impose a 100% excise tax on certain transactions between a taxable
REIT subsidiary and its parent REIT that are not conducted on an arm’s-length basis.
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We may be required to defer repatriation of cash from foreign jurisdictions in order to continue to qualify as a REIT.
Investments in foreign real property may be impacted by changes in the value of foreign currencies. Certain foreign currency gains will generally be excluded
from income for purposes of determining our satisfaction of one or both of the REIT gross income tests; however, under certain circumstances such gains will be
treated as non-qualifying income. To reduce the risk of foreign currency gains adversely affecting our continued REIT qualification, we may be required to defer
the repatriation of cash from foreign jurisdictions or to employ other structures that could affect the timing, character or amount of income we receive from our
foreign investments. No assurance can be given that we will be able to manage our foreign currency gains in a manner that enables us to continue to qualify as a
REIT or to avoid U.S. federal and other taxes on our income as a result of foreign currency gains.
If our operating partnership failed to qualify as a partnership or is not otherwise disregarded for U.S. federal income tax purposes, we would cease to qualify
as a REIT.
If the IRS were to successfully challenge the status of our operating partnership as a partnership or disregarded entity for such purposes, it would be taxable as
a corporation. In such event, this would reduce the amount of distributions that the operating partnership could make to us. This also would result in our failing to
maintain our REIT qualification and becoming subject to a corporate level tax on our income. This substantially would reduce our cash available to pay
distributions to our stockholders. In addition, if any of the partnerships or limited liability companies through which our operating partnership owns its properties,
in whole or in part, loses its characterization as a partnership and is otherwise not disregarded for U.S. federal income tax purposes, it would be subject to taxation
as a corporation, thereby reducing distributions to the operating partnership. Such a recharacterization of an underlying property owner could also threaten our
ability to maintain our REIT qualification.
Our investments in certain debt instruments may cause us to recognize income for U.S. federal income tax purposes even though no cash payments have been
received on the debt instruments, and certain modifications of such debt by us could cause the modified debt to not qualify as a good REIT asset, thereby
jeopardizing our REIT qualification.
Our taxable income may substantially exceed our net income as determined based on GAAP, or differences in timing between the recognition of taxable
income and the actual receipt of cash may occur. For example, we may acquire assets, including debt securities requiring us to accrue original issue discount
("OID"), or recognize market discount income, that generate taxable income in excess of economic income or in advance of the corresponding cash flow from the
assets. In addition, if a borrower with respect to a particular debt instrument encounters financial difficulty rendering it unable to pay stated interest as due, we may
nonetheless be required to continue to recognize the unpaid interest as taxable income with the effect that we will recognize income but will not have a
corresponding amount of cash available for distribution.
As a result of the foregoing, we may generate less cash flow than taxable income in a particular year and find it difficult or impossible to meet the REIT
distribution requirements in certain circumstances. In such circumstances, we may be required to (a) sell assets in adverse market conditions, (b) borrow on
unfavorable terms, (c) distribute amounts that would otherwise be used for future acquisitions or used to repay debt, or (d) make a taxable distributions of our
shares of Common Stock as part of a distribution in which stockholders may elect to receive shares of Common Stock or (subject to a limit measured as a
percentage of the total distribution) cash, in order to comply with the REIT distribution requirements.
The failure of a mezzanine loan to qualify as a real estate asset would adversely affect our ability to continue to qualify as a REIT.
In general, in order for a loan to be treated as a qualifying real estate asset producing qualifying income for purposes of the REIT asset and income tests, the
loan must be secured by real property or an interest in real property. We may acquire mezzanine loans that are not directly secured by real property or an interest in
real property but instead are secured by equity interests in a partnership or limited liability company that directly or indirectly owns real property. In Revenue
Procedure 2003-65, the IRS provided a safe harbor pursuant to which a mezzanine loan that is not secured by real estate would, if it meets each of the requirements
contained in the Revenue Procedure, be treated by the IRS as a qualifying real estate asset. Although the Revenue Procedure provides a safe harbor on which
taxpayers may rely, it does not prescribe rules of substantive tax law and in many cases it may not be possible for us to meet all the requirements of the safe harbor.
We cannot provide assurance that any mezzanine loan in which we invest would be treated as a qualifying asset producing qualifying income for REIT
qualification purposes. If any such loan fails either the REIT income or asset tests, we may be disqualified as a REIT.
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We may choose to pay dividends in our own stock, in which case you may be required to pay U.S. federal income taxes in excess of the cash dividends you
receive.
In connection with our continued qualification as a REIT, we are required to distribute annually to our stockholders at least 90% of our REIT taxable income
(which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net
capital gain. In order to satisfy this requirement, we may make distributions that are payable in cash and/or shares of our Common Stock (which could account for
up to 80% of the aggregate amount of such distributions) at the election of each stockholder. Taxable stockholders receiving such distributions will be required to
include the full amount of such distributions as ordinary dividend income to the extent of our current or accumulated earnings and profits, as determined for U.S.
federal income tax purposes. As a result, U.S. stockholders may be required to pay U.S. federal income taxes with respect to such distributions in excess of the
cash portion of the dividend received. Accordingly, U.S. stockholders receiving a distribution of our shares may be required to sell shares received in such
distribution or may be required to sell other stock or assets owned by them, at a time that may be disadvantageous, in order to satisfy any tax imposed on such
distribution. If a U.S. stockholder sells the stock that it receives as part of the distribution in order to pay this tax, the sales proceeds may be less than the amount
included in income with respect to the distribution, depending on the market price of our stock at the time of the sale. Furthermore, with respect to certain non-U.S.
stockholders, we may be required to withhold U.S. tax with respect to such distribution, including in respect of all or a portion of such distribution that is payable
in stock, by withholding or disposing of part of the shares included in such distribution and using the proceeds of such disposition to satisfy the withholding tax
imposed. In addition, if a significant number of our stockholders determine to sell shares of our Common Stock in order to pay taxes owed on dividend income,
such sale may put downward pressure on the market price of our Common Stock.
Various tax aspects of such a taxable cash/stock distribution are uncertain and have not yet been addressed by the IRS. No assurance can be given that the IRS
will not impose requirements in the future with respect to taxable cash/stock distributions, including on a retroactive basis, or assert that the requirements for such
taxable cash/stock distributions have not been met.
The taxation of distributions to you can be complex; however, distributions that we make to you generally will be taxable as ordinary income, which may
reduce the anticipated return from an investment in us.
Distributions that we make to our taxable stockholders out of current and accumulated earnings and profits (and not designated as capital gain dividends or
qualified dividend income) generally will be taxable as ordinary income. However, a portion of our distributions may (1) be designated by us as capital gain
dividends generally taxable as long-term capital gain to the extent that they are attributable to net capital gain recognized by us, (2) be designated by us as qualified
dividend income generally to the extent they are attributable to dividends we receive from our taxable REIT subsidiaries, or (3) constitute a return of capital
generally to the extent that they exceed our accumulated earnings and profits as determined for U.S. federal income tax purposes. A return of capital is not taxable,
but has the effect of reducing the basis of a stockholder’s investment in our Common Stock.
Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends.
Currently, the maximum tax rate applicable to qualified dividend income payable to U.S. stockholders that are individuals, trusts and estates is 20%.
Dividends payable by REITs, however, generally are not eligible for this reduced rate. Although this legislation does not adversely affect the taxation of REITs or
dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and
estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could
adversely affect the value of the shares of REITs, including our Common Stock. Tax rates could be changed in future legislation.
Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code may limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest
rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets or in certain cases to hedge
previously acquired hedges entered into to manage risks associated with property that has been disposed of or liabilities that have been extinguished, if properly
identified under applicable Treasury Regulations, does not constitute “gross income” for purposes of the 75% or 95% gross income tests. To the extent that we
enter into other types of hedging transactions, the income from those transactions will likely be treated as non-qualifying income for purposes of both of the gross
income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a taxable REIT
subsidiary. This could increase the cost of our hedging activities because our taxable REIT subsidiaries would be subject to tax on gains or expose us to greater
risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in a taxable REIT subsidiary generally will not provide any
tax benefit, except for being carried forward against future taxable income of such taxable REIT subsidiary.
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Table of Contents
Complying with REIT requirements may force us to forgo or liquidate otherwise attractive investment opportunities.
To continue to qualify as a REIT, we must ensure that we meet the REIT gross income tests annually and that at the end of each calendar quarter, at least 75%
of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans and certain
kinds of mortgage-related securities. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally
cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one
issuer. In addition, in general, no more than 5% of the value of our assets can consist of the securities of any one issuer (other than government securities and
qualified real estate assets), and no more than 25% (20% for taxable years beginning after December 31, 2017) of the value of our total assets can be represented
by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure
within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax
consequences. As a result, we may be required to liquidate assets from our portfolio or not make otherwise attractive investments in order to maintain our
qualification as a REIT.
The ability of our board of directors to revoke our REIT qualification without stockholder approval may subject us to U.S. federal income tax and reduce
distributions to you.
Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it
determines that it is no longer in our best interest to continue to qualify as a REIT. While we intend to continue to qualify as a REIT, we may terminate our REIT
election if we determine that continuing to qualify as a REIT is no longer in our best interests. If we cease to be a REIT, we would become subject to U.S. federal
income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse
consequences on our total return to our stockholders and on the market price of our Common Stock.
We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce our operating flexibility and reduce the market
price of our Common Stock.
In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of U.S. federal income tax laws applicable to
investments similar to an investment in shares of our Common Stock. Additional changes to the tax laws are likely to continue to occur, and there can be no
assurance that any such changes will not adversely affect the taxation of a stockholder. Any such changes could have an adverse effect on an investment in our
shares or on the market value or the resale potential of our assets. Investors are urged to consult with an independent tax advisor with respect to the impact of
recent legislation on any investment in our shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on
an investment in our shares. Investors also should note that our counsel’s tax opinion is based upon existing law, applicable as of the date of its opinion, all of
which will be subject to change, either prospectively or retroactively.
Although REITs generally receive better tax treatment than entities taxed as regular corporations, it is possible that future legislation would result in a REIT
having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be treated for U.S. federal income tax
purposes as a corporation. As a result, our charter provides our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our
REIT election and cause us to be taxed as a regular corporation, without the vote of our stockholders. Our board of directors has fiduciary duties to us and our
stockholders and could only cause such changes in our tax treatment if it determines in good faith that such changes are in the best interest of our stockholders.
Reform proposals have been recently put forth by members of Congress and the President which, if ultimately proposed as legislation and enacted as law,
would substantially change the U.S. federal taxation of (among other things) individuals and businesses. Their proposals set forth a variety of principles to guide
potential tax reform legislation. As of the date of this annual report, no legislation has been introduced in Congress. If ultimately reduced to legislation enacted by
Congress and signed into law by the President in a form that is consistent with those principles, such reform could change dramatically the U.S. federal taxation
applicable to us and our stockholders. No reform proposal specifically addresses the taxation of REITs, but because any tax reform is likely to significantly reduce
the tax rates applicable to corporations and dividends received by stockholders, the tax benefits applicable to the REIT structure may be diminished in relation to
corporations. Furthermore, proposed tax reform would limit the deductibility of net interest expense and would allow for the immediate deduction of any
investment in tangible property (other than land) and intangible assets. Finally, the tax reform proposals do not include any principles regarding how to transition
from our current system of taxation to a new tax system based on the principles in such proposed reform. Given how dramatic the changes could be, transition rules
are crucial. While it is impossible to predict whether and to what extent any tax reform legislation (or other legislative, regulatory or administrative change to the
U.S. federal tax laws) will be proposed or enacted, any such change in the U.S. federal tax laws could affect materially the value of any investment in our stock.
You are encouraged to consult with your tax advisor regarding possible legislative and regulatory changes and the potential effect of such changes on an
investment in our shares.
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Table of Contents
The share ownership restrictions of the Code for REITs and the 9.8% share ownership limit in our charter may inhibit market activity in our shares of stock
and restrict our business combination opportunities.
In order to continue to qualify as a REIT, five or fewer individuals, as defined in the Code, may not own, actually or constructively, more than 50% in value of
our issued and outstanding shares of stock at any time during the last half of each taxable year, other than the first year for which a REIT election is made.
Attribution rules in the Code determine if any individual or entity actually or constructively owns our shares of stock under this requirement. Additionally, at least
100 persons must beneficially own our shares of stock during at least 335 days of a taxable year for each taxable year, other than the first year for which a REIT
election is made. To help ensure that we meet these tests, among other purposes, our charter restricts the acquisition and ownership of our shares of stock.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT while
we so qualify. Unless exempted by our board of directors, for so long as we continue to qualify as a REIT, our charter prohibits, among other limitations on
ownership and transfer of shares of our stock, any person from beneficially or constructively owning (applying certain attribution rules under the Code) more than
9.8% in value of the aggregate of our outstanding shares of stock and more than 9.8% (in value or in number of shares, whichever is more restrictive) of any class
or series of our shares of stock. Our board of directors may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of
the 9.8% ownership limit would result in the termination of our continued qualification as a REIT. These restrictions on transferability and ownership will not
apply, however, if our board of directors determines that it is no longer in our best interest to continue to qualify as a REIT or that compliance with the restrictions
is no longer required in order for us to continue to qualify as a REIT.
These ownership limits could delay or prevent a transaction or a change in control that might involve a premium price for our Common Stock or otherwise be
in the best interest of the stockholders.
Non-U.S. stockholders will be subject to U.S. federal withholding tax and may be subject to U.S. federal income tax on distributions received from us and upon
the disposition of our shares.
Subject to certain exceptions, distributions received from us will be treated as dividends of ordinary income to the extent of our current or accumulated
earnings and profits. Such dividends ordinarily will be subject to U.S. withholding tax at a 30% rate, or such lower rate as may be specified by an applicable
income tax treaty, unless the distributions are treated as “effectively connected” with the conduct by the non-U.S. stockholder of a U.S. trade or business. Pursuant
to the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"), capital gain distributions attributable to sales or exchanges of “U.S. real property
interests" ("USRPIs"), generally will be taxed to a non-U.S. stockholder (other than a qualified foreign pension plan) as if such gain were effectively connected
with a U.S. trade or business. However, a capital gain dividend will not be treated as effectively connected income if (a) the distribution is received with respect to
a class of stock that is regularly traded on an established securities market located in the U.S. and (b) the non-U.S. stockholder does not own more than 10% of the
class of our stock at any time during the one-year period ending on the date the distribution is received.
Gain recognized by a non-U.S. stockholder upon the sale or exchange of our Common Stock generally will not be subject to U.S. federal income taxation
unless such stock constitutes a USRPI under FIRPTA. Our Common Stock will not constitute a USRPI so long as we are a “domestically-controlled qualified
investment entity.” A domestically-controlled qualified investment entity includes a REIT if at all times during a specified testing period, less than 50% in value of
such REIT’s stock is held directly or indirectly by non-U.S. stockholders. We believe, but there can be no assurance, that we will be a domestically-controlled
qualified investment entity.
Even if we do not qualify as a domestically-controlled qualified investment entity at the time a non-U.S. stockholder sells or exchanges our Common Stock,
gain arising from such a sale or exchange would not be subject to U.S. taxation under FIRPTA as a sale of a USRPI if: (a) our Common Stock is “regularly
traded,” as defined by applicable Treasury regulations, on an established securities market, and (b) such non-U.S. stockholder owned, actually and constructively,
10% or less of our Common Stock at any time during the five-year period ending on the date of the sale.
Potential characterization of distributions or gain on sale may be treated as unrelated business taxable income to tax-exempt investors.
If (a) we are a “pension-held REIT,” (b) a tax-exempt stockholder has incurred (or is deemed to have incurred) debt to purchase or hold our Common Stock, or
(c) a holder of Common Stock is a certain type of tax-exempt stockholder, dividends on, and gains recognized on the sale of, Common Stock by such tax-exempt
stockholder may be subject to U.S. federal income tax as unrelated business taxable income under the Code.
Item 1B. Unresolved Staff Comments.
None.
34
Table of Contents
Item 2. Properties.
We acquire and operate commercial properties. 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 December 31, 2016 :
Portfolio
Acquisition Date
Country
Number of Properties
Square Feet
Average Remaining
Lease Term (1)
McDonald's
Wickes Building Supplies I
Everything Everywhere
Thames Water
Wickes Building Supplies II
PPD Global Labs
Northern Rock
Kulicke & Soffa
Wickes Building Supplies III
Con-way Freight
Wolverine
Western Digital
Encanto
Rheinmetall
GE Aviation
Provident Financial
Crown Crest
Trane
Aviva
DFS Trading I
GSA I
National Oilwell Varco I
Talk Talk
OBI DIY
GSA II
DFS Trading II
GSA III
GSA IV
Indiana Department of Revenue
National Oilwell Varco II (2)
Nissan
GSA V
Lippert Components
Select Energy Services I
Bell Supply Co I
Axon Energy Products
Lhoist
GE Oil & Gas
Select Energy Services II
Bell Supply Co II
Superior Energy Services
Amcor Packaging
GSA VI
Nimble Storage
FedEx -3-Pack
Sandoz, Inc.
Wyndham
Valassis
Oct. 2012
May 2013
Jun. 2013
Jul. 2013
Jul. 2013
Aug. 2013
Sep. 2013
Sep. 2013
Nov. 2013
Nov. 2013
Dec. 2013
Dec. 2013
Dec. 2013
Jan. 2014
Jan. 2014
Feb. 2014
Feb. 2014
Feb. 2014
Mar. 2014
Mar. 2014
Mar. 2014
Mar. 2014
Apr. 2014
Apr. 2014
Apr. 2014
Apr. 2014
Apr. 2014
May 2014
May 2014
May 2014
May 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jul. 2014
Jul. 2014
Jul. 2014
Jul. 2014
UK
UK
UK
UK
UK
US
UK
US
UK
US
US
US
PR
GER
US
UK
UK
US
UK
UK
US
US
UK
GER
US
UK
US
US
US
US
US
US
US
US
US
US
US
US
US
US
US
UK
US
US
US
US
US
US
1
1
1
1
1
1
2
1
1
7
1
1
18
1
1
1
1
1
1
5
1
1
1
1
2
2
2
1
1
1
1
1
1
3
6
3
1
2
4
2
2
7
1
1
3
1
1
1
9,094
29,679
64,832
78,650
28,758
76,820
86,290
88,000
28,465
105,090
468,635
286,330
65,262
320,102
369,000
117,003
805,530
25,000
131,614
240,230
135,373
24,450
48,415
143,633
24,957
39,331
28,364
33,000
98,542
23,475
462,155
26,533
539,137
135,877
79,829
213,634
22,500
69,846
143,417
19,136
42,470
294,580
6,921
164,608
338,862
154,101
31,881
100,597
7.2
7.8
10.5
5.7
10.0
7.9
6.7
6.8
11.9
6.9
6.1
3.9
8.5
7.0
9.0
18.9
22.1
6.9
12.5
13.2
5.6
6.6
8.2
6.9
6.1
13.2
8.3
8.6
6.0
13.2
11.8
6.2
9.7
9.8
12.0
9.2
6.0
6.7
9.9
12.0
7.3
7.9
7.3
4.8
5.5
9.6
8.3
6.3
35
Table of Contents
GSA VII
AT&T Services
PNC - 2-Pack
Fujitisu
Continental Tire
Achmea
BP Oil
Malthurst
HBOS
Thermo Fisher
Black & Decker
Capgemini
Merck & Co.
Dollar Tree - 65-Pack (3)(4)
GSA VIII
Waste Management
Intier Automotive Interiors
HP Enterprise Services
Shaw Aero Devices, Inc.
FedEx II
Dollar General - 39-Pack (5)
FedEx III
Mallinkrodt Pharmaceuticals
Kuka
CHE Trinity
FedEx IV
GE Aviation
DNV GL
Bradford & Bingley
Rexam
FedEx V
C&J Energy (6)
Dollar Tree II (3)
Panasonic
Onguard
Metro Tonic
Axon Energy Products
Tokmanni
Fife Council
Dollar Tree III (3)
GSA IX
KPN BV
RWE AG
Follett School
Quest Diagnostics
Diebold
Weatherford Intl
AM Castle
FedEx VI
Constellium Auto
C&J Energy II (6)
Portfolio
Acquisition Date
Country
Number of Properties
Square Feet
Average Remaining
Lease Term (1)
Jul. 2014
Jul. 2014
Jul. 2014
Jul. 2014
Jul. 2014
Jul. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Nov. 2014
Nov. 2014
Nov. 2014
Nov. 2014
Nov. 2014
Nov. 2014
Dec. 2014
Dec. 2014
Dec. 2014
Dec. 2014
Dec. 2014
Dec. 2014
Mar. 2015
US
US
US
UK
US
NETH
UK
UK
UK
US
US
UK
US
US
US
US
UK
UK
US
US
US
US
US
US
US
US
US
US
UK
GER
US
US
US
US
US
GER
US
FIN
UK
US
US
NETH
GER
US
US
US
US
US
US
US
US
1
1
2
3
1
2
1
2
3
1
1
1
1
58
1
1
1
1
1
1
21
2
1
1
2
2
1
1
1
1
1
1
34
1
1
1
1
1
1
2
1
1
3
1
1
1
1
1
1
1
1
25,603
401,516
210,256
162,888
90,994
190,252
2,650
3,784
36,071
114,700
71,259
90,475
146,366
485,992
23,969
84,119
152,711
99,444
130,581
11,501
199,946
221,260
89,900
200,000
373,593
255,037
102,000
82,000
120,618
175,615
76,035
96,803
282,730
48,497
120,000
636,066
26,400
800,834
37,331
16,442
28,300
133,053
594,415
486,868
223,894
158,330
19,855
127,600
27,771
320,680
125,000
7.9
9.5
12.6
9.9
5.6
7.0
8.8
8.9
8.6
7.7
5.1
6.3
8.7
12.7
7.6
6.0
7.4
9.2
5.7
7.3
11.2
7.6
7.7
7.5
5.9
6.1
6.0
8.2
12.8
8.2
7.5
6.8
12.8
11.5
7.0
8.8
7.8
16.7
7.1
12.7
5.3
10.0
7.9
8.0
7.7
5.0
8.8
7.8
7.7
12.9
6.8
36
Table of Contents
Fedex VII
Fedex VIII
Crown Group I
Crown Group II
Mapes & Sprowl Steel, Ltd.
JIT Steel Services
Beacon Health System, Inc.
Hannibal/Lex JV LLC
FedEx Ground
Office Depot
Finnair
Auchan (7)
Pole Emploi (7) (8)
Veolia Water (7)
Sagemcom (7)
NCR Dundee (7)
FedEx Freight (7)
DB Luxembourg (7)
ING Amsterdam (7)
Worldline (7)
Foster Wheeler (7)
ID Logistics I (7)
ID Logistics II (7)
Harper Collins (7)
DCNS (7)
Total
Portfolio
Acquisition Date
Country
Number of Properties
Square Feet
Average Remaining
Lease Term (1)
Mar. 2015
Apr. 2015
Aug. 2015
Aug. 2015
Sep. 2015
Sep. 2015
Sep. 2015
Sep. 2015
Sep. 2015
Sep. 2015
Sep. 2015
Dec. 2016
Dec. 2016
Dec. 2016
Dec. 2016
Dec. 2016
Dec. 2016
Dec. 2016
Dec. 2016
Dec. 2016
Dec. 2016
Dec. 2016
Dec. 2016
Dec. 2016
Dec. 2016
US
US
US
US
US
US
US
US
US
NETH
FIN
FR
FR
US
FR
UK
US
LUX
NETH
FR
UK
GER
FR
UK
FR
1
1
3
3
1
2
1
1
1
1
4
1
1
1
1
1
1
1
1
1
1
1
2
1
1
310
12,018
25,852
295,974
642,595
60,798
126,983
49,712
109,000
91,029
206,331
656,275
152,235
41,452
70,000
265,309
132,182
68,960
156,098
509,369
111,338
365,832
308,579
964,489
873,119
96,995
22,004,536
7.8
7.8
18.6
18.7
13.0
13.0
9.3
12.8
8.5
12.2
7.7
6.6
6.5
9.0
7.1
9.9
6.7
7.0
8.5
7.0
7.6
7.8
7.9
8.7
7.8
9.8
______________________________________________________
(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 calculated based on square feet as of December 31, 2016 .
(2) The Company has expanded the property in September 2015 by purchasing additional 15,975 square feet with 13.5 years of remaining lease term as of December 31, 2016 .
(3) On July 6, 2015, the tenant's name has changed from Family Dollar to Dollar Tree due to an acquisition by Dollar Tree.
(4) Of the Dollar Tree - 65-Pack properties, purchased in August 2014, 7 properties were sold on October 13, 2016 and are not included in the table above.
(5) Of the Dollar General - 39-Pack properties, purchased in September 2014, 18 properties were sold during the year ended December 31, 2016 and are not included in the table above.
(6) Lease term modified from March 31, 2026 to October 31, 2023 during the third quarter 2016.
(7) New properties acquired as part of the Merger.
(8) The property is 37,437 square feet, or 90.3% occupied.
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Table of Contents
The following table details distribution of our portfolio by country/location as of December 31, 2016 :
Country
Finland
France
Germany
Luxembourg
The Netherlands
United Kingdom
United States
Puerto Rico
Total
Acquisition Date
Nov. 2014 - Sep. 2015
Dec. 2016
Jan. 2014 - Dec. 2016
Dec. 2016
Jul. 2014 - Dec. 2016
Oct. 2012 - Dec. 2016
Aug. 2013 - Dec. 2016
Dec. 2013
Number of
Properties
Square
Feet
Percentage of
Properties by Square
Feet
Average Remaining
Lease Term (1)
5
7
8
1
5
43
223
18
310
1,457,109
1,631,818
2,178,410
156,098
1,039,005
4,079,576
11,397,258
65,262
22,004,536
6.6%
7.4%
9.9%
0.7%
4.7%
18.5%
51.8%
0.3%
100.0%
12.6
7.6
8.0
7.0
9.1
12.1
9.3
8.5
9.8
_______________________________________________________
(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 calculated based on square feet as of December 31, 2016 .
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Table of Contents
The following table details the tenant industry distribution of our portfolio as of December 31, 2016 :
Industry
Number of Properties
Square Feet
Square Feet as a
Percentage of the Total
Portfolio
Annualized Rental Income
(1)
(In thousands)
Annualized Rental Income as a
Percentage of the Total
Portfolio
Aerospace
Auto Manufacturing
Automation
Automotive Parts Manufacturing
Automotive Parts Supplier
Biotechnology
Consulting
Consumer Goods
Contract Research
Defense
Discount Retail
Education
Electronics
Energy
Engineering
Environmental Services
Financial Services
Foot Apparel
Freight
Government Services
Healthcare
Home Maintenance
Hospitality
Logistics
Marketing
Metal Fabrication
Metal Processing
Office Supplies
Packaging Goods
Petroleum Services
Pharmaceuticals
Publishing
Restaurant - Quick Service
Retail Banking
Retail Food Distribution
Specialty Retail
Technology
Telecommunications
Utilities
Waste Management
Total
7
8
1
1
2
1
1
3
1
1
116
1
1
29
1
1
13
2
21
14
4
4
1
3
1
4
2
1
7
3
3
1
19
3
2
7
10
5
4
1
310
1,257,856
1,939,861
200,000
152,711
411,096
114,700
82,000
271,874
76,820
96,995
1,785,944
486,868
48,497
1,042,692
365,832
70,000
2,315,896
588,635
1,233,415
510,345
647,199
230,535
31,881
1,273,068
100,597
296,781
448,280
206,331
294,580
6,434
390,367
873,119
74,356
36,071
957,765
279,561
1,135,265
913,125
673,065
84,119
22,004,536
5.7% $
8.8%
0.9%
0.7%
1.9%
0.5%
0.4%
1.2%
0.4%
0.4%
8.1%
2.2%
0.2%
4.7%
1.7%
0.3%
10.5%
2.7%
5.6%
2.3%
2.9%
1.1%
0.1%
5.8%
0.5%
1.4%
2.0%
0.9%
1.3%
*
1.8%
4.0%
0.3%
0.2%
4.4%
1.3%
5.2%
4.1%
3.1%
0.4%
100.0% $
14,020
6,611
1,092
954
3,307
1,014
576
1,995
908
1,450
15,320
1,935
686
12,863
10,484
570
31,273
2,141
11,845
12,974
13,680
2,168
404
2,942
1,194
2,120
2,862
2,126
1,049
653
9,788
6,333
3,385
1,055
6,179
2,826
17,087
13,620
11,605
358
233,452
6.0%
2.8%
0.5%
0.4%
1.4%
0.4%
0.3%
0.9%
0.4%
0.6%
6.6%
0.8%
0.3%
5.5%
4.5%
0.2%
13.4%
0.9%
5.1%
5.6%
5.9%
0.9%
0.2%
1.3%
0.5%
0.9%
1.2%
0.9%
0.4%
0.3%
4.2%
2.7%
1.4%
0.5%
2.6%
1.2%
7.3%
5.8%
5.0%
0.2%
100.0%
________________________________
(1) Annualized rental income converted from local currency into USD as of December 31, 2016 for the in-place lease in the property on a straight-line basis, which includes tenant concessions
such as free rent, as applicable.
*
Amount is below 0.1%.
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Table of Contents
The following table details the geographic distribution, by U.S. state or country/location, of our portfolio as of December 31, 2016 :
Country
State
Finland
France
Germany
Luxembourg
The Netherlands
United Kingdom
United States and Puerto Rico:
Alabama
Arizona
Arkansas
California
Colorado
Delaware
Florida
Georgia
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Nebraska
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Pennsylvania
South Carolina
South Dakota
Tennessee
Texas
Utah
Virginia
Puerto Rico
Total
________________________________
Number of
Properties
Square Feet
Square Feet as a
Percentage of the Total
Portfolio
Annualized Rental
Income (1)
(In thousands)
Annualized Rental
Income as a Percentage
of the Total Portfolio
5
7
8
1
5
43
9
2
1
3
1
1
7
5
2
4
6
2
6
6
7
2
1
2
15
4
10
4
6
3
5
2
7
3
7
9
5
14
2
12
45
2
1
18
310
1,457,109
1,631,818
2,178,410
156,098
1,039,005
4,079,576
73,554
15,605
8,320
674,832
26,533
9,967
180,086
41,320
16,267
570,737
1,113,636
32,399
178,807
355,420
136,850
49,572
120,000
127,456
2,296,274
149,690
80,968
138,536
57,572
348,964
46,405
221,260
192,277
47,330
520,617
88,770
322,260
414,081
54,152
789,295
1,869,526
19,966
7,954
65,262
22,004,536
6.6% $
7.4%
9.9%
0.7%
4.7%
18.5%
0.3%
0.1%
*
3.1%
0.1%
*
0.8%
0.2%
0.1%
2.6%
5.1%
0.1%
0.8%
1.6%
0.6%
0.2%
0.6%
0.6%
10.4%
0.7%
0.4%
0.6%
0.3%
1.6%
0.2%
1.0%
0.9%
0.2%
2.4%
0.4%
1.5%
1.9%
0.3%
3.6%
8.5%
0.1%
*
0.3%
100.0% $
13,661
10,784
19,005
4,671
15,276
51,107
791
156
89
12,890
1,088
360
2,646
449
201
2,629
4,490
296
1,275
2,753
1,260
1,877
785
1,772
17,904
2,135
800
2,604
564
8,505
556
2,398
1,539
884
4,216
825
3,299
3,274
1,284
7,076
21,595
395
76
3,212
233,452
5.9%
4.6%
8.1%
2.0%
6.5%
21.9%
0.3%
0.1%
*
5.5%
0.5%
0.2%
1.1%
0.2%
0.1%
1.1%
1.9%
0.1%
0.6%
1.2%
0.5%
0.8%
0.4%
0.8%
7.7%
0.9%
0.3%
1.1%
0.2%
3.6%
0.2%
1.0%
0.7%
0.4%
1.8%
0.4%
1.4%
1.4%
0.6%
3.0%
9.3%
0.2%
*
1.4%
100.0%
Amount is below 0.1%.
*
(1) Annualized rental income converted from local currency into USD as of December 31, 2016 for the in-place lease in the property on a straight-line basis, which includes tenant concessions
such as free rent, as applicable.
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Future Minimum Lease Payments
The following table presents future minimum base rent payments, on a cash basis, due to us over the next ten calendar years and thereafter on the properties
we owned as of December 31, 2016 :
(In thousands)
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Thereafter
Total
$
Future Minimum
Base Rent Payments (1)
224,273
229,591
232,458
235,259
233,180
223,612
199,486
156,614
98,451
69,169
268,131
$
2,170,224
________________________________
(1)
Based on the exchange rate as of December 31, 2016 .
Future Lease Expirations
The following is a summary of lease expirations for the next ten calendar years on the properties we owned as of December 31, 2016 :
Year of Expiration
Number of Leases
Expiring
Annualized Rental
Income (1)
(In thousands)
Annualized Rental
Income as a Percentage
of the Total Portfolio
Leased Rentable
Square Feet
Percent of Portfolio
Rentable Square Feet
Expiring
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Total
$
—
—
—
2
2
16
32
45
38
13
—
—
—
3,482
5,003
23,594
27,678
64,638
35,389
18,864
148
$
178,648
—%
—%
—%
1.5%
2.2%
8.5%
12.0%
28.1%
15.4%
8.3%
76.0%
—
—
—
386,015
322,938
1,552,953
2,718,175
5,869,116
3,210,807
1,782,547
15,842,551
—%
—%
—%
1.7%
1.5%
7.0%
12.3%
26.6%
14.5%
8.1%
71.7%
________________________________
(1) Annualized rental income converted from local currency into USD as of December 31, 2016 for the in-place lease in the property on a straight-line basis, which includes tenant concessions
such as free rent, as applicable.
Tenant Concentration
As of December 31, 2016 , we did not have any tenants whose rentable square footage or annualized rental income represented greater than 10% of total
portfolio rentable square footage or annualized rental income, respectively.
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Table of Contents
Significant Portfolio Properties
The rentable square feet or annual straight-line rental income of Government Services Administration ("GSA") (I - IX) properties, represents 5% or more of
our total portfolio's rentable square feet or annual straight-line rental income based on the exchange rate as of December 31, 2016 . The tenant concentration of
these properties is summarized below.
The GSA portfolio is located in nine different states throughout the U.S. with a total of 11 properties. The buildings are freestanding, single-tenant office
buildings, comprised of 333,020 total rentable square feet and is 100% leased to different U.S. government agencies. As of December 31, 2016 , the tenants have
an average of 6.5 years remaining on their leases which expire between April 2022 and July 2028 . The leases have annualized rental income on a straight-line
basis of $11.6 million and contain one five-year on one of its two leases, two five-year and 20 five-year renewal options for GSA II, GSA VI and GSA VII
tenants, respectively. The other GSA tenants have no renewal options.
Property Financings
See Note 6 — Mortgage Notes Payable for property financings as of December 31, 2016 and 2015 to audited consolidated financial statements in this Annual
Report on Form 10-K.
42
Table of Contents
Item 3. Legal Proceedings.
We are not a party to any material pending legal proceedings.
Item 4. Mine Safety Disclosure.
Not applicable.
43
Table of Contents
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
PART II
Our Common Stock is traded on the NYSE under the symbol "GNL." Set forth below is a line graph comparing the cumulative total stockholder return on our
Common Stock, based on the market price of the Common Stock, with the FTSE National Association of Real Estate Investment Trusts Equity Index ("NAREIT"),
Modern Index Strategy Indexes ("MSCI"), and the New York Stock Exchange Index ("NYSE Index") for the period commencing June 2, 2015 , the date on which
we listed our shares on the NYSE and ending December 31, 2016 . The graph assumes an investment of $100 on June 2, 2015 .
For each calendar quarter indicated, the following table reflects high and low sales prices for the Common Stock as reported by NYSE and the amounts paid to
our stockholders in respect of these shares which we refer to as "dividends."
High
Low
Dividends per share
High
Low
Dividends per share
_______________________________
2016:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
$
8.65 $
5.77 $
8.98 $
7.46 $
8.82 $
7.67 $
0.178 $
0.178 $
0.178 $
8.23
6.92
0.178
2015:
Second Quarter
Third Quarter
Fourth Quarter
$
$
$
10.07
8.75
$
$
9.20 $
7.30 $
0.002 (1) $
0.178 $
9.29
7.76
0.178
(1) Cash distributions in the second quarter of 2015 represent dividends paid for June 2, 2015 based on a monthly dividend rate per share of $0.059 .
Holders
As of February 15, 2017 , we had 198.8 million shares outstanding held by 3,081 stockholders.
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Table of Contents
Dividends
We qualified to be taxed as a REIT for U.S. federal income tax purposes, commencing with our taxable year ended December 31, 2013. As a REIT, we are
required to distribute at least 90% of our REIT taxable income to our stockholders annually. The amount of dividends payable to our stockholders is determined by
our board of directors and is dependent on a number of factors, including funds available for distribution, our financial condition, capital expenditure requirements,
as applicable, requirements of Maryland law and annual dividend requirements needed to maintain our status as a REIT for U.S. federal income tax purposes under
the Code. For tax purposes, of the amounts distributed during the year ended December 31, 2016 , 61.3% , or $0.44 per share per annum, and 38.7% , or $0.27 per
share per annum, represented a return of capital and ordinary dividends, respectively. During the year ended December 31, 2015 , 63.1% , or $0.45 per share per
annum, and 36.9% , or $0.26 per share per annum, represented a return of capital and ordinary dividends, respectively. See Note 9 — Common Stock to our
audited consolidated financial statements in this Annual Report on Form 10-K for further discussion on tax characteristics of dividends.
The following table reflects dividends declared and paid in cash and reinvested through the DRIP to common stockholders, as well as dividends related to
participating LTIP Units and OP Units during the years ended December 31, 2016 and 2015 :
(In thousands)
Q1 2016
Q2 2016
Q3 2016
Q4 2016
Total
(In thousands)
Q1 2015
Q2 2015
Q3 2015
Q4 2015
Total
Dividends
Paid in Cash
Other Distributions Paid in
Cash
Total
Dividends Paid
Dividends Declared
$
$
30,020 $
30,019
30,097
30,250
120,386 $
857 (1) $
487
405
259
2,008
$
30,877 $
30,506
30,502
30,509
122,394 $
30,503
30,503
30,502
30,511
122,019
Dividends
Paid in Cash (2)
Other Distributions Paid in
Cash (3)
Dividends Reinvested in
DRIP (2)(4)
Total
Dividends Paid (2)
Dividends
Declared (2)(3)
$
14,268 $
23,516
29,957
29,989
$
97,730 $
— $
—
321
321
642 $
17,007 $
11,571
—
—
31,275 $
35,087
30,278
30,310
31,364
24,289
30,314
30,306
28,578 $
126,950 $
116,273
_______________________________
(1) Includes 2015 accrued LTIP Units distributions of $0.4 million which were paid during Q1 2016.
(2) Dividend amounts for the periods indicated above exclude distributions related to Class B Units. Dividends paid related to Class B Units were $0.3 million for the year ended December 31,
2015 .
(3) Includes distributions paid of 0.6 million for the OP Units. For the year ended December 31, 2015 total accrued and unpaid distributions to the participating LTIP Units were $0.4 million
and therefore were not included in the table above as they remain unpaid as of December 31, 2015 .
(4) On April 7, 2015, in anticipation of the Listing, we suspended our DRIP which was subsequently terminated effective December 19, 2016.
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Table of Contents
Share-Based Compensation
We have a stock option plan (the “Plan”) which authorizes the grant of non-qualified stock options to our independent directors, subject to the absolute
discretion of the board of directors and the applicable limitations of the Plan. The exercise price for all stock options granted under the Plan will be equal to the fair
market value of a share on the last business day preceding the annual meeting of stockholders. A total of 0.5 million shares have been authorized and reserved for
issuance under the Plan.
The following table sets forth information regarding securities authorized for issuance under our stock option plan, restricted share plan and Multi-Year
Outperformance Plan (as described below) as of December 31, 2016 :
Plan Category
Equity Compensation Plans approved by security holders
Equity Compensation Plans not approved by security holders
Total
Restricted Share Plan
Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants, and Right
Weighted-Average Exercise
Price of Outstanding
Options, Warrants and Rights
Number of Securities Remaining
Available For Future Issuance
Under Equity Compensation Plans
(Excluding Securities Reflected in
Column (a)
(a)
(b)
(c)
— $
—
— $
—
—
—
—
29,419,368
29,419,368
We have an employee and director incentive restricted share plan (“RSP”) that provides the ability to grant awards of restricted shares to our directors, officers
and employees, employees of our Advisor and its affiliates, employees of entities that provide services to us, directors of the Advisor or of entities that provide
services to the Company, certain consultants to the Company and the Advisor and its affiliates or to entities that provide services to the Company.
Prior to April 8, 2015 , the RSP provided for the automatic grant of 3,000 restricted shares of Common Stock to each of the independent directors, without any
further action by our board of directors or the stockholders, on the date of initial election to the board of directors and on the date of each annual stockholder’s
meeting. Restricted stock issued to independent directors will vest over a five-year period following the first anniversary of the date of grant in increments of 20%
per annum. On April 8, 2015 , we amended the RSP ("Amended RSP"), among other things, to remove the fixed amount of shares that are automatically granted to
the independent directors and remove the fixed vesting period of five years. Under the Amended RSP, the annual amount granted to the independent directors is
determined by the board of directors.
Effective upon the Listing, our board of directors approved the following changes to independent director compensation: (i) increasing in the annual retainer
payable to all independent directors to $100,000 per year, (ii) increase in the annual retainer for the non-executive chair to $105,000 , (iii) increase in the annual
retainer for independent directors serving on the audit committee, compensation committee or nominating and corporate governance committee to $30,000 . All
annual retainers are payable 50% in the form of cash and 50% in the form of restricted stock units ("RSU") which vest over a three -year period. In addition, the
directors have the option to elect to receive the cash component in the form of RSUs which would vest over a three - year period. Under the Amended RSP,
restricted share awards entitle the recipient to receive shares of Common Stock from the Company under terms that provide for vesting over a specified period of
time or upon attainment of pre-established performance objectives. Such awards would typically be forfeited with respect to the unvested shares upon the
termination of the recipient's employment or other relationship with the Company. In connection with the Listing, our board of directors also approved a one-time
retention grant of 40,000 RSUs to each of the directors valued at $8.52 per unit, which vest over a five -year period. On July 13, 2015, we granted an annual
retainer to each of its independent directors comprising of 50% (or $0.1 million ) in cash and 50% (or 7,352 ) in RSUs which vest over a three -year period
with the vesting period beginning on June 15, 2015 . In addition, we granted $0.1 million in non executive chair compensation in cash and 5,882 in RSUs which
vest over a three -year period with the vesting period beginning on June 15, 2015 . On August 18, 2016, we granted an annual retainer to each of our independent
directors comprising of $0.1 million and 8,642 in RSUs which vest over a three -year period with the vesting period beginning on June 28, 2016. In addition, we
granted $0.1 million in non executive chair compensation in cash and 6,981 in RSUs which vest over a three -year period with the vesting period beginning on
June 28, 2016 .
On January 3, 2017 , following approval by the Board, 32,000 unvested restricted shares of Common Stock owned by Mr. Kahane became vested
simultaneously with his resignation as a member of the board of directors. The board of directors had accelerated the vesting of 24,000 of these unvested restricted
shares upon Mr. Kahane’s voluntary resignation.
Prior April 8, 2015 , the total number of shares of Common Stock granted under the RSP could not exceed 5% of our outstanding shares on a fully diluted
basis at any time, and in any event could not exceed 7.5 million shares (as such number may be adjusted
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Table of Contents
for stock splits, stock dividends, combinations and similar events). The Amended RSP increased the number of shares of our Common Stock, par value $0.01 per
share, available for awards thereunder to 10% of our outstanding shares of Common Stock on a fully diluted basis at any time. The Amended RSP also eliminated
the limit of 7.5 million shares of Common Stock permitted to be issued as RSUs.
Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares
may receive cash dividends prior to the time that the restrictions on the restricted shares have lapsed. Any dividends payable in common shares shall be subject to
the same restrictions as the underlying restricted shares. As of December 31, 2016 , there were 183,298 unvested restricted shares issued pursuant to the RSP.
Multi-Year Outperformance Agreement
In connection with the Listing and modifications to the Advisor agreement, the Company entered into a Multi-Year Outperformance Agreement (the "OPP")
with the OP and the Advisor. Under the OPP, the Advisor was issued 9,041,801 long term incentive plan ("LTIP Units") in the OP with a maximum award value
on the issuance date equal to 5.00% of the Company’s market capitalization (the “OPP Cap”). The LTIP Units are structured as profits interests in the OP.
The Advisor will be eligible to earn a number of LTIP Units with a value equal to a portion of the OPP Cap upon the first, second and third anniversaries of
the Effective Date, which is the listing date, June 2, 2015 , based on the Company’s achievement of certain levels of total return to its stockholders (“Total
Return”), including both share price appreciation and Common Stock dividends, as measured against a peer group of companies, as set forth below, for the three-
year performance period commencing on the Effective Date (the “ Three -Year Period”); each 12-month period during the Three -Year Period (the “ One -Year
Periods”); and the initial 24-month period of the Three -Year Period (the “ Two -Year Period”), as follows:
Absolute Component: 4% of any excess Total Return attained above an absolute hurdle measured from the
beginning of such period:
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:
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:
Performance
Period
Annual
Period
Interim Period
21%
7%
14%
18%
—%
—%
6%
—%
—%
12%
—%
—%
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 is calculated at the end of each One -Year Period, the Two -Year Period and the Three -Year Period. The award earned
for the Three -Year Period is based on the formula in the table above less any awards earned for the Two -Year Period and One -Year Periods, but not less than
zero; the award earned for the Two -Year Period is based on the formula in the table above less any award earned for the first and second One -Year Period, but not
less than zero. Any LTIP Units that are unearned at the end of the Performance Period will be forfeited. On June 2, 2016, no LTIP units were earned by the
Advisor under the terms of the OPP.
We record equity based compensation expense associated with the awards over the requisite service period of five years on a graded vesting basis. Equity-
based compensation expense is adjusted each reporting period for changes in the estimated market-related performance. Compensation expense related to the OPP
was $3.4 million and $2.2 million for the years ended December 31, 2016 and 2015 , respectively. There was no compensation expense related to the OPP for the
year ended December 31, 2014 . Subject to the Advisor’s continued service through each vesting date, one third of any earned LTIP Units will vest on each of the
third, fourth and fifth anniversaries of the Effective Date. Until such time as an LTIP Unit is earned in accordance with the provisions of the OPP, the holder of
such LTIP Unit is entitled to distributions on such LTIP Unit equal to 10% of the distributions (other than distributions of sale proceeds) made per OP Unit. If real
estate assets are sold and net sales proceeds distributed prior to June 2, 2018, the end of the Three -Year Period, the holders of LTIP Units generally would be
entitled to a portion of those net sales proceeds with respect to both the earned and unearned LTIP Units (although the amount per LTIP Unit, which would be
determined in accordance with a formula in the limited partnership agreement of the OP, would be less than the amount per OP Unit until the average capital
account per LTIP Unit equals the average capital account per OP Unit). We paid $1.0 million in distributions related to LTIP Units during the year ended
December 31, 2016 , which is included in non-controlling interest in the consolidated statements of equity. We accrued $0.4 million in distributions related to LTIP
Units during the year ended December 31, 2015 . After an LTIP
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Table of Contents
Unit is earned, the holder of such LTIP Unit is entitled to a catch-up distribution and then the same distributions as the holders of an OP Unit. At the time the
Advisor’s capital account with respect to an LTIP Unit is economically equivalent to the average capital account balance of an OP Unit, the LTIP Unit has been
earned and it has been vested for 30 days , the Advisor, in its sole discretion, will be entitled to convert such LTIP Unit into an OP Unit in accordance with the
provisions of the limited partnership agreement of the OP. The OPP provides for early calculation of LTIP Units earned and for the accelerated vesting of any
earned LTIP Units in the event Advisor is terminated by us or in the event we incur a change in control, in either case prior to the end of the Three -Year Period.
Subject to the Advisor’s continued service through each vesting date, one third of any earned LTIP Units will vest on each of the third, fourth and fifth
anniversaries of the Effective Date. Any earned and vested LTIP Units may be converted into OP Units in accordance with the terms and conditions of the limited
partnership agreement of the OP. The OPP provides for early calculation of LTIP Units earned and for the accelerated vesting of any earned LTIP Units in the
event Advisor is terminated or in the event the Company incurs a change in control, in either case prior to the end of the Three -Year Period.
On February 25, 2016 , the OPP was amended and restated to reflect the merger of two of the companies in the Peer Group.
Other Share-Based Compensation
We may issue Common Stock in lieu of cash to pay fees earned by our 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 years
ended December 31, 2016 and 2015 . There were 1,056 such shares of Common Stock issued in lieu of cash during the year ended December 31, 2014 which
resulted in additional share based compensation of $10,000 .
Unregistered Sales of Equity Securities
Upon occurrence of the Listing, the Special Limited Partner became entitled to begin receiving dividends of net sale proceeds pursuant to its special limited
partner interest in the OP (the "SLP Interest"). Because the average market value of our outstanding Common Stock for the period 180 days to 210 days after the
Listing did not exceed the hurdle rate, the Special Limited Partner was not entitled to any proceeds.
In connection with the Listing, our board of directors approved a one-time retention grant of 40,000 RSUs to each of our directors valued at $8.52 per unit,
which vest over a five-year period. On July 13, 2015, we granted an annual retainer to each of our independent directors equal to $0.1 million in cash and 7,352 in
RSUs which vest over a three-year period with the vesting period beginning on June 15, 2015. In addition, we granted $0.1 million in non executive chair
compensation in cash and 5,882 RSUs which vest over a three-year period with the vesting period beginning on June 15, 2015.
In connection with the Listing, we issued a total of 160,000 RSUs to our directors. On July 7, 2015, we issued 27,938 RSUs to our directors. The RSUs were
issued in reliance upon exemptions from registration provided under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.
On August 18, 2016, we granted an annual retainer to each of our independent directors comprising of $0.1 million and 8,642 in RSUs which vest over a three
-year period with the vesting period beginning on June 28, 2016. In addition, we granted $0.1 million in non executive chair compensation in cash and 6,981 in
RSUs which vest over a three -year period with the vesting period beginning on June 28, 2016 .
Pursuant to the OPP, the OP issued 9,041,801 LTIP Units to the Advisor on June 2, 2015 . The LTIP Units were issued in reliance upon exemptions from
registration provided under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.
Other than as described above, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended (the "Securities
Act"), during the year ended December 31, 2016 .
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Table of Contents
Item 6. Selected Financial Data
The following is selected financial data as of December 31, 2016 , 2015 , 2014 , 2013 , and 2012 , and for the years ended December 31, 2016 , 2015 , 2014 ,
2013 , and 2012:
Balance sheet data (In thousands)
Total real estate investments, at cost
Total assets
Mortgage notes payable, net of deferred financing costs ($5,103,
$7,466, $3,972, $1,087 and $40 for the years ended December
31, 2016, 2015, 2014, 2013 and 2012)
Credit facility
Mezzanine facility
Total liabilities
Total equity
2016
2015
2014
2013
2012
$
2,931,695
$
2,546,304
$
2,891,467
2,540,522
2,340,039 $
2,424,825
196,908 $
213,840
December 31,
749,884
616,614
55,400
1,535,486
1,355,981
524,262
717,286
—
1,320,403
1,220,119
277,214
659,268
—
1,008,156
1,416,669
75,817
—
—
91,120
122,720
Operating data (In thousands, except share and per
share data)
2016
2015
2014
2013
2012
Year Ended December 31,
$
214,174
$
Total revenues
Operating expenses
Operating income (loss)
Total other expenses
Income taxes (expense) benefit
Net income (loss)
Non-controlling interests
Net income (loss) attributable to stockholders
Other data:
Cash flows provided by (used in) operations
Cash flows provided by (used in) investing activities
Cash flows (used in) provided by financing activities
$
$
Per share data:
$
Dividends declared per common share
Net income (loss) per common share - basic and diluted $
Weighted-average number of common shares
outstanding, basic and diluted
153,892
60,282
(8,283)
(4,422)
47,577
(437)
47,140
$
114,394
$
134,147
(240,878)
0.71
0.27
$
$
205,332 $
172,123
33,209
(29,335)
(5,889)
(2,015)
(50)
(2,065) $
102,155 $
(222,279)
121,604
0.71 $
(0.01) $
93,383 $
136,943
(43,560)
(11,465)
1,431
(53,594)
—
(53,594) $
(9,693) $
(1,517,175)
1,582,907
0.71 $
(0.43) $
3,951 $
10,007
(6,056)
(933)
—
(6,989)
—
(6,989) $
(3,647) $
(111,500)
124,209
0.71 $
(1.28) $
170,161,344
174,309,894
126,079,369
5,453,404
49
2,585
2,893
1,188
—
—
3,689
(796)
30
433
(403)
(10)
—
(413)
—
(413)
(418)
(1,357)
2,027
0.71
(6.43)
64,252
Table of Contents
Item 7. 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 financial statements. The following information contains forward-
looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially
from those expressed or implied by the forward-looking statements. Please see "Forward-Looking Statements" elsewhere in this report for a description of these
risks and uncertainties.
Overview
We were incorporated on July 13, 2011 as a Maryland corporation. We acquired our first property and commenced active operations in October 2012 and
elected and qualified to be taxed as a REIT for U.S. federal income tax purposes beginning with our taxable year ended December 31, 2013. We completed our
IPO on June 30, 2014 and on June 2, 2015 we listed our Common Stock on the NYSE under the symbol "GNL".
As more fully discussed in Note 3 — Merger Transaction to our audited consolidated financial statements in this Annual Report on Form 10-K, on August 8,
2016, we entered into the Merger Agreement with Global II. On December 22, 2016, pursuant to the Merger Agreement, Global II merged with and into the
Merger Sub, at which time the separate existence of Global II ceased and we became the parent of the Merger Sub. In addition, pursuant to the Merger Agreement,
Global II OP, merged with our OP, with our OP being the surviving entity.
Our investment strategy is to acquire a diversified portfolio of commercial properties, with an emphasis on sale-leaseback transactions involving single tenant
net-leased commercial properties. As of December 31, 2016 , including the properties acquired in the Merger, we owned 310 net leased commercial properties
consisting of 22.0 million rentable square feet. Based on original purchase price, 49.2% of our properties are located in the U.S. and the Commonwealth of Puerto
Rico, 28.2% are located in continental Europe and 22.5% are located in the United Kingdom. The properties were 100% leased, with a weighted average remaining
lease term of 9.8 years.
We are externally managed by the Advisor and our properties are managed and leased by the Property Manager. The Advisor, Property Manager and Special
Limited Partner are under common control with the Sponsor, as a result of which they are related parties, and have received and will receive compensation, fees
and expense reimbursements for various services provided to us and for the investment and management of our assets. The Advisor has retained the Service
Provider to provide advisory and property management services with respect to investments located in Europe, subject to the Advisor's oversight. These services
include, among others, sourcing and structuring of investments, sourcing and structuring of debt financing, due diligence, property management and leasing.
During the year ended December 31, 2016 , we had sold 34 properties (see Note 4 — Real Estate Investments, Net to our audited consolidated financial
statements in this Annual Report on Form 10-K for further discussion).
Significant Accounting Estimates and Critical Accounting Policies
Set forth below is a summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation
of our financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations
and require the application of significant judgment by our management. As a result, these estimates are subject to a degree of uncertainty. These significant
accounting estimates and critical accounting policies include:
Revenue Recognition
Our revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a
straight-line basis over the initial term of the lease. Since many of our leases provide for rental increases at specified intervals, straight-line basis accounting
requires us to record a receivable, and include in revenues unbilled rent receivables that we will only receive if the tenant makes all rent payments required through
the expiration of the initial term of the lease. For new leases after acquisition, the commencement date is considered to be the date the tenant takes control of the
space. For lease modifications, the commencement date is considered to be the date the lease is executed. We defer the revenue related to lease payments received
from tenants in advance of their due dates. When we acquire a property, the acquisition date is considered to be the commencement date for purposes of this
calculation.
As of December 31, 2016 and 2015 , our cumulative straight-line rents receivable in the consolidated balance sheets were $30.5 million and $23.0 million ,
respectively. For the years ended December 31, 2016 and 2015 , our rental revenue included impacts of unbilled rental revenue of $10.6 million and $14.8 million ,
respectively, to adjust contractual rent to straight-line rent.
We continually review receivables related to rent and unbilled rent receivables and determine collectability by taking into consideration the tenant's payment
history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the
property is located. In the event that the collectability of a receivable is in doubt, we record an increase in our allowance for uncollectible accounts or record a
direct write-off of the receivable in our consolidated statements of operations.
50
Cost recoveries from tenants are included in operating expense reimbursement in the period the related costs are incurred, as applicable.
Investments in Real Estate
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs
and maintenance are expensed as incurred.
We evaluate the inputs, processes and outputs of each asset acquired to determine if the transaction is a business combination or asset acquisition. If an
acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statements of operations. If an
acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired
assets.
In business combinations, we allocate the purchase price of acquired properties to tangible and identifiable intangible assets or liabilities and non-controlling
interests 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 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.
Disposal of real estate investments that represent a strategic shift in operations that will have a major effect on our operations and financial results are required
to be presented as discontinued operations in the consolidated statements of operations. No properties were presented as discontinued operations as of
December 31, 2016 and 2015 . Properties that are intended to be sold are designated as “held for sale” on the consolidated balance sheets at the lesser of carrying
amount or fair value less estimated selling costs when they meet specific criteria to be presented as held for sale. Properties are no longer depreciated when they are
classified as held for sale. As of December 31, 2016 and 2015 , we did not have any properties designated as held for sale (see Note 4 — Real Estate Investments,
Net to our audited consolidated financial statements in this Annual Report on Form 10-K for further details).
We evaluate acquired leases and new leases on acquired properties based on capital lease criteria. A lease is classified by a tenant as a capital lease if the
significant risks and rewards of ownership are considered to reside with the tenant. This situation is generally considered to be met if, among other things, the non-
cancelable lease term is more than 75% of the useful life of the asset or if the present value of the minimum lease payments equals 90% or more of the leased
property’s fair value at lease inception.
Depreciation and Amortization
Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five
years for fixtures and improvements and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
Capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. Capitalized below-
market lease values are amortized as an increase to rental income over the remaining terms of the respective leases and expected below-market renewal option
periods.
Capitalized above-market ground lease values are amortized as a reduction of property operating expense over the remaining terms of the respective leases.
Capitalized below-market ground lease values are amortized as an increase to property operating expense over the remaining terms of the respective leases and
expected below-market renewal option periods.
The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is amortized to expense over the remaining periods of
the respective leases.
Assumed mortgage premiums or discounts are amortized as an increase or reduction to interest expense over the remaining terms of the respective mortgages.
Impairment of Long Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, we review 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.
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Purchase Price Allocation
We allocate the purchase price of acquired properties to tangible and identifiable intangible assets acquired based on their respective fair values. Tangible
assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. We utilize 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 our analysis of comparable properties in our 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, we include 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 . We also
estimate costs to execute similar leases including leasing commissions, legal and other related expenses.
Above-market and below-market lease values for acquired properties are initially recorded based on the present value (using a discount rate which reflects the
risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s
estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases
and the remaining initial term plus the term of any below-market fixed rate renewal options for below-market leases. The capitalized above-market lease values are
amortized as a reduction of base rental revenue over the remaining terms of the respective leases, and the capitalized below-market lease values are amortized as an
increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases. If a tenant
with a below market rent renewal does not renew, any remaining unamortized amount will be taken into income at that time.
The aggregate value of intangible assets related to customer relationship, as applicable, is measured based on our evaluation of the specific characteristics of
each tenant’s lease and our overall relationship with the tenant. Characteristics considered by us in determining these values include the nature and extent of its
existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease
renewals, among other factors.
The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event
does the amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of
the in-place lease value and customer relationship intangibles is charged to expense.
In making estimates of fair values for purposes of allocating purchase price, we utilize 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. We also consider information obtained about each
property as a result of our pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
As more fully discussed in Note 3 — Merger Transaction to the consolidated financial statements, the Merger was accounted for under the acquisition method
for business combinations with the Company as the accounting acquirer.
Goodwill
We evaluate goodwill for possible 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. We 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 December 31, 2016 and no further analysis is required.
Derivative Instruments
We 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 our foreign operations expose us to fluctuations of foreign interest rates and exchange
rates. These fluctuations may impact the value of our cash receipts and payments in our functional currency, the USD. We enter into derivative financial
instruments to protect the value or fix the amount of certain obligations in terms of our functional currency.
52
We record 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 we have 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 is attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into
derivative contracts that are intended to economically hedge certain risk, even though hedge accounting does not apply or we elect 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 we elect not to apply hedge accounting treatment, any changes in the fair value of these derivative instruments is recognized immediately in gains
(losses) on derivative instruments in the consolidated statements of operations. If the derivative is designated and qualifies for hedge accounting treatment the
change in the estimated fair value of the derivative is recorded in other comprehensive income (loss) in the consolidated statements of comprehensive income
(loss) to the extent that it is effective. Any ineffective portion of a derivative's change in fair value will be immediately recognized in earnings.
Multi-Year Outperformance Agreement
Concurrent with the Listing and modifications to Advisor agreement, we entered into the OPP with the OP and the Advisor. We record equity based
compensation expense associated with the awards over the requisite service period of five years on a graded basis. The cumulative equity-based compensation
expense is adjusted each reporting period for changes in the estimated market-related performance.
Recently Issued Accounting Pronouncements
See Note 2 — Summary of Significant Accounting Policies for Recently Issued Accounting Pronouncements to audited consolidated financial statements in
this Annual Report on Form 10-K for further discussion.
Results of Operations
Comparison of the Year Ended December 31, 2016 to the Year Ended December 31, 2015
During 2015 , we acquired 22 properties, of which 18 were acquired during the third quarter of 2015 , bringing our total portfolio to 329 properties as of
December 31, 2015 . We experienced the results of 329 properties through predominantly the end of the third quarter of 2016, at which time, we had disposed of
only three U.S. properties. During the fourth quarter of 2016 , we disposed of 31 properties, inclusive of one property in the Netherlands, and through the Merger
of Global II, we acquired 15 properties as of the Merger Date, bringing our total portfolio to 310 properties. As a result thereof, the results of operations for the
year ended December 31, 2016 reflect significant changes in most categories when comparing to the year ended December 31, 2015 .
Rental Income
Rental income was $204.0 million and $194.6 million for the years ended December 31, 2016 and 2015 , respectively. Our rental income increased compared
to 2015 , as the result of a full year of rental income for the 22 properties on 295 properties acquired during 2015 and additional rental income for the last 10 days
of 2016 for the 15 properties acquired from the Merger. This was partially offset by the impact from the sale of 34 properties during the last two quarters of 2016
for an aggregate sales price of $110.4 million and currency declines.
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Table of Contents
Operating Expense Reimbursements
Operating expense reimbursements were $10.1 million and $10.7 million for the years ended December 31, 2016 and 2015 , 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 decrease over 2015 is largely driven by our dispositions of 34 properties in the second half of 2016 and currency declines, partially offset by additional
operating expense reimbursements related to a full year of operating expense reimbursements for the 22 properties acquired during 2015 and additional property
operating expense reimbursements for the last ten days of 2016 related to the 15 properties acquired from the Merger.
Property Operating Expense
Property operating expenses were $19.0 million and $18.2 million for the years ended December 31, 2016 and 2015 , respectively. These costs primarily relate
to insurance costs and real estate taxes on our properties, which are generally reimbursable by the tenants. The main exceptions are GSA properties for which
certain expenses are not reimbursable by tenants. The increase is primarily driven by a full year of operating expenses recognized on 22 properties acquired during
2015 and additional property operating expenses incurred for the ten days of 2016 for the 15 properties acquired from the Merger, partially offset by the impact of
our disposition of 34 properties during the second half of 2016 , and currency declines.
Operating Fees to Related Parties
Operating fees to related parties were $19.8 million and $15.2 million for the years ended December 31, 2016 and 2015 , respectively. Operating fees to
related parties represent compensation paid to the Advisor for asset management services as well as property management fees paid to the Service Provider for our
European investments. Prior to April 1, 2015 , we compensated the Advisor by issuing restricted performance based subordinated participation interests in the OP
in the form of Class B Units for asset management services. These Class B Units converted to OP Units as of the Listing. During the year ended December 31,
2015 , the board of directors approved the issuance of 1,020,580 Class B Units to the Advisor assuming a price of $9.00 per unit, all of which converted to OP
Units upon Listing. There was no charge reflected in the financial statements for the issuance of Class B Units, until the Listing Date, at which time they were no
longer subject to forfeiture. There were no Class B Units issued during the year ended December 31, 2016 . With effect following the Listing Date, our Advisory
Agreement requires us to pay Base Management Fee of $18.0 million per annum and variable fee or the Incentive Compensation, both payable in cash (see Note 11
— Related Party Transactions for details). Our operating fees have increased in 2016 due to incurring a full year on Base Management Fee of $18.0 million , $0.2
million of Incentive Compensation after new equity issuance during the period following the Listing Date due to Merger compared to 2015 .
Our Service Provider and Property Manager are entitled to fees for the management of our properties. Property management fees are calculated as a
percentage of gross revenues. During the years ended December 31, 2016 and 2015 , property management fees were $3.8 million and $4.0 million , respectively.
The Property Manager elected to waive $2.3 million and $2.5 million of the property management fees for the years ended December 31, 2016 and 2015 ,
respectively.
Acquisition and Transaction Related Expenses
We recognized $9.8 million of acquisition and transaction expenses during the year ended December 31, 2016 , which consisted of third party financial
advisor fees, bridge facility commitment letter fees, auditor consent fees, legal fees and expenses as well as the cost of appraising the Global II properties that were
acquired in the Merger. Acquisition and transaction related expenses for the year ended December 31, 2015 of $6.1 million primarily related to the purchase of 22
properties with an aggregate purchase price of $255.0 million .
Listing Fees
We incurred a listing fee in 2015 in connection with our Listing of approximately $18.7 million . The majority of these fees were paid to related parties, see
Note 11 — Related Party Transactions for details of the breakdown.
Vesting of Class B Units
There was no additional expense realized during the year ended December 31, 2016 , relating to the vesting of Class B Units previously issued to the Advisor
for prior asset management services. Vesting of Class B Units expense was $14.5 million for the year ended December 31, 2015 , relating to the vesting of Class B
Units previously issued to the Advisor for prior asset management services. The performance condition related to these Class B Units was satisfied upon
completion of the Listing and on June 2, 2015 , the Class B Units were converted to OP Units on a one-to-one basis.
General and Administrative Expenses
General and administrative expenses were $7.1 million and $7.2 million for the years ended December 31, 2016 and 2015 , respectively, primarily consists of
board member compensation, directors and officers' liability insurance, and professional fees including audit and taxation services.
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Equity Based Compensation
During the year ended December 31, 2016 and 2015 , we recognized $3.4 million and $2.2 million , respectively, of expense related to equity-based
compensation primarily related to the amortization of the OPP and restricted shares granted to our independent directors of $0.4 million and $0.2 million for the
year ended December 31, 2016 and 2015 , respectively.
Depreciation and Amortization Expense
Depreciation and amortization expense was $94.5 million and $90.1 million for the years ended December 31, 2016 and 2015 , respectively. The increase in
2016 is due to our aforementioned full year of depreciation and amortization expense for our 22 property acquisitions during 2015, coupled with our depreciation
and amortization expense for the last ten days of 2016 on the 15 properties acquired through the Merger. The increases were partially offset by the lack of
depreciation and amortization expense in 2016 for the 34 dispositions during the second half of 2016 and currency declines.
Interest Expense
Interest expense was $39.1 million and $34.9 million for the years ended December 31, 2016 and 2015 , respectively. The increase was primarily related to an
increase in average borrowings throughout 2016 to fund our 2015 property acquisitions. Additionally, on the Merger Date, we incurred ten days of interest expense
associated with our assumption of $107.0 million Mezzanine Facility obligations, which were subsequently reduced by $52.1 million of repayments and $276.3
million of mortgages, which were subsequently reduced by $12.6 million of repayments in connection with our payoff of the DB Luxembourg secondary
mortgage. These increases were partially offset by currency declines.
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.
Gains on Dispositions of Real Estate Investments
The gains of $13.3 million on disposition of real estate investments is related to the sale of 34 assets during the year ended December 31, 2016 . There were no
gains (losses) on dispositions of assets during the year ended December 31, 2015 .
Foreign Currency and Interest Rate Impact on Operations
The gains of $7.4 million and $3.9 million on derivative instruments for the years ended December 31, 2016 and 2015 , respectively, reflect the positive
marked-to-market impact from foreign currency and interest rate derivative instruments used to hedge the investment portfolio from adverse currency and interest
rate movements, and was mainly driven by volatility in foreign currencies, particularly GBP and Euro.
The gains of $10.1 million and $5.1 million on undesignated foreign currency advances and other hedge ineffectiveness for the years ended December 31,
2016 and 2015 , respectively, primarily relate 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.
We had no unrealized gains or (losses) on non-functional foreign currency advances not designated as net investment hedges for year ended December 31,
2016 . The unrealized losses on non-functional foreign currency advances that were not designated as net investment hedges for the year ended December 31, 2015
were $3.6 million . Effective May 17, 2015 , additional foreign currency advances were designated as net investment hedges.
Income Tax Expense
We recognize income tax (expense) benefit for state taxes and local income taxes 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 taxes across jurisdictions. Our current income
tax expense fluctuates from period to period based primarily on the timing of those taxes. The income tax expense was $4.4 million and $5.9 million for the years
ended December 31, 2016 and 2015 , respectively.
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Comparison of the Year Ended December 31, 2015 to the Year Ended December 31, 2014
We purchased 22 properties in 2015 compared to our portfolio of 307 properties as of December 31, 2014 . The results of operations for the year ended
December 31, 2015 therefore reflect significant increases in most categories as portfolio was mostly stabilized in last quarter 2014 and 2015 is showing full year of
operations for those assets as well as incremental growth from the addition of 22 properties, 18 of which were acquired in third quarter of 2015 .
Rental Income
Rental income was $194.6 million and $88.2 million for the years ended December 31, 2015 and 2014 , respectively. The significant increase in rental income
was driven by our acquisition of 22 properties since December 31, 2014 for an aggregate purchase price of $255.0 million , as of the respective acquisition dates.
In addition, we had a full year of rental income on 270 properties acquired during 2014 .
Operating Expense Reimbursements
Operating expense reimbursements were $10.7 million and $5.2 million for the years ended December 31, 2015 and 2014 , 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 over 2015 is largely driven by acquisitions made in latter part of 2014 and during 2015 .
Property Operating Expense
Property operating expenses were $18.2 million and $7.9 million for the years ended December 31, 2015 and 2014 , respectively. These costs primarily
relate to insurance costs and real estate taxes on our properties, which are generally reimbursable by the tenants. The increase is primarily driven by our acquisition
of 22 properties during the year ended December 31, 2015 , compared to our portfolio of 307 properties as of December 31, 2014 , most of which are triple net
leases. The main exceptions are GSA properties for which certain expenses are not reimbursable by tenants.
Operating Fees to Related Parties
Operating fees to related parties were $15.2 million and $0.8 million for the years ended December 31, 2015 and 2014 , respectively. Operating fees to related
parties represent compensation paid to the Advisor for asset management services as well as property management fees paid to the Service Provider for our
European investments. Prior to April 1, 2015 , we compensated the Advisor by issuing restricted performance based subordinated participation interests in the OP
in the form of Class B Units for asset management services. These Class B Units converted to OP Units as of the Listing. During the years ended December 31,
2015 and 2014 , the board of directors approved the issuance of 1,020,580 and 682,351 , respectively, Class B Units to the Advisor assuming a price of $9.00 per
unit, all of which converted to OP Units upon Listing. There was no charge reflected in the financial statements for the issuance of Class B Units, until the Listing
Date, at which time they were no longer subject to forfeiture. Our operating fees to related parties have increased in 2015 due to paying such fees in cash effective
April 1, 2015 . In addition, effective the Listing Date, our Advisory Agreement requires us to pay Base Management Fee of $18.0 million per annum and variable
fee or the Incentive Compensation, subject to certain conditions, both payable in cash (see Note 11 — Related Party Transactions for details).
Our Service Provider and Property Manager are entitled to fees for the management of our properties. Property management fees are calculated as a
percentage of gross revenues. During the years ended December 31, 2015 and 2014 , property management fees were $4.0 million and $1.3 million ,
respectively. The Property Manager elected to waive $2.5 million and $0.7 million of the property management fees for the years ended December 31, 2015
and 2014 , respectively.
Acquisition and Transaction Related Expenses
Acquisition and transaction related expenses for the year ended December 31, 2015 of $6.1 million primarily related to the purchase of 22 properties with an
aggregate purchase price of $255.0 million . Acquisition and transaction related expenses for the year ended December 31, 2014 of $83.5 million were incurred
related to the 270 properties acquired during that period with an aggregate purchase price of $2.2 billion .
Listing Fees
During the year ended December 31, 2015 , we paid approximately $18.7 million in listing related fees in association with the Listing. The majority of these
fees were paid to related parties, see Note 11 — Related Party Transactions for details of the breakdown.
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Vesting of Class B Units
Vesting of Class B Units expense was $14.5 million for the year ended December 31, 2015 , relating to the vesting of Class B Units previously issued to the
Advisor for prior asset management services. The performance condition related to these Class B Units was satisfied upon completion of the Listing and on June 2,
2015 , the Class B Units were converted to OP Units on a one-to-one basis. We did not incur any expense relating to the vesting of Class B Units for the year ended
December 31, 2014 .
Change in Fair Value of Listing Note
The Listing Note fair value was zero as of December 31, 2015 . The Listing Note was marked-to-market quarterly, with changes in the value recorded in the
consolidated statements of operations. The Listing Note measurement period ended on January 23, 2016 and no amounts were payable pursuant to its terms.
Accordingly, the Listing Note will have no further effect on our operations.
General and Administrative Expenses
General and administrative expenses were $7.2 million for the year ended December 31, 2015 , primarily consist of board member compensation, directors
and officers' liability insurance, and professional fees including audit and taxation services. General and administrative expenses for the year ended December 31,
2014 were $4.3 million .
Equity Based Compensation
During the year ended December 31, 2015 , we recognized approximately $2.2 million of expense related to equity-based compensation primarily related to
the amortization of the OPP and $0.2 million related to amortization of restricted shares granted to our independent directors.
Depreciation and Amortization Expense
Depreciation and amortization expense was $90.1 million and $40.4 million for the years ended December 31, 2015 and 2014 , respectively. The majority of
the portfolio was acquired in 2014 . The purchase price of acquired properties is allocated to tangible and identifiable intangible assets and depreciated or
amortized over the estimated useful lives. The increase in 2015 is due to our acquisition of 22 properties, as well as the prior acquisitions incurring a full year of
depreciation and amortization expense in 2015.
Interest Expense
Interest expense was $34.9 million and $14.9 million for the years ended December 31, 2015 and 2014 , respectively. The increase was primarily related to an
increase in average borrowings and additional draws under our Credit Facility to fund our 2015 property acquisitions. In addition, during 2015, we encumbered an
additional 36 properties via mortgages.
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.
Foreign Currency and Interest Rate Impact on Operations
There were minimal realized gains or (losses) on day-to-day foreign currency fluctuations for the year ended December 31, 2015 , reflecting the limited effect
of day-to-day movements in foreign currency exchange rates. A loss on foreign currency of $0.2 million was realized for the year ended December 31, 2014 .
The gains on derivative instruments of $3.9 million and $1.9 million for the years ended December 31, 2015 and 2014 , respectively, reflect the positive
marked-to-market impact from foreign currency and interest rate hedge instruments used to protect the investment portfolio from adverse currency and interest rate
movements, and was mainly driven by volatility in foreign currencies, particularly the Euro.
The gains on hedges and derivatives deemed ineffective of $5.1 million and $1.4 million for the years ended December 31, 2015 and 2014 , respectively, relate
to the marked-to-market adjustments of slightly over-hedged portion of our European investments.
The unrealized losses on non-functional foreign currency advances that were not designated as net investment hedges for the year ended December 31, 2015
were $3.6 million . There were no corresponding gains or (losses) for the year ended December 31, 2014 . Effective May 17, 2015 , additional foreign currency
advances were designated as net investment hedges.
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Income Tax (Expense) Benefit
We recognize income tax (expense) benefit for state taxes and local income taxes incurred, if any, in 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 taxes across jurisdictions. Our current income tax
(expense) benefit fluctuates from period to period based primarily on the timing of those taxes. The income tax (expense) benefit was $(5.9) million and $1.4
million for the years ended years ended December 31, 2015 and 2014 , respectively.
Cash Flows for the Year Ended December 31, 2016
During the year ended December 31, 2016 , net cash provided by operating activities was $114.4 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 paid for asset and property management and the amount of
interest payments on outstanding borrowings. Cash flows provided by operating activities during the year ended December 31, 2016 reflect a net income of $47.6
million adjusted for non-cash items of $94.0 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 $2.7 million .
Net cash provided by investing activities during the year ended December 31, 2016 of $134.1 million primarily related to proceeds from sale of real estate
investments of $107.8 million on dispositions of 34 properties, cash acquired in Merger transaction of $19.0 million and restricted cash acquired in Merger
transaction of $7.6 million .
Net cash used in financing activities of $240.9 million during the year ended December 31, 2016 related to borrowings on the Credit Facility of $62.7 million
and net advances from related parties of $2.2 million , offset by repayments on Credit Facility of $113.9 million , Mezzanine Facility of $51.8 million and
mortgage notes payable of $13.4 million . Other payments included dividends to stockholders of $120.4 million and distributions to non-controlling interest holders
of $2.0 million .
Cash Flows for the Year Ended December 31, 2015
During the year ended December 31, 2015, net cash provided by operating activities was $102.2 million. The level of cash flows provided by operating
activities is driven by the volume of acquisition activity, related rental income received and the amount of interest payments on outstanding borrowings. Cash
flows provided in operating activities during the year ended December 31, 2015 also reflect $6.1 million of acquisition and transaction related costs.
Net cash used in investing activities during the year ended December 31, 2015 of $222.3 million primarily related to our acquisition of 22 properties with an
aggregate base purchase price of $255.0 million, which were partially funded with borrowings under our Credit Facility and mortgage notes payable.
Net cash provided by financing activities of $121.6 million during the year ended December 31, 2015 related to proceeds, net of receivables, from the issuance
of Common Stock of $0.4 million, borrowings under Credit Facility of $476.2 million, proceeds from mortgage notes payable of $245.5 million and net advances
from related parties of $0.4 million, partially offset by Common Stock repurchases of $127.3 million and repayments on Credit Facility of $373.2 million. Other
payments included dividends to stockholders of $97.7 million and distributions to non-controlling interest holders of $0.6 million.
Cash Flows for the Year Ended December 31, 2014
During the year ended December 31, 2014, net cash used in operating activities was $9.7 million. The level of cash flows used in or provided by operating
activities is affected by the volume of acquisition activity, the timing of interest payments and the amount of borrowings outstanding during the period, as well as
the receipt of scheduled rent payments. Cash used in operating activities during the year ended December 31, 2014 reflects a net loss, after adjustments for non-
cash items, of $13.1 million (net loss of $53.6 million adjusted for non-cash items including depreciation and amortization of tangible and intangible real estate
assets, amortization of deferred financing costs, net realized and unrealized mark-to-market transactions of $3.3 million and share based compensation of $0.1
million). Operating cash flow during the year ended December 31, 2014 includes $83.5 million of acquisition and transaction related costs reflected in our net loss
and an increase in prepaid expenses and other assets of $20.6 million primarily related to prepaid professional fees due for strategic advisory services from our
Former Dealer Manager and receivables due from the Advisor related to absorbed costs. These cash outflows were partially offset by an increase in deferred rent
of $10.4 million and increased accounts payable and accrued expenses of $15.7 million primarily related to accrued interest payable and local taxes.
Net cash used in investing activities during the year ended December 31, 2014 of $1.5 billion primarily related to our acquisition of 270 properties which were
partially funded with borrowings under our Credit Facility. Net cash used in investing activities also includes a deposit of $0.8 million on a potential future
acquisition.
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Net cash provided by financing activities of $1.6 billion during the year ended December 31, 2014 related to proceeds, net of receivables, from the issuance of
Common Stock of $1.6 billion and net borrowings under our Credit Facility of $240.0 million, partly offset by payments related to offering costs of $168.3 million,
payments of deferred financing costs of $16.9 million, dividends to stockholders of $35.4 million and restricted cash increases of $5.4 million.
Liquidity and Capital Resources
As of December 31, 2016 , we had cash and cash equivalents of $69.8 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 our stockholders. Management expects that operating
income from our properties should cover operating expenses and the payment of our monthly dividend.
During the year ended December 31, 2016 , cash used to pay our dividends was generated mainly from funds received from cash flows provided by operations
and cash on hand. In order to improve our operating cash flows and our ability to pay dividends from operating cash flows, the Advisor may waive certain fees
including asset management and property management fees. Until April 1, 2015, the Advisor and the Service Provider were issued Class B Units in lieu of asset
management fees. Class B Units earned prior to April 2015 were exchanged for OP Units. During the years ended December 31, 2016 and 2015 , we incurred
approximately $3.8 million and $4.0 million , respectively, in property management fees payable to the Property Manager. The Advisor may elect to waive a
portion of property management fees, and will determine if a portion or all of such fees will be waived in subsequent periods on a quarter-to-quarter basis. During
the years ended December 31, 2016 and 2015 , the Property Manager elected to waive approximately $2.3 million and $2.5 million , respectively, of property
management fees. The fees that are waived are not deferrals and accordingly, will not be paid by us. Because the Advisor may waive certain fees that we may owe,
cash flow from operations that would have been paid to the Advisor will be available to pay dividends to our stockholders.
As we continue to build our portfolio of investments, we expect that we will use funds received from operating activities to pay a greater proportion of our
dividends. As the cash flows from operations become more significant the Advisor may discontinue its practice of forgiving fees and providing contributions and
may charge the full fee owed to it in accordance with our agreements with the Advisor.
Generally, we fund our acquisitions through a combination of cash and cash equivalents with mortgage or other debt, but we also may acquire assets free and
clear of permanent mortgage or other indebtedness. See Note 6 — Mortgage Notes Payable to our audited consolidated financial statements in this Annual Report
on Form 10-K for further discussion. Other potential future sources of capital include proceeds from secured or unsecured financings from banks or other lenders,
proceeds from future offerings, proceeds from the sale of properties and undistributed cash from operations, if any.
As of December 31, 2016 , we have a revolving Credit Facility and Mezzanine Facility that currently permits us to borrow up to $740.0 million and €128.0
million , respectively. The initial maturity date of the Credit Facility was July 25, 2016. On July 25, 2016 , we extended the maturity date of the Credit Facility to
July 25, 2017 , for an extension fee of $1.5 million . There is an additional one -year extension option remaining, subject to certain conditions. The maturity date of
the Mezzanine Facility is August 13, 2017 . See Note 5 — Credit Borrowings to our audited consolidated financial statements in this Annual Report on Form 10-K
for further discussion of the terms and conditions of the facilities. As of December 31, 2016 , the unused borrowing capacity, based on the value of the borrowing
base properties under the Credit Facility as of December 31, 2016 was $113.0 million . The Company has no unused borrowing capacity under the Mezzanine
Facility as of December 31, 2016 .
As of December 31, 2016 , we had gross mortgage notes payable net of mortgage discount of $752.5 million , outstanding advances under our Credit Facility
of $616.6 million and Mezzanine Facility of $55.4 million . All of these borrowing bear interest at a weighted average interest rate per annum equal to 2.8% . Our
debt leverage ratio was 45.9% (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
December 31, 2016 . See Note 7 — Fair Value of Financial Instruments to our audited consolidated financial statements in this Annual Report on Form 10-K for
fair value of such debt as of December 31, 2016 .
The Mezzanine Facility will either need to be extended, refinanced or otherwise repaid by August 2017 using the proceeds from property sales or other
potential source of capital. After considering the property and other collateral, the Mezzanine Facility is currently at 57.1% loan to fair value at December 31, 2016
. Accordingly, if refinancing is necessary, management believes that it is probable that such loans can be commercially refinanced.
Management believes it has the ability to service its obligations as they come due.
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Implementation of “At-the-Market” Program
On December 12, 2016, we entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with UBS Securities LLC, Robert W. Baird
& Co. Incorporated, Capital One Securities, Inc., Mizuho Securities USA Inc., and FBR Capital Markets & Co. (each, an “Agent” and collectively, the “Agents”),
pursuant to which we may, from time to time, offer, issue and sell to the public, through the Agents, shares of our common stock, par value $0.01 per share, having
an aggregate offering price of up to $175.0 million .
Subject to the terms and conditions of the Equity Distribution Agreement, the Agents will use their commercially reasonable efforts to sell, on our behalf,
shares of common stock offered by us under and in accordance with the Equity Distribution Agreement. The sales, if any, of the Shares, made under the Equity
Distribution Agreement will be made by means of ordinary brokers’ transactions or otherwise at market prices prevailing at the time of sale, at prices related to
prevailing market prices or at negotiated prices. Actual sales will depend on a variety of factors to be determined by us from time to time.
We intend to use any net proceeds from the offering for general corporate purposes, including funding investment activity, repaying outstanding indebtedness
(including borrowings under our Credit Facility), and for working capital. The Equity Distribution Agreement provides that the applicable Agent will be entitled to
compensation for its services of up to 1.0% of the gross sales price of all Shares sold through it as Agent under the Equity Distribution Agreement. We have no
obligation to sell any of the Shares under the Equity Distribution Agreement, and may at any time suspend solicitation and offers under the Equity Distribution
Agreement.
The Shares will be issued pursuant to our shelf registration statement on Form S-3 (Registration No. 333-214579). We filed a prospectus supplement (the
“Prospectus Supplement”), dated December 12, 2016, with the Securities and Exchange Commission in connection with the offer and sale of the Shares. As of
February 28, 2017 , we have not sold any shares pursuant to the Equity Distribution Agreement.
Loan Obligations
Our loan obligations generally require us to pay principal and interest on a monthly or quarterly basis with all unpaid principal and interest due at maturity.
Our loan agreements stipulate compliance with specific reporting covenants. As of December 31, 2016 , we were in compliance with the debt covenants under our
loan agreements.
The Advisor may, with approval from our independent board of directors, seek to borrow short-term capital that, combined with secured mortgage financing,
exceeds our targeted leverage ratio. Such short-term borrowings may be obtained from third-parties on a case-by-case basis as acquisition opportunities present
themselves.
Non-GAAP Financial Measures
This section includes non-GAAP financial measures, including Funds from Operations, Core Funds from Operations and Adjusted Funds from Operations. A
description of these non-GAAP measures and reconciliations to the most directly comparable GAAP measure, which is net income, is provided below.
Funds from Operations, Core Funds from Operations and Adjusted Funds from Operations
Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts
("NAREIT"), an industry trade group, has promulgated a measure known as funds from operations ("FFO"), which we believe to be an appropriate supplemental
measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is
not equivalent to net income or loss as determined under GAAP.
We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of
NAREIT, as revised in February 2004 (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding
gains or losses from sales of property but including asset impairment 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.
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
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and amortization, among other things, provides a more complete understanding of our performance to investors and to management, and when compared year over
year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs,
which may not be immediately apparent from net income. However, FFO, core funds from operations ("Core FFO") and adjusted funds from operations (“AFFO”),
as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in
evaluating our operating performance. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more
relevant measure of operational performance and considered more prominently than the non-GAAP FFO, Core FFO and AFFO measures and the adjustments to
GAAP in calculating FFO, Core FFO and AFFO. Other REITs may not define FFO in accordance with the current NAREIT definition (as we do) or may interpret
the current NAREIT definition differently than we do or 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 calculations exclude such factors as depreciation and amortization
of real estate assets and gains or losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on
historical cost accounting and useful-life estimates), FFO facilitates comparisons of operating performance between periods and between other REITs in our peer
group.
Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an
expensed-as-incurred model) that were put into effect in 2009 and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT's
definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses for all industries as items that are expensed under
GAAP.
Core FFO is FFO, excluding acquisition and transaction related costs as well as certain other costs that are considered to be non-core, such as charges relating
to the Listing Note and listing related fees. The purchase of properties, and the corresponding expenses associated with that process, is a key operational feature of
our business plan to generate operational income and cash flows in order to make dividend payments to stockholders. In evaluating investments in real estate, we
differentiate the costs to acquire the investment from the operations derived from the investment. By excluding expensed acquisition and transaction related costs
as well as non-core costs, we believe Core FFO provides useful supplemental information that is comparable for each type of real estate investment and is
consistent with management's analysis of the investing and operating performance of our properties.
We exclude certain income or expense items from AFFO that we consider more reflective of investing activities, other non-cash income and expense items
and the income and expense effects of other activities that are not a fundamental attribute of our business plan. These items include early extinguishment of debt
and unrealized gains and losses, which may not ultimately be realized, such as gains or losses on derivative investments, gains and losses on foreign currency
transactions, and gains and losses 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 gains or losses 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 assists investors and analysts to better assess the sustainability of our ongoing operating
performance without the impacts of transactions that are not related to the ongoing performance of our portfolio of properties. We also believe that AFFO is a
recognized measure of sustainable operating performance by the REIT industry. Further, we believe AFFO is useful in comparing the sustainability of our
operating performance with the sustainability of the operating performance of other real estate companies. However, AFFO is not indicative of cash available to
fund ongoing cash needs, including the ability to make cash distributions. Investors are cautioned that AFFO should only be used to assess the sustainability of our
operating performance excluding these activities, as it excludes certain costs that have a negative effect on our operating performance during the periods in which
these costs are incurred.
In calculating AFFO, we exclude certain expenses, which under GAAP are characterized as operating expenses in determining operating net income. 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. AFFO
that excludes such costs and expenses would only be comparable to companies that did not have such activities. Further, under GAAP, certain contemplated non-
cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income. In addition, as discussed above, we view gains and
losses 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 gains or losses, we believe AFFO provides useful supplemental information.
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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.
The table below reflects the items deducted or added to net income (loss) attributable to stockholders in our calculation of FFO, Core FFO and AFFO for the
periods indicated.
(In thousands)
Year Ended
December 31, 2016
December 31, 2015 (5)
Net income (loss) attributable to stockholders (in accordance with GAAP)
$
47,140 $
Depreciation and amortization
Gains on dispositions of real estate investments (1)
Proportionate share of adjustments for non-controlling interest to arrive at FFO
FFO (as defined by NAREIT) attributable to stockholders
Acquisition and transaction fees (2)
Listing fees
Vesting of Class B Units upon Listing
Proportionate share of adjustments for non-controlling interest to arrive at Core FFO
Core FFO attributable to stockholders
Non-cash equity based compensation
Non-cash portion of interest expense
Non-recurring general and administrative expenses (3)
Straight-line rent
Amortization of above- and below- market leases and ground lease assets and liabilities, net
Realized losses on investment securities
Eliminate unrealized (gains) losses on foreign currency transactions (4)
Unrealized (gains) losses on undesignated foreign currency advances and other hedge ineffectiveness
Unrealized losses on non-functional foreign currency advances not designated as net investment hedges
Amortization of mortgage (discount) premium, net and mezzanine discount
Proportionate share of adjustments for non-controlling interest to arrive at AFFO
AFFO attributable to stockholders
Summary
FFO (as defined by NAREIT) attributable to stockholders
Core FFO attributable to stockholders
AFFO attributable to stockholders
$
$
$
$
94,455
(11,841)
(669)
129,085
9,792
—
—
(79)
138,798
3,748
6,698
—
(10,613)
(41)
—
(1,072)
(10,109)
—
(437)
89
127,061 $
129,085 $
138,798 $
127,061 $
(2,065)
90,070
—
(574)
87,431
6,053
18,653
14,480
(138)
126,479
2,345
8,609
302
(14,809)
252
66
(7,140)
(5,124)
3,558
(489)
41
114,090
87,431
126,479
114,090
_______________________
(1) Gains on dispositions of real estate investments is net of $1.5 million of tax recognized on the sale of Hotel Winston, The Netherlands property.
(2) For the year ended December 31, 2016 , Merger related costs are $9.8 million . There were no Merger related costs for the year ended December 31, 2015.
(3) Represents the Company's estimate of non-recurring internal audit service fees associated with its SOX readiness efforts and other non-recurring charges. There were no such charges for
the year ended December 31, 2016 .
(4) For the year ended December 31, 2016 , gains on foreign currency transactions were $7.4 million which were comprised of unrealized gains of $1.1 million and realized gains of $6.3
million .
(5) Effective January 1, 2016, we eliminate unrealized (gains) losses of foreign currency transactions, Class B Units distributions and certain general and administrative items in deriving
AFFO. As a result of this change, we revised the prior period amounts in our reconciliation of AFFO. AFFO for the year ended December 31, 2015 was previously reported as $122.4
million when not adjusting for the unrealized (gains) losses on foreign currency transactions, Class B Units distributions and certain general and administrative items in aggregate for $(7.7)
million for the year ended December 31, 2015. Additionally, effective January 1, 2016, we adjusted the presentation of AFFO to exclude the effect of non-controlling interests in
aggregate for $(0.7) million.
Dividends
During the year ended December 31, 2016 , dividends paid to common stockholders were $122.4 million , inclusive of $2.0 million of distributions paid for
OP Units and LTIP Units holders. During the year ended December 31, 2016 , cash used to pay dividends was generated from cash flows from operations and cash
available on hand.
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The following table shows the sources for the payment of dividends to common stockholders for the periods indicated:
Three Months Ended
Year Ended
March 31, 2016
June 30, 2016
September 30, 2016
December 31, 2016
December 31, 2016
Percentage of
Dividends
Percentage of
Dividends
Percentage of
Dividends
Percentage of
Dividends
Percentage of
Dividends
$
30,020
857
$
30,877
$
28,130
2,747
$
30,877
$
30,019
487
$
30,506
$
30,097
405
$
30,502
$
30,250
259
$
30,509
$ 120,386
2,008
$ 122,394
91.1% $
8.9%
100.0% $
30,506
—
30,506
100.0% $
—%
100.0% $
30,502
—
30,502
100.0% $
—%
100.0% $
24,347
6,162
30,509
79.8% $ 113,485
20.2%
8,909
100.0% $ 122,394
92.7%
7.3%
100.0%
(In thousands)
Dividends:
Dividends to stockholders
Other (1)
Total dividends
Source of dividend coverage:
Cash flows provided by operations
Available cash on hand
Total sources of dividend coverage
Cash flows provided by operations (GAAP
basis) (2)
$
28,130
$
31,783
$
30,134
$
24,347
$ 114,394
Net income attributable to stockholders (in
accordance with GAAP)
$
6,488
$
15,763
$
8,943
$
15,946
$
47,140
_______________________________
(1)
Includes distributions paid of $1.0 million for the OP Units and $1.0 million to the participating LTIP Units during the year ended December 31, 2016 .
(2) Cash flows provided by operations for the year ended December 31, 2016 reflect acquisition and transaction related expenses of $9.8 million .
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 statements of equity.
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Contractual Obligations
The following table presents our estimated future payments under contractual obligations at December 31, 2016 and the effect these obligations are expected
to have on our liquidity and cash flow in the specified future periods:
(In thousands)
Total
Less than 1 Year
1-3 Years
3-5 Years
More than 5 Years
Principal on mortgage notes payable
Interest on mortgage notes payable (1)
Principal on credit facility (2)
Interest on credit facility (1) (2)
Principal on mezzanine facility (3)
Interest on mezzanine facility (1) (3)
Operating ground lease rental payments due (4)
$
754,987 $
22,857 $
388,764 $
343,366 $
60,781
616,614
7,622
55,383
2,895
46,106
20,059
616,614
7,622
55,383
2,895
1,261
32,527
8,195
—
—
—
—
—
—
—
—
2,522
2,522
Total (5) (6)
$
1,544,388 $
726,691 $
423,813 $
354,083 $
—
—
—
—
—
—
39,801
39,801
_________________________
(1) Based on the exchange rates of £1.00 to $1.23 for GBP and €1.00 to $1.05 for Euro as of December 31, 2016 .
(2) The initial maturity date of the Credit Facility was July 25, 2016 with two one-year extension options. On July 25, 2016 , we extended the maturity date of the Credit Facility to July 25,
2017 with an additional one-year extension option remaining, subject to certain conditions.
(3) The maturity date of the Mezzanine Facility is August 13, 2017.
(4) Ground lease rental payments due for ING Amsterdam are not included in the table above as the Company's ground for this property is prepaid through 2050.
(5) Amounts in the table above that relate to our foreign operations are based on the exchange rate of the local currencies at December 31, 2016 , which consisted primarily of the Euro and the
GBP. At December 31, 2016 , we had no material capital lease obligations for which we were the lessee, either individually or in the aggregate.
(6) Derivative payments are not included in this table due to the uncertainty of the timing and amounts of payments. Additionally, as derivatives can be settled at any point in time, they are
generally not considered long-term in nature.
Credit Facility
On July 25, 2013 , we through the OP, entered into a Credit Facility. The Credit Facility has been amended at various times, and maximum borrowings have
increased to $740.0 million , with the most recent increase being on August 24, 2015. We had $616.6 million and $717.3 million outstanding under the Credit
Facility as of December 31, 2016 and 2015 , respectively. As of December 31, 2016 , the Credit Facility reflected variable and fixed rate borrowings with a
weighted average effective interest rate of 2.4% after giving effect to interest rate swaps in place.
A portion of foreign currency draws under the Credit Facility are designated as net investment hedges of our investments during the periods reflected in the
consolidated statements of operations. See Note 8 — Derivatives and Hedging Activities to our audited consolidated financial statements in this Annual Report on
Form 10-K for further discussion.
Mezzanine Facility
In connection with the Global II Merger, the Company assumed the Mezzanine Facility, that provided for aggregate borrowings up to €128.0 million subject to
certain conditions. The Mezzanine Facility may be prepaid at any time during the term. We had $55.4 million outstanding under the Mezzanine Facility (including
€52.7 million ) as of December 31, 2016 . As of December 31, 2016 , the Mezzanine Facility bears a fixed interest at 8.25% per annum.
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.
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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 indexed escalation provisions. In addition, we may be required to pay costs for
maintenance and operation of properties which may adversely impact our results of operations due to potential increases in costs and operating expenses resulting
from inflation.
Related-Party Transactions and Agreements
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, pursuant to which Global II Advisor agreed to reimburse Global II $6.3 million in organization and offering costs incurred by Global II
in its IPO that exceeded 2.0% of gross offering proceeds in its IPO (the "Excess Amount"). Global II's initial public offering was suspended in November 2015 and
lapsed in accordance with its terms in August 2016.
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 OP ("Global II Class B Units"), previously issued to the Global II Advisor as payment in lieu of cash 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 Company Stock on
the Merger Date.
We have entered into agreements with affiliates of our Sponsor, whereby we have paid or will in the future pay certain fees or reimbursements to the Advisor
or its affiliates and entities under common ownership with the Advisor in connection with items such as acquisition and financing activities, transfer agency
services, asset and property management services and reimbursement of operating and offering related costs. The predecessor to AR Global was a party to a
services agreement with RCS Advisory Services, LLC, a subsidiary of the parent company of the Former Dealer Manager (“RCS Advisory”), pursuant to which
RCS Advisory and its affiliates provided us and certain other companies sponsored by AR Global with services (including, without limitation, transaction
management, compliance, due diligence, event coordination and marketing services, among others) on a time and expenses incurred basis or at a flat rate based on
services performed. The predecessor to AR Global instructed RCS Advisory to stop providing such services in November 2015 and no services have since been
provided by RCS Advisory. We were also party to a transfer agency agreement with American National Stock Transfer, LLC, a subsidiary of the parent company
of the Former Dealer Manager (“ANST”), pursuant to which ANST provided us with transfer agency services (including broker and stockholder servicing,
transaction processing, year-end IRS reporting and other services), and supervisory services overseeing the transfer agency services performed by a third-party
transfer agent. AR Global received written notice from ANST on February 10, 2016 that it would wind down operations by the end of the month and would
withdraw as the transfer agent effective February 29, 2016. See Note 11 — Related Party Transactions to our audited consolidated financial statements included in
this Annual Report on Form 10-K for a discussion of the various related party transactions, agreements and fees.
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Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as of December 31, 2016 that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to
investors other than our future obligations under nonconcealable operating ground leases (see Note 10 — Commitments and Contingencies and Contractual
Obligations for details).
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, and equity prices. The primary risks to which we
are exposed are interest rate risk and foreign currency exchange risk, and we are also exposed to further market risk as a result of concentrations of tenants in
certain industries and/or geographic regions. Adverse market factors can affect the ability of tenants in a particular industry/region to meet their respective lease
obligations. In order to manage this risk, we view our collective tenant roster as a portfolio, and in our investment decisions we attempt to diversify our portfolio so
that we are not overexposed to a particular industry or geographic region.
Generally, we do not use derivative instruments to hedge credit risks or for speculative purposes. However, from time to time, we may enter into foreign
currency forward contracts to hedge our foreign currency cash flow exposures.
Interest Rate Risk
The values of our real estate and related fixed-rate debt obligations are subject to fluctuations based on changes in interest rates. The value of our real estate is
also subject to fluctuations based on local and regional economic conditions and changes in the creditworthiness of lessees, all of which may affect our ability to
refinance property-level mortgage debt when balloon payments are scheduled, if we do not choose to repay the debt when due. Interest rates are highly sensitive to
many factors, including governmental monetary and tax policies, domestic and international economic and political conditions, and other factors beyond our
control. An increase in interest rates would likely cause the fair value of our owned and managed assets to decrease, which would create lower revenues from
managed assets and lower investment performance for the Managed REITs. Increases in interest rates may also have an impact on the credit profile of certain
tenants.
We are exposed to the impact of interest rate changes primarily through our borrowing activities. We obtained, and may in the future obtain, variable-rate,
non-recourse mortgage loans, and as a result, we have entered into, and may continue to enter into, interest rate swap agreements or interest rate cap agreements
with lenders. Interest rate swap agreements effectively convert the variable-rate debt service obligations of the loan to a fixed rate, while interest rate cap
agreements limit the underlying interest rate from exceeding a specified strike rate. Interest rate swaps are agreements in which one party exchanges a stream of
interest payments for a counterparty’s stream of cash flows over a specific period, and interest rate caps limit the effective borrowing rate of variable-rate debt
obligations while allowing participants to share in downward shifts in interest rates. These interest rate swaps and caps are derivative instruments designated as
cash flow hedges on the forecasted interest payments on the debt obligation. The face amount on which the swaps or caps are based is not exchanged. Our
objective in using these derivatives is to limit our exposure to interest rate movements. At December 31, 2016 , we estimated that the total fair value of our interest
rate swaps, which are included in Derivatives, at fair value in the consolidated financial statements, was in a net liability position of $13.2 million ( Note 8 —
Derivatives and Hedging Activities ).
As of December 31, 2016 , our total consolidated debt included borrowings under our Credit Facility, Mezzanine Facility and secured mortgage financings,
with a total carrying value of $1.4 billion , and a total estimated fair value of $1.4 billion and a weighted average effective interest rate per annum of 2.8% . At
December 31, 2016 , a significant portion (approximately 81.1% ) of our long-term debt either bore interest at fixed rates, or was swapped to a fixed rate. The
annual interest rates on our fixed-rate debt at December 31, 2016 ranged from 1.0% to 6.3% . The contractual annual interest rates on our variable-rate debt at
December 31, 2016 ranged from 1.9% to 2.8% . Our debt obligations are more fully described in Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations-Contractual Obligations above.
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The following table presents future principal cash flows based upon expected maturity dates of our debt obligations outstanding at December 31, 2016 :
(In thousands)
Fixed-rate debt (1)
Variable-rate debt (1)
Total Debt
2017
2018
2019
2020
2021
Thereafter
Total
(2)
$
511,789 (2) $
74,104
261,170
267,615
43,211
—
182,762 $
52,800
—
33,550
—
—
694,551
126,904
261,170
301,165
43,211
—
$
1,157,889
$
269,112 $
1,427,001
_____________________
(1) Amounts are based on the exchange rate at December 31, 2016 , as applicable.
(2) The initial maturity date of the Credit Facility was July 25, 2016 with two one-year extension options. On July 25, 2016 , we extended the maturity date of the Credit Facility to July 25,
2017 with an additional one-year extension option remaining, subject to certain conditions.
The estimated fair value of our fixed-rate debt and our variable-rate debt that currently bears interest at fixed rates or has effectively been converted to a fixed
rate through the use of interest rate swaps is affected by changes in interest rates. A decrease or increase in interest rates of 1% would change the estimated fair
value of this debt at December 31, 2016 by an aggregate increase of $1.8 million or an aggregate decrease of $2.2 million , respectively.
Annual interest expense on our unhedged variable-rate debt that does not bear interest at fixed rates at December 31, 2016 would increase or decrease by $3.6
million and $0.6 million , respectively for each respective 1% change in annual interest rates.
Foreign Currency Exchange Rate Risk
We own foreign investments, primarily in Europe and as a result are subject to risk from the effects of exchange rate movements in various foreign currencies,
primarily the Euro and the British pound sterling which may affect future costs and cash flows. We manage foreign currency exchange rate movements by
generally placing our debt service obligation to the lender and the tenant’s rental obligation to us in the same currency. This reduces our overall exposure to
currency fluctuations. In addition, we may use currency hedging to further reduce the exposure to currency fluctuations. We are generally a net receiver of these
currencies (we receive more cash than we pay out), and therefore our presented operation of our foreign properties benefit from a weaker USD, and are adversely
affected by a stronger USD, relative to the foreign currency.
We have designated all current foreign currency draws as net investment hedge to the extent of our net investment in foreign subsidiaries. To the extent
foreign draws in each currency exceed the net investment, we reflect the effects of changes in currency on such excess in earnings. As of December 31, 2016 , we
had draws of £44.2 million and €29.4 million in excess of our net investments ( Note 8 — Derivatives and Hedging Activities ).
We enter into foreign currency forward contracts to hedge certain of our foreign currency cash flow exposures. A foreign currency forward contract is a
commitment to deliver a certain amount of foreign currency at a certain price on a specific date in the future. The total estimated fair value of our foreign currency
forward contracts, which are included in derivatives, at fair value in the consolidated balance sheets, was in a net asset position of $7.0 million at December 31,
2016 ( Note 7 — Fair Value of Financial Instruments ). We have obtained, and may in the future obtain, non-recourse mortgage financing in the local currency. To
the extent that currency fluctuations increase or decrease rental revenues as translated to U.S. dollars, the change in debt service, as translated to U.S. dollars, will
partially offset the effect of fluctuations in revenue and, to some extent, mitigate the risk from changes in foreign currency exchange rates.
Scheduled future minimum rents, exclusive of renewals, under non-cancelable operating leases, for our foreign operations as of December 31, 2016 , during
each of the next five calendar years and thereafter, are as follows:
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(In thousands)
2017
2018
2019
2020
2021
Thereafter
Total
Future Minimum Base Rent Payments (1)
Euro
British pound
sterling
Total
$
61,458 $
47,653 $
63,394
63,700
64,007
64,296
243,819
560,674 $
49,036
50,164
51,502
52,121
334,348
584,824 $
$
109,111
112,430
113,864
115,509
116,417
578,167
1,145,498
_______________________
(1) Based on the exchange rates of £1.00 to $1.23 for GBP and €1.00 to $1.05 for Euro as of December 31, 2016 .
Scheduled debt service payments (principal and interest) for mortgage notes payable for our foreign operations as of December 31, 2016 , during each of the
next five calendar years and thereafter, are as follows (in thousands):
(In thousands)
2017
2018
2019
2020
2021
Thereafter
Total
(In thousands)
2017
2018
2019
2020
2021
Thereafter
Total
Future Debt Service Payments (1)(2)
Mortgage Notes Payable
Euro
British pound
sterling
Total
$
— $
—
167,654
159,778
15,254
—
938 $
74,104
93,516
107,837
—
—
$
342,686 $
276,395 $
938
74,104
261,170
267,615
15,254
—
619,081
Future Debt Service Payments (1) (2)
Borrowing Facilities (3)
Euro
British pound
sterling
$
— $
— $
327,818
218,746
—
—
—
—
—
—
—
—
Total
—
546,564
—
—
—
—
$
327,818 $
218,746 $
546,564
_______________________
(1) Based on the exchange rates of £1.00 to $1.23 for GBP and €1.00 to $1.05 for Euro as of December 31, 2016 . Contractual rents and debt obligations are denominated in the functional
currency of the country of each property.
Interest on unhedged variable-rate debt obligations was calculated using the applicable annual interest rates and balances outstanding at December 31, 2016 .
(2)
(3) The initial maturity of our Credit Facility was July 25, 2016 with two one-year extension options. On July 25, 2016 , we extended the maturity date of the Credit Facility to July 25, 2017
with an additional one-year extension option remaining, subject to certain conditions. The maturity date of the Mezzanine Facility is August 13, 2017 ( Note 5 — Credit Borrowings ).
Borrowings under our Credit Facility and Mezzanine Facility in foreign currencies are designated and effective as economic hedges of our net investments in foreign entities ( Note 8 —
Derivatives and Hedging Activities ).
We currently anticipate that, by their respective due dates, we will have repaid or refinanced certain of these loans, or extended it, but there can be no
assurance that we will be able to refinance these loans on favorable terms, if at all. If refinancing has not
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occurred, we would expect to use our cash resources, including unused capacity on our Credit Facility, to make these payments, if necessary.
Concentration of Credit Risk
Concentrations of credit risk arise when a number of tenants are engaged in similar business activities or have similar economic risks or conditions that could
cause them to default on their lease obligations to us. We regularly monitor our portfolio to assess potential concentrations of credit risk. While we believe our
portfolio is reasonably well diversified, it does contain concentrations in excess of 10%, based on the percentage of our annualized rental income as of
December 31, 2016 , in certain areas. See Item 2. Properties in this Annual Report on Form 10-K for further discussion on distribution across countries and
industries.
Based on original purchase price or fair market value for the properties acquired through Merger, the majority of our properties are located in the U.S.
including Commonwealth of Puerto Rico ( 49.2% ) and 50.8% are in Europe. Based on our annualized rental income, the majority of our directly owned real estate
properties and related loans are located in the U.S. and the Commonwealth of Puerto Rico 51.0% and the remaining are in Finland ( 5.9% ), France ( 4.6% ),
Germany ( 8.1% ), Luxembourg ( 2.0% ), The Netherlands ( 6.5% ) and United Kingdom ( 21.9% ) December 31, 2016 . No individual tenant accounted for more
than 10% of our annualized rental income at December 31, 2016 . Based on annualized rental income, at December 31, 2016 , our directly owned real estate
properties contain significant concentrations in the following asset types: office ( 59.7% ), industrial/distribution ( 30.4% ), and retail ( 9.9% ).
Item 8. Financial Statements and Supplementary Data.
The information required by this Item 8 is hereby incorporated by reference to our Consolidated Financial Statements beginning on page F-1 of this Annual
Report of Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
In accordance with Rules 13a-15(b) and 15d-15(b) of the Exchange Act, we, under the supervision and with the participation of our Chief Executive Officer
and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded, as of December 31, 2016 , the end of such period, that our disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, within the time periods specified in the SEC rules and forms, information required to be disclosed by us in our reports that
we file or submit under the Exchange Act, and in such information being accumulated and communicated to management as appropriate to allow timely decisions
regarding required disclosure.
Management's Annual Reporting on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f)
or 15d-15(f) promulgated under the Exchange Act.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016 . In making that assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework
(2013).
Based on its assessment, our management concluded that, as of December 31, 2016 , our internal control over financial reporting was effective.
The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated on their report, which is included on page F-2 in this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
During the year ended December 31, 2016 , 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.
Item 9B. Other Information.
None.
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Item 10. Directors, Executive Officers and Corporate Governance.
PART III
We have adopted a Code of Ethics that applies to all of our executive officers and directors, including but not limited to, our principal executive officer and
principal financial officer. A copy of our code of ethics may be obtained, free of charge, by sending a written request to our executive office – 405 Park Avenue –
14th Floor, New York, NY 10022, attention Chief Financial Officer.
The information required by this Item will be set forth in our definitive proxy statement with respect to our 2017 annual meeting of shareholders to be filed on
or before April 30, 2017 , and is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this Item will be set forth in our definitive proxy statement with respect to our 2017 annual meeting of shareholders to be filed on
or before April 30, 2017 , and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item will be set forth in our definitive proxy statement with respect to our 2017 annual meeting of shareholders to be filed on
or before April 30, 2017 , and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item will be set forth in our definitive proxy statement with respect to our 2017 annual meeting of shareholders to be filed on
or before April 30, 2017 , and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information required by this Item will be set forth in our definitive proxy statement with respect to our 2017 annual meeting of shareholders to be filed on
or before April 30, 2017 , and is incorporated herein by reference.
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Item 15. Exhibits and Financial Statement Schedules.
(a) Financial Statement Schedules
PART IV
See the Index to Consolidated Financial Statements at page F-1 of this report.
The following financial statement schedule is included herein at page F-52 of this report:
Schedule III – Real Estate and Accumulated Depreciation
(b) Exhibits
EXHIBITS INDEX
The following exhibits are included, or incorporated by reference, in this Annual Report on Form 10-K for the year ended December 31, 2016 (and are
numbered in accordance with Item 601 of Regulation S-K).
Exhibit No.
Description
1.1 (19)
2.1 (17)
3.1 (10)
3.2 (12)
3.3 (14)
4.1 (13)
10.1 (13)
10.2 (1)
10.3 (11)
10.4 (1)
10.5 (2)
10.6 (2)
10.7 (3)
10.8 (3)
10.9 (3)
10.10 (3)
10.11 (3)
10.12 (3)
10.13 (3)
10.14 (4)
10.15 (4)
Equity Distribution Agreement dated December 12, 2016.
Agreement and Plan of Merger, dated as of August 8, 2016, among Global Net Lease, Inc., American Realty Capital Global Trust II, Inc.,
Mayflower Acquisition, LLC, Global Net Lease Operating Partnership, L.P., and American Realty Capital Global Trust II Operating
Partnership, L.P.
Articles of Amendment to the Amended and Restated Charter of Global Net Lease, Inc. (f/k/a American Realty Capital Global Trust, Inc.),
effective May 5, 2015.
Articles of Amendment of Global Net Lease, Inc. (f/k/a American Realty Capital Global Trust, Inc.)
Amended and Restated Bylaws of Global Net Lease, Inc.
Second Amended and Restated Agreement of Limited Partnership of Global Net Lease Operating Partnership, L.P., dated June 2, 2015,
between Global Net Lease, Inc. and Global Net Lease Special Limited Partner, LLC.
Fourth Amended and Restated Advisory Agreement, dated June 2, 2015, among Global Net Lease, Inc., Global Net Lease Operating
Partnership, L.P. and Global Net Lease Advisors, LLC.
Property Management and Leasing Agreement, dated April 20, 2012, among Global Net Lease, Inc. (f/k/a American Realty Capital Global
Trust, Inc.), Global Net Lease Operating Partnership, L.P (f/k.a American Realty Capital Global Operating Partnership, L.P.) and Global
Net Lease Properties, LLC) (f/k/a American Realty Capital Global Properties, LLC).
Amended and Restated Incentive Restricted Share Plan of Global Net Lease, Inc. (f/k/a American Realty Capital Global Trust, Inc.)
Company’s Stock Option Plan
Agreement for the Sale and Purchase of Wickes Store, dated April 12, 2013, between Aviva Investors Pensions Limited and ARC
WKBPLUK001, LLC.
Facility Letter, dated May 3, 2013, by and between ARC WKBPLUK001, LLC and Santander UK plc.
Asset Sale Contract, dated as of May 22, 2013, by and among Mapeley Acquisition Co (5) Limited, Jemma McAndrew and Richard Stanley
and ARC EEMTRUK001, LLC.
Facility Letter, dated June 7, 2013, by and between ARC EEMTRUK001, LLC and Santander UK plc.
Agreement for Sale of 1, 2 and 3 Walnut Court, Kembrey Park, Swindon SN2 8BW.
Facility Letter, dated July 19, 2013, by and between ARC TWSWDUK001, LLC and Santander UK plc.
Agreement for the Sale of Land Lying to the North West of Reginald Mitchell Way, Tunstall, dated July 23, 2013, by and among (1) St James
Place UK PLC and ARC WKSOTUK001, LLC.
Facility Letter, dated July 22, 2013, by and between ARC WKSOTUK001, LLC and Santander UK plc.
Credit Agreement, dated as of July 25, 2013, by and among American Realty Capital Global Partnership, L.P., JPMorgan Chase Bank, N.A.,
and the lenders and agents party thereto.
Agreement for Purchase and Sale of Real Property, dated as of August 19, 2013, by and between AR Capital, LLC and Alliance HSP Fort
Washington Office I Limited Partnership.
Agreement for Purchase and Sale of Real Property, dated as of August 24, 2013, by and between AR Capital, LLC and Stein Family, LLC
10.16 (4)
Agreement related to the sale and leaseback of Solar House, dated 4 th September, 2013, by Northern Rock (Asset Management) PLC and
ARC NRSLDUK001, LLC.
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Exhibit No.
Description
10.17 (4)
10.18 (4)
10.19 (5)
10.20 (6)
10.21 (6)
10.22 (6)
10.23 (6)
10.24 (7)
10.25 (7)
10.26 (7)
10.27 (7)
10.28 (7)
10.29 (7)
10.30 (7)
10.31 (7)
10.32 (7)
10.33 (8)
10.34 (8)
10.35 (18)
10.36 (18)
10.37 (18)
10.38 (13)
10.39 (13)
10.40 (13)
10.41 (18)
First Amendment to Agreement for Purchase and Sale of Real Property dated as of September 10, 2013, by and between Alliance AR Capital,
LLC and Alliance HSP Fort Washington Office I Limited Partnership.
Facility Letter, dated September 4, 2013, by and between ARC NRSLDUK001, LLC and Santander UK plc.
Purchase and Sale Agreement by and among ARC PADRBPA001, LLC and AR Capital, LLC and the sellers described on schedules thereto,
dated as of July 24, 2013.
Agreement for Purchase and Sale of Real Property, dated September 3, 2013, by and between AR Capital, LLC and Towers Partners, L.L.C.
Amendment to Agreement for Purchase and Sale of Real Property, dated September 9, 2013 by and between AR Capital, LLC and Towers
Partners, LLC.
Agreement to Assign Agreements of Sale, dated November 12, 2013, by and between Setzer Properties XCW, LLC and AR Capital, LLC.
Agreement for Purchase and Sale of Real Property, dated December 3, 2013, by and between AR Capital, LLC and 3W Development II,
L.L.C.
Sale and purchase agreement, dated November 19, 2013, between Axiom Asset 1 GmbH & Co. KG and ARC RMNUSBER01, LLC.
Agreement for lease, dated December 24, 2013, between Coolatinney Developments Limited and ARC PFBFDUK001, LLC.
Sale and purchase agreement, dated December 31, 2013, among Crown Crest Property Developments Limited, ARC CCLTRUK001, LLC,
Crown Crest (Leicester) Plc and Crown Crest Group Limited and Poundstretcher Limited.
Sale and purchase agreement, dated January 21, 2014, between Holaw (472) Limited and ARC ALSFDUK001, LLC.
Loan Agreement, dated February 5, 2014, between ARC RMNUSGER01 LLC and Deutsche Pfandbriefbank AG.
Facility Letter, dated January 30, 2014, between Santander UK Plc and ARC PFBDUK001, LLC.
Facility Letter, dated February 13, 2014, between Santander UK Plc and ARC CCLTRUK001, LLC.
Facility Agreement, dated March 7, 2014, among ARC ALSFDUK001, LLC, Royal Bank of Scotland International Limited and the other
parties named therein.
Omnibus Amendment to Loan Documents, dated as of March 26, 2014, among American Realty Capital Global Partnership, L.P., JPMorgan
Chase Bank, N.A., and the lenders and agents party thereto.
Agreement for Purchase and Sale of Real Property, dated April 29, 2014, between AR Capital, LLC and Mesa Real Estate Partners, L.P.
Third Amendment to Credit Agreement, dated as of June 24, 2014, among American Realty Capital Global Operating Partnership, the
Company, ARC Global Holdco, LLC, JPMorgan Chase Bank, N.A. and the other parties named thereto.
Fourth Amendment to Credit Agreement, dated as of July 29, 2014, among American Realty Capital Global Operating Partnership, the
Company, ARC Global Holdco, LLC, JPMorgan Chase Bank, N.A. and the other parties named thereto.
Fifth Amendment to Credit Agreement, dated as of October 16, 2014, among American Realty Capital Global Operating Partnership, the
Company, ARC Global Holdco, LLC, JPMorgan Chase Bank, N.A. and the other parties named thereto.
Sixth Amendment to Credit Agreement, dated as of December 16, 2014, among American Realty Capital Global Trust, Operating Partnership,
the Company, ARC Holdco. LLC. JPMorgan Chase Bank, N.A. and the other parties named thereto.
Seventh Amendment to Credit Agreement, dated June 1, 2015, among Global Net Lease Operating Partnership, L.P., Global Net Lease, Inc.,
ARC Global Holdco, LLC, the guarantors party thereto, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative
agent for the lenders.
Contribution and Exchange Agreement, dated June 2, 2015, between Global Net Lease Operating Partnership, L.P. and Global Net Lease
Advisors, LLC.
Listing Note Agreement, dated June 2, 2015, between Global Net Lease Operating Partnership, L.P. and Global Net Lease Special Limited
Partner, LLC.
Second Amended and Restated 2015 Advisor Multi-Year Outperformance Agreement, dated February 25, 2016, among Global Net Lease,
Inc., Global Net Lease Operating Partnership, L.P. and Global Net Lease Advisors, LLC.
72
Table of Contents
Exhibit No.
Description
10.42 (15)
10.43 (16)
10.44 (18)
10.45 *
10.46 *
10.47 *
12.1*
14.1 (18)
21.1*
23.1*
31.1 *
Indemnification Agreement, dated June 2, 2015, among Global Net Lease, Inc., Scott J. Bowman, Peter M. Budko, Patrick J. Goulding,
William M. Kahane, P. Sue Perrotty, Nicholas Radesca, Edward G. Rendell, Nicholas S. Schorsch, Abby M. Wenzel, Andrew Winer,
Edward M. Weil, Jr., Global Net Lease Advisors, LLC, AR Capital, LLC and RCS Capital Corporation.
Eighth Amendment to Credit Agreement, dated as of August 24, 2015, among Global Net Lease Operating Partnership, L.P., Global Net
Lease, Inc., ARC Global Holdco, LLC, the guarantors party thereto, the lenders party thereto and JPMorgan Chase Bank, N.A., as
administrative agent for the lenders.
Indemnification Agreement between the Company and Timothy Salvemini, dated as of December 22, 2015.
Indemnification Agreement between the Company and Edward M. Weil, Jr., dated as of January 3, 2017.
Indemnification Agreement between the Company and Nicholas Radesca, dated as of January 6, 2017.
Letter Agreement, dated December 16, 2016, by and among American Realty Capital Global Trust II, Inc., American Realty Capital Global II
Advisors, LLC and AR Global Investments, LLC.
Calculation of Ratios of Earnings to Fixed Charges.
Amended and Restated Code of Business Conduct and Ethics.
List of Subsidiaries
Consent of PricewaterhouseCoopers LLP.
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.
101.1 *
XBRL (eXtensible Business Reporting Language). The following materials from Global Net Lease, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 2016 formatted in XBRL: (i) the Consolidated Balance Sheets at December 31, 2016 and 2015, (ii) the
Consolidated Statements of Operations for the years ended December 31, 2016, 2015, and 2014, (iii) the Consolidated Statements of
Comprehensive Income (Loss) for the years ended December 31, 2016, 2015, and 2014, (iv) the Consolidated Statements of Equity for the
years ended December 31, 2016, 2015, and 2014, (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2016,
2015, and 2014, (vi) the Notes to the Consolidated Financial Statements, and (vii) Schedule III — Real Estate and Accumulated
Depreciation.
___________________________________________
*
Filed herewith
Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 11, 2013.
Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 filed with the SEC on May 10, 2013.
Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 filed with the SEC on August 13, 2013.
Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 filed with the SEC on November 13, 2013.
Filed as an exhibit to our Current Report on Form 8-K/A filed with the SEC on January 3, 2014.
Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 7, 2014.
Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended March 30, 2014 filed with the SEC on May 15, 2014.
Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed with the SEC on August 11, 2014.
Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on January 20, 2015.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10) Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on April 3, 2015.
(11) Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on April 9, 2015.
(12) Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on May 6, 2015.
(13) Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on June 2, 2015.
(14) Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on June 3, 2015.
(15) Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 filed with the SEC on August 10, 2015.
(16) Filed as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 filed with the SEC on November 10, 2015.
(17) Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on August 8, 2016.
(18) Filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on February 29, 2016.
(19) Filed as an exhibit to our Current Report on Form 8-K filed with the SEC on December 13, 2016.
73
Table of Contents
Item 16. Form 10-K Summary.
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized this 28th day of February, 2017 .
SIGNATURES
GLOBAL NET LEASE, INC.
By:
/s/ Scott J. Bowman
Scott J. Bowman
CHIEF EXECUTIVE OFFICER AND PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Capacity
Date
/s/ P. Sue Perrotty
P. Sue Perrotty
Non-Executive Chair of the Board of Directors, Audit Committee Chair
February 28, 2017
/s/ Edward M. Weil, Jr.
Edward Mr. Weil, Jr.
Director
Chief Executive Officer and President
(Principal Executive Officer)
February 28, 2017
February 28, 2017
/s/ Scott J. Bowman
Scott J. Bowman
/s/ Nicholas Radesca
Nicholas Radesca
/s/ Lee M. Elman
Lee M. Elman
Chief Financial Officer, Treasurer and Secretary
(Principal Financial Officer and Principal Accounting Officer)
February 28, 2017
Independent Director
February 28, 2017
/s/ Edward G. Rendell
Independent Director
February 28, 2017
Edward G. Rendell
/s/ Abby M. Wenzel
Independent Director
February 28, 2017
Abby M. Wenzel
74
GLOBAL NET LEASE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Operations for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Equity for the Years Ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
Financial Statement Schedule:
Schedule III — Real Estate and Accumulated Depreciation
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-9
F-52
Financial statement schedules other than those listed above are omitted because the required information is given in the financial statements, including the notes
thereto, or because the conditions requiring their filing do not exist.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Global Net Lease, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income (loss), equity, and
cash flows present fairly, in all material respects, the financial position of Global Net Lease, Inc. and its subsidiaries at December 31, 2016 and December 31, 2015
, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index for the years
ended December 31, 2016 , 2015 and 2014 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related
consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2016 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting, included in Management’s Annual Reporting on Internal Control over Financial reporting appearing under Item
9A. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our audits
(which was an integrated audit in 2015 ). We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 28, 2017
F-2
GLOBAL NET LEASE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
ASSETS
Real estate investments, at cost:
Land
Buildings, fixtures and improvements
Construction in progress
Acquired intangible lease assets
Total real estate investments, at cost
Less accumulated depreciation and amortization
Total real estate investments, net
Cash and cash equivalents
Restricted cash
Derivatives, at fair value ( Note 8 )
Unbilled straight-line rent
Prepaid expenses and other assets
Related party notes receivable acquired in Merger ( Note 3 )
Due from related parties
Deferred tax assets
Goodwill and other intangible assets, net
Deferred financing costs, net
Total assets
LIABILITIES AND EQUITY
December 31,
2016
2015
$
376,704 $
1,967,930
—
587,061
2,931,695
(216,055)
2,715,640
69,831
7,497
28,700
30,459
17,577
5,138
16
1,586
13,931
1,092
341,911
1,685,919
180
518,294
2,546,304
(133,329)
2,412,975
69,938
3,319
5,812
23,048
15,345
—
136
2,552
2,988
4,409
$
2,891,467 $
2,540,522
Mortgage notes payable, net of deferred financing costs ( $5,103 and $7,446 for December 31, 2016 and 2015, respectively)
$
749,884 $
Mortgage (discount) premium, net
Credit facility
Mezzanine facility
Mezzanine discount, net
Acquired intangible lease liabilities, net
Derivatives, at fair value ( Note 8 )
Due to related parties
Accounts payable and accrued expenses
Prepaid rent
Deferred tax liability
Taxes payable
Dividends payable
Total liabilities
Commitments and contingencies ( Note 10 )
Equity:
(2,503)
616,614
55,400
(17)
33,041
15,457
2,162
22,861
18,429
15,065
9,059
34
524,262
676
717,286
—
—
27,978
6,028
399
18,659
15,491
4,016
5,201
407
1,535,486
1,320,403
Preferred stock, $0.01 par value, 50,000,000 authorized, none issued and outstanding
—
—
Common stock, $0.01 par value, 300,000,000 shares authorized, 198,775,675 and 168,936,633 shares issued and outstanding
at December 31, 2016 and 2015, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders' equity
Non-controlling interest
Total equity
Total liabilities and equity
1,990
1,708,541
(16,695)
(346,058)
1,347,778
8,203
1,355,981
$
2,891,467 $
1,692
1,480,162
(3,649)
(272,812)
1,205,393
14,726
1,220,119
2,540,522
The accompanying notes are an integral part of these consolidated financial statements.
F-3
GLOBAL NET LEASE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
Year Ended December 31,
2016
2015
2014
$
204,049 $
10,125
214,174
194,620 $
10,712
205,332
19,038
19,751
9,792
—
—
7,108
3,748
94,455
153,892
60,282
18,180
15,167
6,053
18,653
14,480
7,175
2,345
90,070
172,123
33,209
88,158
5,225
93,383
7,947
797
83,498
—
—
4,314
—
40,387
136,943
(43,560)
Revenues:
Rental income
Operating expense reimbursements
Total revenues
Expenses:
Property operating
Operating fees to related parties
Acquisition and transaction related
Listing fees
Vesting of Class B Units
General and administrative
Equity based compensation
Depreciation and amortization
Total expenses
Operating income (loss)
Other income (expense):
Interest expense
Income from investments
Losses on foreign currency
Realized losses on investment securities
Gains on dispositions of real estate investments
Gains on derivative instruments
Unrealized gains on undesignated foreign currency advances and other
hedge ineffectiveness
Unrealized losses on non-functional foreign currency advances not
designated as net investment hedges
Other income
Total other expense, net
Net income (loss) before income tax
Income tax (expense) benefit
Net income (loss)
Non-controlling interest
Net income (loss) attributable to stockholders
Basic and Diluted Earnings Per Share:
Basic and diluted net income (loss) per share attributable to stockholders
$
$
(39,121)
(34,864)
(14,852)
—
—
—
13,341
7,368
10,109
—
20
(8,283)
51,999
(4,422)
47,577
(437)
15
—
(66)
—
3,935
5,124
(3,558)
79
(29,335)
3,874
(5,889)
(2,015)
(50)
47,140 $
(2,065) $
14
(186)
—
—
1,881
1,387
—
291
(11,465)
(55,025)
1,431
(53,594)
—
(53,594)
0.27 $
(0.01) $
(0.43)
Basic and diluted weighted average shares outstanding
170,161,344
174,309,894
126,079,369
The accompanying notes are an integral part of these consolidated financial statements.
F-4
GLOBAL NET LEASE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Net income (loss)
Other comprehensive income (loss)
Cumulative translation adjustment
Designated derivatives, fair value adjustments
Other comprehensive (loss) income
Comprehensive income (loss)
Amounts attributable to non-controlling interest
Net income
Cumulative translation adjustment
Designated derivatives, fair value adjustments
Comprehensive (income) loss attributable to non-controlling interest
Year Ended December 31,
2016
2015
2014
$
47,577 $
(2,015) $
(53,594)
(6,447)
(6,705)
(13,152)
$
34,425 $
(437)
52
54
(331)
1,257
556
1,813
(202) $
(50)
197
(70)
77
476
(6,384)
(5,908)
(59,502)
—
—
—
—
Comprehensive income (loss) attributable to stockholders
$
34,094 $
(125) $
(59,502)
The accompanying notes are an integral part of these consolidated financial statements.
F-5
GLOBAL NET LEASE, INC.
CONSOLIDATED STATEMENTS OF EQUITY
Years Ended December 31, 2016, 2015 and 2014
(In thousands, except share data)
Common Stock
Number of
Shares
Par
Value
Additional
Paid-in
Capital
Accumulated Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders'
Equity
Non-
controlling
interest
Total Equity
177,933,175
$ 1,782
$
1,575,592
$
(5,589)
$
(155,116)
$
1,416,669
$
Balance, December 31, 2013
15,665,827
$
157
$
133,592
$
Issuance of common stock
157,635,481
1,579
1,565,738
Common stock offering costs, commissions and
dealer manager fees
—
Common stock issued through dividend
reinvestment plan
Common stock repurchases
Share-based compensation
Amortization of restricted shares
Dividends declared
Net loss
Cumulative translation adjustment
Designated derivatives, fair value adjustments
Balance, December 31, 2014
Issuance of common stock
Common stock offering costs, commissions and
dealer manager fees
Common stock issued through dividend
reinvestment plan
Dividends declared
Issuance of operating partnership units
Vesting of Class B Units
Equity-based compensation
Distributions to non-controlling interest holders
Net loss
Cumulative translation adjustment
Designated derivatives, fair value adjustments
Rebalancing of ownership percentage
Balance, December 31, 2015
—
47
(1)
—
—
—
—
—
—
(167,693)
44,839
(990)
10
96
—
—
—
—
4,721,780
(99,969)
10,056
—
—
—
—
—
37,407
—
—
—
420
49
3,005,936
—
—
—
—
—
—
—
—
—
30
—
—
—
—
—
—
—
—
—
28,548
—
—
—
181
—
—
—
—
1,574
Common stock repurchases, inclusive of fees
(12,039,885)
(120)
(126,202)
$
319
—
—
—
—
—
—
—
—
476
(6,384)
(11,348)
$
122,720
$
—
—
—
—
—
—
(90,174)
(53,594)
—
—
1,567,317
(167,693)
44,886
(991)
10
96
(90,174)
(53,594)
476
(6,384)
—
—
—
—
—
—
—
—
—
—
1,454
486
—
—
—
—
—
(115,631)
—
—
—
—
(2,065)
—
—
—
420
49
(126,322)
28,578
(115,631)
—
—
181
—
(2,065)
1,454
486
1,574
168,936,633
$ 1,692
$
1,480,162
$
(3,649)
$
(272,812)
$
1,205,393
$
Issuance of common stock
28,684,163
Related party fees acquired in Merger (Note 3 )
(150,601)
Conversion of OP Units to common stock (
Note 1 )
Dividends declared
Equity-based compensation
Distributions to non-controlling interest holders
Net Income
Cumulative translation adjustment
Designated derivatives, fair value adjustments
Rebalancing of ownership percentage
Balance, December 31, 2016
1,264,148
—
41,332
—
—
—
—
—
287
(2)
13
—
—
—
—
—
—
—
220,581
(1,158)
9,264
—
386
—
—
—
—
(694)
—
—
—
—
—
—
—
(6,395)
(6,651)
—
—
—
—
220,868
(1,160)
9,277
(120,386)
(120,386)
—
—
47,140
—
—
—
386
—
47,140
(6,395)
(6,651)
(694)
198,775,675
$ 1,990
$
1,708,541
$
(16,695)
$
(346,058)
$
1,347,778
$
The accompanying notes are an integral part of these consolidated financial statements.
F-6
— $
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
750
14,480
2,164
(1,017)
50
(197)
70
(1,574)
14,726 $
—
—
(9,277)
—
3,362
(1,633)
437
(52)
(54)
694
8,203 $
122,720
1,567,317
(167,693)
44,886
(991)
10
96
(90,174)
(53,594)
476
(6,384)
1,416,669
420
49
(126,322)
28,578
(115,631)
750
14,480
2,345
(1,017)
(2,015)
1,257
556
—
1,220,119
220,868
(1,160)
—
(120,386)
3,748
(1,633)
47,577
(6,447)
(6,705)
—
1,355,981
GLOBAL NET LEASE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation
Amortization of intangibles
Amortization of deferred financing costs
Amortization of mortgage (discount) premium, net
Amortization of mezzanine discount
Amortization of below-market lease liabilities
Amortization of above-market lease assets
Amortization of above- and below- market ground lease assets
Bad debt expense
Unbilled straight-line rent
Vesting of Class B Units
Equity based compensation
Unrealized losses (gains) on foreign currency transactions, derivatives, and other
Unrealized gains on undesignated foreign currency advances and other hedge ineffectiveness
Unrealized losses on non-functional foreign currency advances not designated as net investment hedges
Gains on dispositions of real estate investments
Appreciation of investment in securities
Changes in operating assets and liabilities, net:
Prepaid expenses and other assets
Deferred tax assets
Accounts payable and accrued expenses
Prepaid rent
Deferred tax liability
Taxes payable
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Investment in real estate and real estate related assets
Deposits for real estate acquisitions
Proceeds from termination of derivatives
Capital expenditures
Purchase of investment securities
Proceeds from sale of real estate investments
Proceeds from redemption of investment securities
Cash acquired in merger transaction
Restricted cash
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Borrowings under credit facility
Repayments on credit facility
Repayment on mezzanine facility
Proceeds from notes payable
Payments on notes payable
Proceeds from mortgage notes payable
Payments on mortgage notes payable
Proceeds from issuance of common stock
Proceeds from issuance of operating partnership units
Year Ended December 31,
2016
2015
2014
$
47,577 $
(2,015) $
(53,594)
50,333
44,122
6,698
(446)
9
(2,559)
2,335
183
236
(10,613)
—
3,748
(1,072)
(10,109)
—
(13,341)
—
(1,151)
1,342
(3,010)
(3,063)
978
2,197
47,649
42,421
8,527
(489)
—
(2,134)
2,315
71
—
(14,809)
14,480
2,345
(7,337)
(5,124)
3,558
—
66
31
(450)
4,859
3,239
(249)
5,201
114,394
102,155
20,856
19,531
3,753
(498)
—
(1,085)
1,085
32
—
(8,679)
—
106
(1,391)
(1,881)
—
—
—
(11,965)
(2,102)
11,183
10,390
3,665
901
(9,693)
—
—
—
(200)
—
107,789
—
18,983
7,575
(223,075)
(1,507,072)
773
10,055
(10,495)
—
—
463
—
—
(775)
—
(8,838)
(490)
—
—
—
—
134,147
(222,279)
(1,517,175)
62,682
(113,868)
(51,803)
—
—
—
(13,377)
—
—
476,208
(373,167)
—
—
—
245,483
(721)
420
750
258,500
(18,500)
—
12,505
(12,505)
—
(135)
1,569,082
—
7575
Payments of offering costs
Payments of deferred financing costs
Dividends paid
—
(126)
(120,386)
49
(168,270)
(4,881)
(97,730)
(16,888)
(35,415)
F-7
GLOBAL NET LEASE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Distributions to non-controlling interest holders
Payments on common stock repurchases, inclusive of fees
Payments on share repurchases related to Tender Offer
Advances from related parties, net
Restricted cash
Net cash (used in) provided by financing activities
Net change in cash and cash equivalents
Effect of exchange rate changes on cash
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental Disclosures:
Cash paid for interest
Cash paid for income taxes
Non-Cash Investing and Financing Activities: (1)
(2,008)
—
—
2,186
(4,178)
(642)
(2,313)
(125,000)
363
2,785
—
—
—
(100)
(5,367)
(240,878)
121,604
1,582,907
7,663
(7,770)
69,938
1,480
3,774
64,684
$
69,831 $
69,938 $
$
36,195 $
24,625 $
3,778
1,589
56,039
(2,855)
11,500
64,684
6,540
—
Mortgage notes payable assumed or used to acquire investments in real estate
$
— $
31,933 $
217,791
Conversion of OP Units to common stock ( Note 1 )
Related party fees acquired in Merger ( Note 3 )
Borrowings under line of credit to acquire real estate
Common stock issued through dividend reinvestment plan
(1) Excludes non-cash activity in connection with the Merger transaction (see Note 3 — Merger Transaction ).
9,277
(1,054)
—
—
—
—
—
28,578
—
—
446,558
44,886
The accompanying notes are an integral part of these consolidated financial statements.
F-8
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
Note 1 — Organization
Global Net Lease, Inc. (the "Company"), formerly known as American Realty Capital Global Trust, Inc., incorporated on July 13, 2011, is a Maryland
corporation that elected and qualified to be taxed as a real estate investment trust ("REIT") for the United States ("U.S.") federal income tax purposes beginning
with the taxable year ended December 31, 2013. The Company operated as a non-traded REIT through June 1, 2015. On June 2, 2015 (the "Listing Date"), the
Company listed its Common Stock (the "Listing") on the New York Stock Exchange ("NYSE") under the symbol "GNL".
The Company was formed to primarily acquire a diversified portfolio of commercial properties, with an emphasis on sale-leaseback transactions involving
single tenant net-leased commercial properties. As of December 31, 2016 , the Company owned 310 properties (all references to number of properties and square
footage are unaudited) consisting of 22.0 million rentable square feet, which were 100% leased, with a weighted average remaining lease term of 9.8 years. Based
on original purchase price, 49.2% of our properties are located in the U.S. and the Commonwealth of Puerto Rico and 50.8% are in Europe. The Company may
also originate or acquire first mortgage loans secured by real estate. As of December 31, 2016 , the Company has not invested in any mezzanine loans, preferred
equity or securitized loans.
On June 30, 2014 , the Company completed its initial public offering ("IPO") after selling 172.3 million shares of common stock, $0.01 par value per share
("Common Stock"), at a price of $10.00 per share, subject to certain volume and other discounts. In addition, the Company issued an additional 1.1 million shares
pursuant to its dividend reinvestment plan (the "DRIP"). On April 7, 2015 , in anticipation of the Listing, the Company announced the suspension of the DRIP. On
May 7, 2015, the Company filed a post-effective amendment to its Registration statement on Form S-11 (File No. 001-37390) (as amended, the "Registration
Statement") to deregister the unsold shares registered under the Registration Statement. The Company’s DRIP was terminated effective December 19, 2016.
In connection with the Listing, the Company offered to purchase up to 11.9 million shares of its Common Stock at a price of $10.50 per share (the “Tender
Offer”). As a result of the Tender Offer, on July 6, 2015 , the Company purchased approximately 11.9 million shares of its Common Stock at a price of $10.50 per
share, for an aggregate amount of $125.0 million , excluding fees and expenses relating to the Tender Offer and including fractional shares repurchased thereafter.
Substantially all of the Company's business is conducted through Global Net Lease Operating Partnership, L.P. (the "OP"), a Delaware limited partnership. At
Listing, the OP had issued 1,809,678 units of limited partner interests ("OP Units") to limited partners other than the Company, of which 1,461,753 OP Units were
issued to Global Net Lease Advisors, LLC (the "Advisor"), 347,903 OP Units were issued to Moor Park Capital Partners LLP (the "Service Provider"), and 22 OP
Units were issued to Global Net Lease Special Limited Partner, LLC (the "Special Limited Partner") (see Note 11 — Related Party Transactions ). In accordance
with the limited partnership agreement of the OP, a holder of OP Units has the right to convert OP Units, at the Company's option, for a corresponding number of
shares of the Company's Common Stock or the cash value of those corresponding shares. The remaining rights of the limited partner interests are limited and do
not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP's assets. Subsequent to the Listing, all OP Units
issued to the Advisor were transferred to individual investors. On September 2, 2016 , 1,264,148 of the OP Units were converted into Common Stock, of which
916,231 were issued to individual members and employees of AR Global, 347,903 were issued to the Service Provider, and 14 were issued to the Special Limited
Partner. There were 545,530 of OP Units outstanding that were held by parties other than the Company as of December 31, 2016 .
The Company has retained the Advisor to manage the Company's affairs on a day-to-day basis. The properties are managed and leased by Global Net Lease
Properties, LLC (the "Property Manager"). The Advisor, Property Manager and Special Limited Partner are under common control with the parent of AR Capital
Global Holdings, LLC (the "Sponsor"), as a result of which they are related parties. These related parties receive compensation and fees for various services
provided to the Company. The Advisor has entered into a service provider agreement with the Service Provider, pursuant to which the Service Provider provides,
subject to the Advisor's oversight, certain real estate related services, as well as sourcing and structuring of investment opportunities, performance of due diligence,
and arranging debt financing and equity investment syndicates, solely with respect to investments in Europe.
The Company and American Realty Capital Global Trust II, Inc. ("Global II"), an entity formerly sponsored by an affiliate of the Sponsor, entered into an
agreement and plan of merger on August 8, 2016 ("the Merger Agreement"). On December 22, 2016, pursuant to the Merger Agreement, Global II merged with
and into Mayflower Acquisition LLC (the "Merger Sub"), a Maryland limited liability company and wholly owned subsidiary of the Company, at which time the
separate existence of Global II ceased and the Company became the parent of the Merger Sub (the "Merger").
F-9
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
In addition, pursuant to the Merger Agreement, American Realty Capital Global II Operating Partnership, L.P., a Delaware limited partnership and the
operating partnership of Global II (the "Global II OP"), merged with the OP, with the OP being the surviving entity (the "Partnership Merger" and together with the
Merger, the "Mergers"). As a result of the Mergers, the Company acquired the business of Global II, which immediately prior to the effective time of the Merger,
owned a portfolio of commercial properties, including single tenant net-leased commercial properties two of which were located in the U.S., three of which were
located in the United Kingdom and 10 of which were located in continental Europe (see Note 3 — Merger Transaction ).
The Company and Global II each were sponsored, directly or indirectly, by the Sponsor. The Sponsor and its affiliates provide or provided asset management
services to the Company and Global II pursuant to written advisory agreements. In connection with the Merger Agreement, the Sponsor and its affiliates had the
vesting of certain of their restricted interests in Global II and the Global II OP accelerated.
Note 2 — Summary of Significant Accounting Policies
Basis of Accounting
The accompanying consolidated financial statements of the Company are prepared on the accrual basis of accounting in accordance with accounting principles
generally accepted in the United States of America (“GAAP”).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, the OP and its subsidiaries. All inter-company 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.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates. Management makes significant estimates regarding revenue recognition, purchase
price allocations to record investments in real estate, real estate taxes, income taxes, derivative financial instruments, hedging activities, equity-based compensation
expenses related to a Multi-Year Outperformance Agreement (the “OPP”) and fair value measurements, as applicable.
Revenue Recognition
The Company's revenues, which are derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease
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.
As of December 31, 2016 and 2015 , the Company's cumulative straight-line rents receivable in the consolidated balance sheets were $30.5 million and $23.0
million , respectively. For the years ended December 31, 2016 and 2015 , the Company’s rental revenue included impacts of unbilled rental revenue of $10.6
million and $14.8 million , respectively, to adjust contractual rent to straight-line rent.
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.
F-10
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
Cost recoveries from tenants are included in operating expense reimbursement in the period the related costs are incurred, as applicable.
Investments in Real Estate
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs
and maintenance are expensed as incurred.
The Company evaluates the inputs, processes and outputs of each asset acquired to determine if the transaction is a business combination or asset acquisition.
If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statements of operations. If an
acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired
assets.
In business combinations, the Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets or liabilities and non-
controlling interests 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 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.
Disposal of real estate investments that represent a strategic shift in operations that will have a major effect on the Company's operations and financial results
are required to be presented as discontinued operations in the consolidated statements of operations. No properties were presented as discontinued operations as of
December 31, 2016 and 2015 . Properties that are intended to be sold are to be designated as “held for sale” on the consolidated balance sheets at the lesser of
carrying amount or fair value less estimated selling costs when they meet specific criteria to be presented as held for sale. Properties are no longer depreciated
when they are classified as held for sale. As of December 31, 2016 and 2015 , we did no t have any properties designated as held for sale.
The Company evaluates acquired leases and new leases on acquired properties based on capital lease criteria. A lease is classified by a tenant as a capital lease
if the significant risks and rewards of ownership reside with the tenant. This situation is met if, among other things, the non-cancelable lease term is more than 75%
of the useful life of the asset or if the present value of the minimum lease payments equals 90% or more of the leased property’s fair value at lease inception.
Depreciation and Amortization
Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five
years for fixtures and improvements and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
Capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. Capitalized below-
market lease values are amortized as an increase to rental income over the remaining terms of the respective leases and expected below-market renewal option
periods.
Capitalized above-market ground lease values are amortized as a reduction of property operating expense over the remaining terms of the respective leases.
Capitalized below-market ground lease values are amortized as an increase to property operating expense over the remaining terms of the respective leases and
expected below-market renewal option periods.
The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is amortized to expense over the remaining periods of
the respective leases.
Assumed mortgage premiums or discounts are amortized as an increase or reduction to interest expense over the remaining terms of the respective mortgages.
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.
F-11
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
Purchase Price Allocation
The Company allocates the purchase price of acquired properties to tangible and identifiable intangible assets acquired, including those acquired in the
Merger, based on their respective fair values. Tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant
basis. The Company utilizes various estimates, processes and information to determine the as-if vacant property value. Estimates of value are made using
customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land
improvements, buildings and fixtures are based on cost segregation studies performed by independent third parties or on the Company's analysis of comparable
properties in the Company's portfolio. Identifiable intangible assets include amounts allocated to acquire leases for above- and below-market lease rates, the value
of in-place leases, and the value of customer relationships, as applicable.
Factors considered in the analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property,
taking into account current market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance
and other operating expenses and estimates of lost rentals at contract rates during the expected lease-up period, which typically ranges from 12 to 18 months . The
Company also estimates costs to execute similar leases including leasing commissions, legal and other related expenses.
Above-market and below-market lease values for acquired properties are initially recorded based on the present value (using a discount rate which reflects the
risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s
estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases
and the remaining initial term plus the term of any below-market fixed rate renewal options for below-market leases. The capitalized above-market lease values are
amortized as a reduction of base rental revenue over the remaining terms of the respective leases, and the capitalized below-market lease values are amortized as an
increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases. If a tenant
with a below market rent renewal does not renew, any remaining unamortized amount will be taken into income at that time.
The aggregate value of intangible assets related to customer relationship, as applicable, is measured based on the Company's evaluation of the specific
characteristics of each tenant’s lease and the Company's overall relationship with the tenant. Characteristics considered by the Company in determining these
values include the nature and extent of its existing business relationships with the tenant, growth prospects for developing new business with the tenant, the
tenant’s credit quality and expectations of lease renewals, among other factors.
The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event
does the amortization period for intangible assets exceed the remaining depreciable life of the building. If a tenant terminates its lease, the unamortized portion of
the in-place lease value and customer relationship intangibles is charged to expense.
In making estimates of fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including independent appraisals that
may be obtained in connection with the acquisition or financing of the respective property and other market data. The Company also considers information
obtained about each property as a result of the Company's pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired
and intangible liabilities assumed.
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 December 31, 2016 .
F-12
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
Cash and Cash Equivalents
Cash and cash equivalents include cash in bank accounts as well as investments in highly-liquid money market funds with original maturities of three months
or less. The Company deposits cash with high quality financial institutions. Deposits in the U.S. and other countries where we have deposits are guaranteed by the
Federal Deposit Insurance Company ("FDIC") in the U.S., Financial Services Compensation Scheme ("FSCS") in the United Kingdom, Duchy Deposit Guarantee
Scheme ("DDGS") in Luxembourg and by similar agencies in the other countries, up to insurance limits. The Company had deposits in the U.S., United Kingdom,
Luxembourg, Germany, Finland, France and The Netherlands totaling $69.8 million at December 31, 2016 , of which $11.5 million , $12.9 million and $43.4
million are currently in excess of amounts insured by the FDIC, FSCS and European equivalent deposit insurance companies including DDGS, respectively. At
December 31, 2015 , the Company had deposits in the U.S., United Kingdom, Luxembourg, Germany, Finland and The Netherlands totaling $69.9 million , of
which $40.3 million , $11.4 million and $11.7 million were in excess of the amounts insured by the FDIC, FSCS and European equivalent deposit insurance
companies including DDGS, respectively. Although the Company bears risk to amounts in excess of those insured, losses are not anticipated.
Restricted Cash
Restricted cash primarily consists of debt service and real estate tax reserves. The Company had restricted cash of $7.5 million and $3.3 million as of
December 31, 2016 and 2015 , respectively.
Deferred Costs, Net
Deferred costs, net consists of deferred financing costs. Deferred financing costs represent commitment fees, legal fees, and other costs associated with
obtaining commitments for financing. These costs are amortized over the terms of the respective financing agreements using the effective interest method.
Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financial
transactions that do not close are expensed in the period in which it is determined that the financing will not close.
Share Repurchase Program
Prior to April 7, 2015 , the Company had in place a Share Repurchase Program ("SRP), providing for limited repurchases of the Company's Common Stock.
On April 7, 2015 , the Company's board of directors approved the termination of the Company’s SRP.
The Company accounts for the purchase of capital stock under a method that is consistent with Maryland law (the state of Company's domicile), which does
not contemplate treasury stock. Any capital stock reacquired for any purpose is recorded as a reduction of common stock (at $0.01 par value per share) and an
increase in accumulated deficit.
Dividend Reinvestment Plan
Prior to April 7, 2015 , the Company had in place a DRIP, providing for reinvestment of dividends in the Company's Common Stock. Shares issued under the
DRIP were recorded to equity in the accompanying consolidated balance sheets in the period dividends were declared. The Company’s DRIP was terminated
effective December 19, 2016.
F-13
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
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, 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 the derivative is designated and qualifies for as a 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 derivative's change in fair value will be immediately recognized in
earnings.
Share-Based Compensation
The Company has a stock-based incentive award plan for its directors, which are accounted for under the guidance for employee share based payments. The
cost of services received in exchange for a stock award is measured at the grant date fair value of the award and the expense for such awards is included in equity
based compensation on consolidated statements of operations and is recognized over the vesting period or when the requirements for exercise of the award have
been met (see Note 13 — Share-Based Compensation ).
Income Taxes
The Company qualified to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), beginning
with the taxable year ended December 31, 2013. Commencing with such taxable year, the Company was organized to operate in such a manner as to qualify for
taxation as a REIT under the Code. The Company intends to continue to operate in such a manner to continue to qualify for taxation as a REIT, but no assurance
can be given that it will operate in a manner so as to remain qualified as a REIT. As a REIT, the Company generally will not be subject to federal corporate income
tax to the extent it distributes annually all of its REIT taxable earnings. REIT's are subject to a number of other organizational and operational requirements. The
Company conducts business in various states and municipalities within the U.S. (including Puerto Rico), United Kingdom and continental Europe and, as a result,
the Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and certain foreign jurisdictions. As a result, the
Company 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 Company's earnings and available cash.
F-14
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
In addition, Company's 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. During the period
from July 13, 2011 (date of inception) to December 31, 2012, the Company elected to be taxed as a corporation, pursuant to which income taxes are accounted for
under the asset and liability method. Deferred tax assets and liabilities are recorded for the future tax consequences attributable to differences between the financial
statement carrying amounts and income tax basis of assets and liabilities and the expected benefits of utilizing net operating loss and tax credit carryforwards,
using expected tax rates in effect for each taxing jurisdiction in which the Company operates for the year in which those temporary differences are expected to be
recovered or settled. The Company recognizes the financial statement effects of a tax position when it is more-likely-than-not, based on technical merits, that the
position will be sustained upon examination. Because, the Company elected and qualified to be taxed as a REIT commencing with the taxable year ended
December 31, 2013, it did not anticipate that any applicable deferred tax assets or liabilities will be realized.
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 income from its real estate operations in the U.S.. 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.
The Company’s current income tax provision for the years ended December 31, 2016 , 2015 and 2014 was $2.5 million , $5.1 million and $0.7 million ,
respectively. The Company’s deferred income tax provision (benefit) for the years ended December 31, 2016 , 2015 , and 2014 was $1.9 million , $0.8 million ,
and $(2.1) million , respectively. Deferred tax assets are net of a valuation allowance in the amounts of $2.4 million and $4.3 million as of December 31, 2016 and
2015 , respectively.
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. For the years ended December 31, 2016 and 2015 , the
Company recognized an income tax expense of $4.4 million and $5.9 million , respectively. Deferred income tax (expense) benefit is generally a function of the
period’s temporary differences and the utilization of net operating losses generated in prior years that had been previously recognized as deferred income tax assets
from state and local taxes in the U.S. or in foreign jurisdictions.
The amount of dividends payable to the Company's stockholders is determined by the board of directors and is dependent on a number of factors, including
funds available for distributions, financial condition, capital expenditure requirements, as applicable, and annual dividend requirements needed to qualify and
maintain the Company's status as a REIT under the Code.
F-15
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
Foreign Currency Translation
The Company's reporting currency is the USD. The functional currency of the Company's foreign operations is the applicable local currency for each foreign
subsidiary. Assets and liabilities of foreign subsidiaries (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 statements of equity.
Per Share Data
The Company calculates basic earnings per share of Common Stock by dividing net income (loss) for the period by weighted-average shares of its Common
Stock outstanding for a respective period. Diluted income per share takes into account the effect of dilutive instruments such as unvested restricted stock, long term
incentive plan ("LTIP") units and OP units, based on the average share price for the period in determining the number of incremental shares that are to be added to
the weighted-average number of shares outstanding (see Note 14 — Earnings Per Share ).
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.
The Company owns and invests in commercial properties principally in the U.S., United Kingdom, and continental Europe, that are then leased to companies,
primarily on a triple-net lease basis. The Company earns lease revenues from its wholly-owned real estate investments. The Company’s portfolio was comprised of
full ownership interests in 310 properties, substantially all of which were net leased to 95 tenants, with an occupancy rate of 100% , and totaled approximately 22.0
million square feet.
The Company evaluates its results from operations in one reportable segment by its local currency. Other than the U.S. and United Kingdom, no country or
tenant individually comprised more than 10% of the Company’s total lease revenues, or total long lived-assets at December 31, 2016 .
The following tables present the geographic information:
(In thousands)
Revenues:
United States
United Kingdom
Europe (Finland, France, Germany, Luxembourg, and the Netherlands)
Total
(In thousands)
Investments in Real Estate:
United States
United Kingdom
Europe (Finland, France, Germany, Luxembourg, and the Netherlands)
Total
Reclassifications
Year Ended December 31,
2016
2015
2014
$
133,315 $
130,598 $
37,263
43,596
40,830
33,904
$
214,174 $
205,332 $
65,651
18,199
9,533
93,383
As of December 31,
2016
2015
$
1,542,958 $
1,610,720
571,246
817,491
441,586
493,998
$
2,931,695 $
2,546,304
Reclassifications have been made to the 2014 and 2015 consolidated financial statements to conform to the current period presentation.
F-16
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
Revision to previously issued financial statements
During the six months ended June 30, 2016, the Company identified errors in the preparation of its consolidated statements of comprehensive income (loss)
and consolidated statement of changes in equity since 2014 which impacted the quarterly financial statements for the periods ended March 31, June 30 and
September 30, 2015 and 2014 and the years ended December 31, 2015 and 2014. Specifically, the Company had been reflecting the fair value adjustments for its
cross currency derivatives designated as net investment hedges on its foreign investments as part of “Designated derivatives - fair value adjustments” within Other
Comprehensive Income ("OCI") rather than treating them as part of “Cumulative translation adjustments” also in OCI consistent with the treatment of the hedged
item as required by ASC 815. The Company concluded that the errors noted above were not material to any historical periods presented. However, in order to
correctly present the cumulative translation adjustment and designated derivatives, fair value adjustment in the appropriate period, management revised previously
issued financial statements. The Company will revise its future presentations of OCI when the periods are refiled in first quarter of 2017 for comparative purposes.
The effects of these revisions are summarized below:
(In thousands)
Year ended December 31, 2014
Cumulative translation adjustment
Designated derivatives, fair value adjustments
Total OCI
(In thousands)
Year ended December 31, 2015
Cumulative translation adjustment
Designated derivatives, fair value adjustments
Total OCI
(In thousands)
Three months ended March 31, 2016
Cumulative translation adjustment
Designated derivatives, fair value adjustments
Total OCI
As originally Reported
Adjustment
As Revised
$
$
(11,990) $
6,082
(5,908) $
12,466 $
(12,466)
— $
As originally Reported
Adjustment
As Revised
$
$
(5,169) $
6,982
1,813 $
6,426
$
(6,426)
— $
As originally Reported
Unaudited Adjustment
As Revised
$
$
2,996 $
(11,316)
(8,320) $
(2,930) $
2,930
— $
F-17
476
(6,384)
(5,908)
1,257
556
1,813
66
(8,386)
(8,320)
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
Classification correction
During the quarter ended March 31, 2016, the Company identified that one of its bank accounts was legally restricted but had been erroneously classified as
cash and cash equivalents rather than as restricted cash in its balance sheets and cash flow statements since 2014 and impacted the quarterly financial statements
for the periods ended June 30 and September 30, 2014 and the year ended December 31, 2014 and 2015. The account had a balance of $1.7 million at December
31, 2015. The Company evaluated the impact to all periods and concluded that prior financial statements were not materially misstated and the impact to the
current period financial statements was not material. The Company correctly classified this bank account as restricted cash at March 31, 2016 and reflected a cash
out-flow from financing activities for $1.7 million during the three months ended March 31, 2016.
Out-of-period adjustments
During the first and second quarter of 2015, the Company had recorded the following out-of-period adjustments to correct errors from prior periods: (i)
additional rental income and accrued rent of $0.3 million related to the straight-line rent effect of correctly including termination payments required under leases
with cancellation clauses that were considered probable when assessing the lease term and (ii) additional taxes of $0.9 million representing current foreign taxes
payable of $1.2 million and a deferred tax asset of $0.3 million , both relating to 2014. The Company also recorded an out-of-period adjustment in the fourth
quarter to correct an additional error in income taxes of $0.5 million relating to 2014 which resulted from errors in estimating our income tax expense. The
Company concluded that these adjustments were not material to the financial position or results of operations for the current period or any of the prior periods,
accordingly, the Company recorded the related adjustments in the periods they were identified during the year ended December 31, 2015.
In addition, the Company identified errors in accounting for certain cross currency derivatives that were no longer designated as hedges subsequent to their
restructuring on February 4, 2015 (see Note 8 — Derivatives and Hedging Activities ). Gains that should have been included in net income (loss) were instead
included in other comprehensive income (loss) of approximately $0.5 million during the three month period ended March 31, 2015. The Company has concluded
that this adjustment is not material to the financial position or results of operations for the prior periods. The Company recorded the related adjustment in the
period it was identified during the year ended December 31, 2015.
Listing Note
Concurrent with the Listing, the Company, as the general partner of the OP, caused the OP, subject to the terms of the Second Amended and Restated Limited
Partnership Agreement, to issue a note ("the Listing Note") to the Special Limited Partner, to evidence the OP's obligation to distribute to the Special Limited
Partner an aggregate amount (the "Listing Amount") equal to 15.0% of the difference (to the extent the result is a positive number) between:
•
•
the sum of (i) the "market value" (as defined in the Listing Note) of all of the Company’s outstanding shares of Common Stock plus (ii) the sum of all
distributions or dividends (from any source) paid by the Company to its stockholders prior to the Listing; and
the sum of (i) the total amount raised in the Company’s IPO and its DRIP prior to the Listing ("Gross Proceeds") plus (ii) the total amount of cash that, if
distributed to those stockholders who purchased shares in the IPO and under the DRIP, would have provided those stockholders a 6.0% cumulative, non-
compounded, pre-tax annual return (based on a 365-day year) on the Gross Proceeds.
The market value used to calculate the Listing Amount was not determinable until January 2016, which was the end of a measurement period of 30
consecutive trading days, commencing on the 180th calendar day following the Listing. The Special Limited Partner had the right to receive distributions of Net
Sales Proceeds, as defined in the Listing Note, until the Listing Note is paid in full; provided that, the Special Limited Partner had the right, but not the obligation,
to convert the entire special limited partner interest into OP Units. Those OP Units would be convertible for the cash value of a corresponding number of shares of
Common Stock or, at the Company's option, a corresponding number of shares of Common Stock in accordance with the terms contained in the Second Amended
and Restated Limited Partnership Agreement.
Until the amount of the Listing Note was determined, the Listing Note was recorded as a liability which was marked to fair value at each reporting date, with
changes in the fair value recorded in the consolidated statements of operations. The final value of the Listing Note on maturity at January 2016 was determined to
be zero .
Multi-Year Outperformance Agreement
Concurrent with the Listing and modifications to the Advisor agreement, the Company entered into the OPP with the OP and the Advisor (see Note 13 —
Share-Based Compensation ). The Company records equity based compensation expense associated with the awards over the requisite service period of five years .
The cumulative equity-based compensation expense is adjusted each reporting period for changes in the estimated market-related performance.
F-18
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
Recently Issued Accounting Pronouncements
Adopted:
In August 2014, the FASB issued ASU 2014-15, Disclosures of Uncertainties about an Entities Ability to Continue as a Going Concern, which requires
management to assess a company’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. The assessment is
required for each annual and interim reporting period. Management’s assessment should evaluate whether there are conditions or events that raise substantial doubt
about the entity's ability to continue as a going concern. Substantial doubt is deemed to exist when it is probable that the company will be unable to meet its
obligations within one year from the financial statement issuance date. If conditions or events give rise to substantial doubt about the entity's ability to continue as a
going concern, the guidance requires management to disclose information that enables users of the financial statements to understand the conditions or events that
raised the substantial doubt, management's evaluation of the significance of the conditions or events that led to the doubt, the entity’s ability to continue as a going
concern and management’s plans that are intended to mitigate or that have mitigated the conditions or events that raised substantial doubt about the entity's ability
to continue as a going concern. The guidance is effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter, early
application is permitted. The Company believes that adoption of this guidance will not have a material impact on the Company's consolidated financial position,
results of operations or cash flows.
In February 2015, the Financial Accounting Standards Board ("FASB") issued ASU 2015-02 Consolidation (Topic 810) - Amendments to the Consolidation
Analysis . The new guidance applies to entities in all industries and provides a new scope exception to registered money market funds and similar unregistered
money market funds. It makes targeted amendments to the current consolidation guidance and ends the deferral granted to investment companies from applying the
VIE guidance. The standard does not add or remove any of the characteristics that determine if an entity is a VIE. However, when decision-making over the
entity’s most significant activities has been outsourced, the standard changes how a reporting entity assesses if the equity holders at risk lack decision making
rights. Previously, the reporting entity would be required to determine if there is a single equity holder that is able to remove the outsourced decision maker that
has a variable interest. The new standard requires that the reporting entity first consider the rights of all of the equity holders at risk. If the equity holders have
certain rights that are deemed to give them the power to direct the entity’s most significant activities, then the entity does not have this VIE characteristic. The new
standard also introduces a separate analysis specific to limited partnerships and similar entities for assessing if the equity holders at risk lack decision making
rights. Limited partnerships and similar entities will be VIEs unless the limited partners hold substantive kick-out rights or participating rights. In order for such
rights to be substantive, they must be exercisable by a simple majority vote (or less) of all of the partners (exclusive of the general partner and its related parties). A
right to liquidate an entity is viewed as akin to a kick-out right. The guidance for limited partnerships under the voting model has been eliminated in conjunction
with the introduction of this separate analysis, including the rebuttable presumption that a general partner unilaterally controls a limited partnership and should
therefore consolidate it. A limited partner with a controlling financial interest obtained through substantive kick out rights would consolidate a limited partnership.
The standard eliminates certain of the criteria that must be met for an outsourced decision maker or service provider’s fee arrangement to not be a variable interest.
Under current guidance, a reporting entity first assesses whether it meets power and economics tests based solely on its own variable interests in the entity to
determine if it is the primary beneficiary required to consolidate the VIE. Under the new standard, a reporting entity that meets the power test will also include
indirect interests held through related parties on a proportionate basis to determine whether it meets the economics test and is the primary beneficiary on a
standalone basis. The standard is effective for annual periods beginning after December 15, 2015. The Company has evaluated the impact of the adoption of ASU
2015-02 on its consolidated financial position and has determined under ASU 2015-02 the Company's operating ownership is a VIE. However, the Company meets
the disclosure exemption criteria as the Company is the primary beneficiary of the VIE and the OP's interest is considered a majority voting interest. As such, this
standard will not have a material impact on the Company's consolidated financial statements.
F-19
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
In April 2015, the FASB issued ASU 2015-03 Interest-Imputation of Interest (Subtopic 835-30). The guidance changes the presentation of debt issuance costs
on the balance sheet. The amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction
from the carrying amount of that debt liability. In August 2015, the FASB added that, for line of credit arrangements, the SEC staff would not object to an entity
deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line, regardless of
whether or not there are any outstanding borrowings. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning
after December 15, 2015. The Company adopted this guidance effective January 1, 2016. As a result, the Company reclassified $7.4 million of deferred debt
issuance costs related to the Company's mortgage notes payable from deferred costs, net to mortgage notes payable in the Company's consolidated balance sheets
as of December 31, 2015 . As permitted under the revised guidance, the Company elected to not reclassify the deferred debt issuance costs associated with its
Credit Facility (as defined in Note 5 — Credit Borrowings). The deferred debt issuance costs associated with the Credit Facility, net of accumulated amortization,
and deferred leasing costs, net of accumulated amortization, are included in deferred costs, net on the Company's accompanying consolidated balance sheets as of
December 31, 2016 and 2015 .
In August 2015, FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit
Arrangements, which amends ASC 835-30, Interest - Imputation of Interest . This update clarifies the presentation and subsequent measurement of debt issuance
costs associated with lines of credit. These costs may be deferred and presented as an asset and subsequently amortized ratably over the term of the revolving debt
arrangement. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company
has adopted the provisions of this guidance effective January 1, 2016, and has applied the provisions prospectively. The adoption of this guidance has not had a
material impact on the Company's consolidated financial position, results of operations or cash flows.
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805) . The guidance eliminates the requirement to adjust provisional
amounts from a business combination and the related impact on earnings by restating prior period financial statements for measurement period adjustments. The
new guidance requires that the cumulative impact of measurement period adjustments on current and prior periods, including the prior period impact on
depreciation, amortization and other income statement items and their related tax effects, shall be recognized in the period the adjustment amount is determined.
The cumulative adjustment would be reflected within the respective financial statement line items affected. The revised guidance is effective for fiscal years, and
for interim periods within those fiscal years, beginning after December 15, 2015. The Company has adopted the provisions of this guidance effective January 1,
2016, and has applied the provisions prospectively. The adoption of this guidance has not had a material impact on the Company's consolidated financial position,
results of operations or cash flows.
Pending Adoption:
In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) . Under the revised guidance, an entity is required to
recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. The revised guidance allows entities to apply either a full retrospective or modified retrospective transition method upon
adoption. In July 2015, the FASB finalized a one-year delay of the revised guidance, although entities will be allowed to early adopt the guidance as of the original
effective date. The new guidance will be effective in the Company's 2018 fiscal year. The Company is currently evaluating the impact of the revised guidance on
the consolidated financial statements and has not yet determined the method by which the Company will adopt the standard.
In January 2016, the FASB issued ASU 2016-01 Financial Instruments-Overall:Recognition and Measurement of Financial Assets and Financial Liabilities
(Subtopic 825-10). The revised guidance 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 revised guidance is effective for fiscal years,
and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is not permitted for most of the amendments in the update.
The Company is currently evaluating the impact of the new guidance.
F-20
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
In February 2016, the FASB issued ASU 2016-02 Leases (ASC 842), which sets out the principles for the recognition, measurement, presentation and
disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual 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 of 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. The new standard requires lessors to account for leases using an
approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The ASU is expected to impact the
Company’s consolidated financial statements as the Company has certain operating and land lease arrangements for which it is the lessee. ASC 842 supersedes the
previous leases standard, ASC 840 Leases. The standard is effective on January 1, 2019, with early adoption permitted. The Company is in the process of
evaluating the impact of this new guidance.
In March 2016, the FASB issued ASU 2016-05 Derivatives and Hedging (Topic 815) , Effect of Derivative Contract Novations on Existing Hedge Accounting
Relationships . Under the new guidance, the novation of a derivative contract in a hedge accounting relationship does not, in and of itself, require dedesignation of
that hedge accounting relationship. The hedge accounting relationship could continue uninterrupted if all of the other hedge accounting criteria are met, including
the expectation that the hedge will be highly effective when the creditworthiness of the new counterparty to the derivative contract is considered. The guidance is
effective for fiscal years beginning after December 15, 2016, and interim periods therein. Early adoption is permitted, including adoption in an interim period. The
Company is currently evaluating the impact of this new guidance.
In March 2016, the FASB issued ASU 2016-08 Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting
Revenue Gross versus Net). The guidance requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed
in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation. This guidance is effective for public
business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The Company
is currently evaluating the impact of this new guidance.
In March 2016, the FASB issued an update on ASU 2016-09 Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting. The guidance changes the accounting for certain aspects of share-based compensation. Among other things, the revised guidance allows
companies to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they
occur. The revised guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently
evaluating the impact of this new guidance.
In April 2016, the FASB issued ASU 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing . The
amendments in this update do not change the core principle of the guidance in Topic 606 but rather, clarify aspects of identifying performance obligations and the
licensing implementation guidance, while retaining the related principles for those areas. The amendment is effective on the same date as ASU 2014-09, which is
not yet effective. The Company is currently evaluating the impact of the revised guidance on the consolidated financial statements and has not yet determined the
method by which the Company will adopt the standard.
In May 2016, the FASB issued ASU 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients .
The amendments provide clarifying guidance in a few narrow areas and add some practical expedients to the guidance. The amendments are expected to reduce the
degree of judgment necessary to comply with Topic 606 , which the FASB expects will reduce the potential for diversity arising in practice and reduce the cost and
complexity of applying the guidance. The amendment is effective on the same date as ASU 2014-09, which is not yet effective. The Company is currently
evaluating the impact of the revised guidance on the consolidated financial statements and has not yet determined the method by which the Company will adopt the
standard.
In August 2016, the FASB issued ASU 2016-15 Statement of Cash Flows (Topic 230) 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 revised guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is
currently evaluating the impact of this new guidance.
F-21
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
In October 2016, the FASB issued ASU 2016-17 Interest Held through Related Parties that Are under Common Control (Topic 810) guidance where a
reporting entity will need to evaluate if it should consolidate a VIE. The amendments change the evaluation of whether a reporting entity is the primary beneficiary
of a VIE by changing how a single decision maker of a VIE treats indirect interests in the entity held through related parties that are under common control with
the reporting entity. The revised guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company is
currently evaluating the impact of this new guidance.
In November 2016, the FASB issued ASU 2016-18 Restricted Cash (a consensus of the FASB Emerging Issues Task Force) (Topic 230) guidance on the
classification of restricted cash in the statement of cash flows. The amendment requires restricted cash to be included in the beginning-of-period and end-of-period
total cash amounts. Therefore, transfers between cash and restricted cash will no longer be shown on the statement of cash flows. The guidance is effective for
reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.
In January 2017, the FASB issued ASU 2017-01 Clarifying the Definition of a Business (Topic 805) guidance that revises the definition of a business. 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. Early application is permitted only for transactions that have not previously been reported in issued financial
statements. The Company is currently evaluating the impact of this new guidance.
Note 3 — Merger Transaction
Pursuant to the Merger Agreement, each outstanding share of Global II's common stock, including restricted shares of common stock, par value $0.01 per
share ("Global II Common Stock"), other than shares owned by the Company, any subsidiary of the Company or any wholly owned subsidiary of Global II, was
converted into the right to receive 2.27 shares of Common Stock of the Company, par value $0.01 per share (such consideration, the “Stock Merger
Consideration”), and each outstanding unit of limited partnership interest and Class B interest of the Global II OP (collectively, “Global II OP Units”) was
converted into the right to receive 2.27 shares of Company Common Stock (the “Partnership Merger Consideration” and, together with the Stock Merger
Consideration, the “Merger Consideration”), in each case with cash paid in lieu of fractional shares.
In addition, as provided in the Merger Agreement, all outstanding restricted stock of Global II became fully vested and entitled to receive the Merger
Consideration.
The Company issued 28.7 million of Company Common Shares as consideration in the Merger. Based upon the closing price of the shares of Company
Common Stock of $7.70 on December 21, 2016 , as reported on the NYSE, and the number of shares of Global II Common Stock outstanding, including unvested
restricted shares and OP Units, net of any fractional shares on December 21, 2016 , the aggregate fair value of the Merger Consideration paid to former holders of
Global II Common Stock and former holders of units of Global II OP Units was $220.9 million .
On December 22, 2016 (the "Merger Date"), pursuant to the Merger Agreement, Global II merged with and into the Merger Sub. In addition, Global II OP,
merged with the OP (see Note 1 — Organization for details). The fair value of the consideration transferred for the Mergers totaled $220.9 million and consisted of
the following:
Fair value of consideration transferred:
Cash
Common stock
Total consideration transferred
F-22
As of Mergers Date
$
$
—
220,868
220,868
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
Accounting Treatment of the Mergers
The Mergers are accounted for under the acquisition method for business combinations pursuant to GAAP, with GNL as the accounting acquirer of Global II.
The consideration to be transferred by GNL to acquire Global II establishes a new accounting basis for the assets acquired, liabilities assumed and any non-
controlling interests, measured at their respective fair value as of the Merger Date. To the extent fair value of the Merger Consideration exceeds fair value of net
assets acquired, any such excess represents goodwill. Alternatively, if fair value of net assets acquired exceeds fair value of the Merger Consideration, the
transaction could result in a bargain purchase gain that is recognized immediately in earnings and attributable to GNL common stockholders. Adjustments to
estimated fair value of identifiable assets and liabilities of Global II, as well as adjustments to the Merger Consideration may change the determination and amount
of goodwill and/or bargain purchase gain and may impact depreciation, amortization and accretion based on revised fair value of assets acquired and liabilities
assumed. The actual value of the Merger Consideration is based upon the market price of the GNL common stock at the time of closing of the Merger.
F-23
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
Allocation of Consideration
The consideration transferred pursuant to the Merger was allocated to the assets acquired and liabilities assumed for Global II, based upon their estimated fair
values as of the Merger Date. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed, including all measurement
period adjustments, at the Merger Date.
(Dollar amounts in thousands)
Total consideration:
Global II
Fair value of Company's shares of common stock issued, net of fractional shares
$
220,868
Assets Acquired at Fair Value
Land
Buildings, fixtures and improvements
Acquired intangible lease assets
Total real estate investments, at fair value
Restricted cash
Derivatives, at fair value
Prepaid expenses and other assets
Related party notes receivable acquired in Merger
Due from related parties
Deferred tax assets
Goodwill and other intangible assets, net
Total Assets Acquired at Fair Value
Liabilities Assumed at Fair Value
Mortgage notes payable
Mortgage (discount) premium, net
Mezzanine facility
Mezzanine discount, net
Acquired intangible lease liabilities, net
Derivatives, at fair value
Accounts payable and accrued expenses
Prepaid rent
Deferred tax liability
Taxes payable
Dividend payable
Total Liabilities Assumed at Fair Value
Net assets acquired excluding cash
Cash acquired on acquisition
70,880
392,247
111,221
574,348
7,575
21,808
1,317
5,138
1,463
376
10,977
623,002
279,032
(2,724)
107,047
(26)
8,930
3,911
7,212
6,001
10,071
1,661
2
421,117
201,885
18,983
$
The allocations in the table above from land, buildings and fixtures and improvements, acquired intangible lease assets and liabilities, have been provisionally
assigned to each class of assets and liabilities, pending final confirmation from the third party specialist for the Merger acquisitions acquired on the Merger Date.
See Note 4 — Real Estate Investments, Net for pro forma disclosures relating to the Global II Merger and other property acquisitions during the years ended in
2015 and 2014 .
F-24
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
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 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 as payment in lieu of cash 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 of Company Stock
on the Merger Date.
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. AR Global has unconditionally and
irrevocably guaranteed Global II Advisor’s obligations to repay the monthly installments.
Note 4 — Real Estate Investments, Net
Property Acquisitions
The following table presents the allocation of the assets acquired and liabilities assumed during the years ended December 31, 2015 and 2014 based on
contract purchase price, excluding acquisition related costs, based on the exchange rate at the time of purchase. The Company has acquired 15 properties as part of
business acquisition of Global II during the year ended December 31, 2016 .
(Dollar amounts in thousands)
Real estate investments, at cost:
Land
Buildings, fixtures and improvements
Total tangible assets
Intangibles acquired:
In-place leases
Above market lease assets
Below market lease liabilities
Below market ground lease assets
Above market ground lease liabilities
Goodwill
Total assets acquired, net
Mortgage notes payable used to acquire real estate investments
Credit facility borrowings used to acquire real estate investments
Cash paid for acquired real estate investments
Number of properties purchased
F-25
Year Ended December 31
2015
2014
23,865 $
192,052
215,917
44,241
1,007
(7,449)
3,363
(2,071)
—
255,008
(31,933)
—
223,075 $
22
288,376
1,450,862
1,739,238
418,419
26,711
(17,513)
901
—
3,665
2,171,421
(217,791)
(446,558)
1,507,072
270
$
$
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
Proforma Information
As described in Note 3 — Merger Transaction , the following table presents unaudited pro forma information as if the Company's Merger and acquisition in
2016 of Global II were completed on January 1, 2015 . Additionally, the unaudited pro forma net income (loss) attributable to stockholders was adjusted to exclude
acquisition and transaction related expense of $9.8 million for the year ended December 31, 2016 to the year ended December 31, 2015 . Such acquisition and
transaction related expenses have been reflected in the year ended December 31, 2015 as if such acquisition costs had been consummated on January 1, 2015 .
(In thousands)
Pro forma revenues
Pro forma net income (loss)
Pro forma basic and diluted net income (loss) per share
Dispositions
Year Ended December 31,
2016
2015
$
$
$
258,919 $
42,510 $
0.25 $
265,933
(15,367)
(0.09)
As of December 31, 2016 and 2015 , the Company did not have any properties that are classified as assets held for sale. The Company did not sell any real
estate assets during the year ended December 31, 2015 . During the year ended December 31, 2016 , the Company sold 34 properties pursuant to the Company's
asset recycling plan for a total contract sales price of $110.4 million and gains on sale of $14.3 million . Such gains are reflected within gains on dispositions of
real estate investments in the consolidated statements of operations for the year ended December 31, 2016 and exclude $0.9 million Gain Fee payable to the
Advisor (see Note 11 — Related Party Transactions for details). The following table summarizes the aforementioned properties sold.
Portfolio
State
Disposition Date
Number of Properties
Square Feet
Properties Sold
Fresenius II
Garden Ridge
Dollar General
Dollar General - Choctaw
Dollar Tree - 8-Pack
Dollar General - Allentown
Dollar General - Uniontown
Dollar General - 15-Pack
Fresenius I
Garden Ridge
Hotel Winston
Garden Ridge
Garden Ridge
Total
Georgia
September 2, 2016
North Carolina
September 29, 2016
Ohio
Oklahoma
Florida
Pennsylvania
Pennsylvania
(3)
September 29, 2016
October 13, 2016
October 13, 2016
October 25, 2016
October 27, 2016
October 28, 2016
South Carolina
November 2, 2016
Texas
November 21, 2016
The Netherlands
December 15, 2016
Arizona
Kentucky
December 20, 2016
December 20, 2016
1
1
1
1
8
1
1
15
1
1
1
1
1
34
6,192
119,258
9,026
9,100
63,510
9,026
9,014
145,938
10,155
140,381
24,283
143,271
162,000
851,154
(1) The Company has used the proceeds to pay down portion of mezzanine facility, credit facility and paid off a secondary mortgage loan on DB Luxembourg.
(2) Consists of properties sold in Pennsylvania, Ohio and Oklahoma.
F-26
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
Intangible Lease Assets and Lease Liabilities
Acquired intangible lease assets and lease liabilities consist of the following:
(In thousands)
Intangible assets:
December 31,
2016
2015
In-place leases, net of accumulated amortization of $99,355 and $61,857 at December 31, 2016 and 2015,
respectively
$
419,472 $
426,434
Above-market leases, net of accumulated amortization of $5,040 and $3,279 at December 31, 2016 and 2015,
respectively
Below-market ground leases, net of accumulated amortization of $339 and $115 at December 31, 2016, and
2015, respectively
Total intangible lease assets, net
Intangible liabilities:
Below-market leases, net of accumulated amortization of $5,621 and $3,296 at December 31, 2016 and 2015,
respectively
Above-market ground leases, net of accumulated amortization of $72 and $15 at December 31, 2016 and 2015,
respectively
Total intangible lease liabilities, net
Projected Amortization for intangible lease assets and liabilities
33,773
22,322
29,082
482,327 $
4,287
453,043
31,175 $
1,866 $
33,041 $
25,984
1,994
27,978
$
$
$
The following table provides the weighted-average amortization periods as of December 31, 2016 for intangible assets and liabilities and the projected
amortization expense and adjustments to revenues and property operating expense for the next five calendar years:
(In thousands)
In-place leases
Total to be included in depreciation and amortization
Above-market lease assets
Below-market lease liabilities
Total to be included in rental income
Below-market ground lease assets
Above-market ground lease liabilities
Total to be included in property operating expense
Weighted-
Average
Amortization
Years
10.4
14.9
13.1
79.8
32.7
F-27
2017
2018
2019
2020
$
$
50,728 $
50,728 $
50,728 $
50,568 $
50,728 $
50,728 $
50,728 $
50,568 $
2021
49,366
49,366
$
4,122 $
4,122 $
4,122 $
4,122 $
4,122
(3,536)
(3,536)
(3,536)
(3,511)
(3,235)
$
586 $
586 $
586 $
611 $
887
$
3,154 $
3,154 $
3,154 $
3,154 $
3,154
(57)
(57)
(57)
(57)
(57)
$
3,097 $
3,097 $
3,097 $
3,097 $
3,097
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
Future Minimum Rents
The following presents future minimum base rental cash payments due to the Company during the next five calendar years and thereafter as of December 31,
2016 . These amounts exclude contingent rent payments, as applicable, that may be collected from certain tenants based on provisions related to sales thresholds
and increases in annual rent based on exceeding certain economic indices among other items.
(In thousands)
2017
2018
2019
2020
2021
Thereafter
Total
Future Minimum
Base Rent Payments (1)
224,273
229,591
232,458
235,259
233,180
1,015,463
2,170,224
$
$
(1) Based on the exchange rate as of December 31, 2016 .
There were no tenants whose annualized rental income on a straight-line basis represented 10% or greater of consolidated annualized rental income on a
straight-line basis for all properties as of December 31, 2016 , 2015 and 2014 .
The termination, delinquency or non-renewal of leases by any major tenant may have a material adverse effect on revenues.
Geographic Concentration
The following table lists the countries and states where the Company has concentrations of properties where annualized rental income on a straight-line basis
represented greater than 10% of consolidated annualized rental income on a straight-line basis as of December 31, 2016 , 2015 and 2014 .
Country
Germany
United Kingdom
United States:
Texas
___________________________________________
2016
*
21.9%
December 31,
2015
*
19.2%
2014
10.9%
22.0%
*
11.5%
10.4%
*
Geography's annualized rental income on a straight-line basis was not greater than 10% of total annualized rental income for all portfolio properties as of the period specified.
Note 5 — Credit Borrowings
On July 25, 2013 , the Company, through the OP, entered into a credit facility (the "Credit Facility") that provided for aggregate revolving loan borrowings of
up to $50.0 million (subject to borrowing base availability). The Credit Facility has been amended at various times, and maximum borrowings have increased to
$740.0 million , with the most recent increase being on August 24, 2015. The Company had $616.6 million (including £177.2 million and €258.9 million ) and
$717.3 million (including £160.2 million and €288.4 million ) outstanding under the Credit Facility as of December 31, 2016 and 2015 , respectively.
Availability of borrowings is based on a pool of eligible unencumbered real estate assets. On July 25, 2016 the Company extended the maturity date of the
Credit Facility to July 25, 2017 , for an extension fee of $1.5 million . There is an additional one -year extension option remaining, subject to certain conditions.
F-28
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
The Company has the option, based upon its consolidated leverage ratio, to have draws under the Credit Facility priced at either the Alternate Base Rate (as
described below) plus 0.60% to 1.20% or at Adjusted LIBOR (as described below) plus 1.60% to 2.20% . The Alternate Base Rate is defined in the Credit Facility
as a rate per annum equal to the greatest of (a) the fluctuating annual rate of interest announced from time to time by the lender as its “prime rate” in effect on such
day, (b) the federal funds effective rate in effect on such day plus half of 1% and (c) the Adjusted LIBOR for a one-month interest period on such day plus 1% .
Adjusted LIBOR refers to LIBOR multiplied by the statutory reserve rate, as determined by the Federal Reserve System of the United States. The Credit Facility
agreement requires the Company to pay an unused fee per annum of 0.25% if the unused balance of the Credit Facility exceeds or is equal to 50% of the available
facility or a fee per annum of 0.15% if the unused balance of the Credit Facility is less than 50% of the available facility. As of December 31, 2016 , the Credit
Facility reflected variable and fixed rate borrowings with a carrying value and fair value of $616.6 million , and a weighted average effective interest rate of 2.4%
after giving effect to interest rate swaps in place. The unused borrowing capacity under the Credit Facility as of December 31, 2016 and 2015 was $113.0 million
and $22.7 million , respectively.
The Credit Facility agreement provides for quarterly interest payments for each Alternate Base Rate loan and periodic payments for each Adjusted LIBOR
loan, based upon the applicable LIBOR loan period, with all principal outstanding being due on the extended maturity date in July 2017. The Credit Facility
agreement may be prepaid at any time, in whole or in part, without premium or penalty, subject to prior notice to the lender. In the event of a default, the lender has
the right to terminate their obligations under the Credit Facility agreement and to accelerate the payment on any unpaid principal amount of all outstanding loans.
The Credit Facility requires the Company to meet certain financial covenants, including the maintenance of certain financial ratios (such as specified debt to equity
and debt service coverage ratios) as well as the maintenance of a minimum net worth. As of December 31, 2016 , the Company was in compliance with the
financial covenants under the Credit Facility.
A portion of foreign currency draws under the Credit Facility are designated as net investment hedges of the Company's investments during the periods
reflected in the consolidated statements of operations (see Note 8 — Derivatives and Hedging Activities for further discussion).
Bridge Loan Facility
On August 8, 2016, in connection with the execution of the Merger Agreement, the OP entered into a bridge loan commitment letter, pursuant to which UBS
Securities LLC and UBS AG, Stamford Branch agreed to provide a $150.0 million senior secured bridge loan facility (the "Bridge Loan Facility") for a term of 364
days from date of the merger transaction. Amounts drawn on the Bridge Loan Facility are subject to interest at LIBOR plus 3.25% per annum with a minimum
floor of 4.00% . The margin rate of 3.25% per annum will increase by 0.75% 90 days after the date of funding and increases by 0.75% every 90 days thereafter
with a maximum increase rate of 2.25% . The Bridge Loan Facility requires a 1.50% fee of the commitment amount upon execution and a fee equal to 0.375% of
the commitments 180 days after signing. The Bridge Loan Facility is subject to a duration fee of 1.0% on outstanding draws 90 days after the date of funding. In
addition, the Bridge Loan Facility requires a repayment fee of 0.5% on repayments made within 30 days of funding and a repayment fee of 1.0% fee on repayments
made after 30 days after funding. The Bridge Loan Facility is subject to cross default provisions with the Company’s Credit Facility. Upon closing of the Merger,
the Company did not exercise its rights under the bridge loan commitment letter and as a result thereof the bridge loan commitment was automatically terminated
at the Merger.
Mezzanine Facility
In connection with the Merger, the Company assumed the mezzanine loan agreement (the "Mezzanine Facility") with an estimated aggregate fair value of
$107.0 million . The Mezzanine Facility, that provided for aggregate borrowings up to €128.0 million ( $134.7 million based upon an exchange rate as of
December 31, 2016 ) subject to certain conditions. The Mezzanine Facility bears interest at 8.25% per annum, payable quarterly, and is scheduled to mature on
August 13, 2017 . The creditors can offer leverage up to 82.5% of the net purchase price of the collateral properties. If the actual leverage of the Borrower exceeds
77.5% of net purchase price of the collateral properties, the interest rate for the loan shall be 8.50% .
The Mezzanine Facility is secured by first-priority ranking of the shares of the Borrower, and all of the Borrower's unencumbered country holding vehicles.
The Mezzanine Facility is also cross-collateralized by pledges of the direct or indirect ownership of the Company in all the related personal property, reserves, and
a pledge of shareholder loans and receivables to the extent not already pledged to senior lenders. The Mezzanine Facility may be prepaid at any time during the
term. The outstanding amount of the Mezzanine Facility was $55.4 million (including €52.7 million ) as of December 31, 2016 . The Company has no unused
borrowing capacity under the Mezzanine Facility as of December 31, 2016 .
The Mezzanine Facility will either need to be extended, refinanced or repaid by August 2017 using the proceeds from property sales or other potential source
of capital. See Item 7. — Liquidity and Capital Resources for further discussion.
F-29
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
All non-functional currency draws under the Mezzanine Facility are designated as net investment hedges (see Note 8 — Derivatives and Hedging Activities
for further discussion).
The total gross carrying value of unencumbered assets as of December 31, 2016 is $1.5 billion .
Note 6 — Mortgage Notes Payable
Mortgage notes payable as of December 31, 2016 and 2015 consisted of the following:
Country
Portfolio
Outstanding Loan Amount (1)
Encumbered
Properties
December 31, 2016
December 31, 2015
Effective
Interest
Rate
Finland:
France:
Finnair
Tokmanni
Auchan (5)
Pole Emploi (5)
Sagemcom (5)
Worldline (5)
DCNS (5)
ID Logistics II (5)
Germany
Rheinmetall
OBI DIY
RWE AG
Rexam
Metro Tonic
ID Logistics I (5)
Luxembourg:
DB Luxembourg (5)
The Netherlands:
ING Amsterdam (5)
4
1
1
1
1
1
1
2
1
1
3
1
1
1
1
1
Total EUR denominated
22
United Kingdom:
McDonald's
Wickes Building Supplies I
Everything Everywhere
Thames Water
Wickes Building Supplies II
Northern Rock
Wickes Building Supplies III
Provident Financial
Crown Crest
Aviva
Bradford & Bingley
Intier Automotive Interiors
Capgemini
Fujitsu
Amcor Packaging
Fife Council
Malthrust
Talk Talk
HBOS
DFS Trading
1
1
1
1
1
2
1
1
1
1
1
1
1
3
7
1
3
1
3
5
(In thousands)
(In thousands)
$
29,878 $
30,483
30,976
31,603
8,732
6,102
37,768
5,260
9,994
11,046
11,152
4,734
65,753
5,534
27,879
4,208
37,873
46,290
342,686
938
2,402
4,936
7,405
2,036
6,479
2,345
15,735
23,757
19,376
9,330
5,831
6,788
30,581
3,858
2,263
3,949
4,721
6,652
12,513
—
—
—
—
—
—
11,561
4,908
68,169
5,737
28,904
—
—
—
181,858
1,125
2,882
5,922
8,882
2,443
7,772
2,813
18,875
28,498
23,242
11,192
6,995
8,142
36,684
4,628
2,715
4,737
5,663
7,979
15,010
2.2%
2.4%
1.7%
1.7%
1.7%
1.9%
1.5%
1.3%
2.6%
2.4%
1.6%
1.8%
1.7%
1.0%
1.4%
1.7%
4.1%
3.7%
4.0%
4.1%
4.2%
4.4%
4.3%
4.1%
4.2%
3.8%
3.5%
3.5%
3.2%
3.2%
3.5%
3.5%
3.5%
3.5%
3.5%
3.4%
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
Interest
Rate
Maturity
Fixed
Fixed
Sep. 2020
Oct. 2020
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Dec. 2019
Dec. 2019
Dec. 2019
Jul. 2020
Dec. 2020
Jun. 2021
Jan. 2019
Jan. 2019
Oct. 2019
Oct. 2019
Dec. 2019
Oct. 2021
May 2020
Jun. 2020
Oct. 2017
May 2018
Jun. 2018
Jul. 2018
Jul. 2018
Sep. 2018
Nov. 2018
Feb. 2019
Feb. 2019
Mar. 2019
May 2020
May 2020
Jun. 2020
Jun. 2020
Jul. 2020
Jul. 2020
Jul. 2020
Jul. 2020
Jul. 2020
Aug. 2020
DFS Trading
2
2,930
3,514
3.4%
(2)
Fixed
Aug. 2020
F-30
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
HP Enterprise Services
Foster Wheeler
Harper Collins
NCR Dundee
Total GBP denominated
United States:
Quest Diagnostics
Western Digital
AT&T Services
FedEx Freight (5)
Veolia Water (5)
Puerto Rico:
Encanto Restaurants
Total USD denominated
Gross mortgage notes payable
Deferred financing costs, net of
accumulated amortization
Mortgage notes payable, net of deferred
financing costs
1
1
1
1
43
1
1
1
1
1
18
23
88
—
88
_________________________
(1) Amounts borrowed in local currency and translated at the spot rate as of respective date.
(2)
(3)
(4)
(5) New mortgages acquired as part of the Merger on the Merger Date.
Fixed as a result of an interest rate swap agreement.
The interest rate is 2.0% plus 1-month LIBOR.
The interest rate is 2.0% plus 1- month Adjusted LIBOR as defined in the mortgage agreement.
11,461
48,501
34,648
6,960
276,395
52,800
17,682
33,550
6,165
4,110
21,599
135,906
754,987
(2)
(2)
(2)
(2)
Fixed
Fixed
Fixed
Fixed
Aug. 2020
Oct. 2018
Oct. 2019
Apr. 2020
(3)
Variable
Sep. 2018
Fixed
(4)
Variable
Jul. 2021
Dec. 2020
Fixed
Fixed
Fixed
Jun. 2021
Jun. 2021
Jun. 2017
13,748
—
—
—
223,461
52,800
17,982
33,550
—
—
22,057
126,389
531,708
3.4%
2.6%
3.4%
2.9%
2.7%
5.3%
2.8%
4.5%
4.5%
6.3%
2.7%
(5,103)
(7,446)
—%
$
749,884
$
524,262
2.7%
In connection with the Global II Merger, the OP assumed the outstanding gross mortgage notes payable with an estimated aggregate fair value of $279.0
million at the Merger Date or carrying value of $267.7 million at December 31, 2016 .
The following table presents future scheduled aggregate principal payments on the mortgage notes payable over the next five calendar years and thereafter as
of December 31, 2016 :
(In thousands)
2017
2018
2019
2020
2021
Thereafter
Total
Future Principal Payments
(1)
$
$
22,857
127,241
261,523
301,537
41,829
—
754,987
_________________________
(1) Based on the exchange rate as of December 31, 2016 .
The Company's mortgage notes payable agreements require compliance with certain property-level financial covenants including debt service coverage ratios.
As of December 31, 2016 and 2015 , the Company was in compliance with financial covenants under its mortgage notes payable agreements.
Note 7 — 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:
F-31
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
Level 1 — Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market
data for substantially the entire contractual term of the asset or liability and those inputs are significant.
Level 3 — Unobservable inputs that reflect the entity's own assumptions about the assumptions that market participants would use in the pricing of the asset or
liability and are consequently not based on market activity, but rather through particular valuation techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In
instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value
hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The
Company evaluates its hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from
quarter to quarter, however, the Company expects that changes in classifications between levels will be rare.
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 December 31, 2016 and 2015 , 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 December 31, 2016 and 2015 , aggregated by the level in the fair value hierarchy level within which those instruments fall.
(In thousands)
December 31, 2016
Cross currency swaps, net (GBP & EUR)
Foreign currency forwards, net (GBP & EUR)
Interest rate swaps, net (GBP & EUR)
Put options (GBP & EUR)
OPP (see Note 13 )
December 31, 2015
Cross currency swaps, net (GBP & EUR)
Foreign currency forwards, net (GBP & EUR)
Interest rate swaps, net (GBP & EUR)
OPP (see Note 13 )
Quoted Prices in
Active Markets
Level 1
Significant Other
Observable Inputs
Level 2
Significant
Unobservable Inputs
Level 3
Total
$
$
$
$
$
$
$
$
$
— $
— $
— $
— $
— $
— $
— $
— $
— $
21,179 $
6,998 $
(15,457) $
523 $
— $
3,042 $
2,203 $
(5,461) $
— $
— $
— $
— $
— $
(13,400)
$
— $
— $
— $
(14,300)
$
21,179
6,998
(15,457)
523
(13,400)
3,042
2,203
(5,461)
(14,300)
The valuation of the OPP is determined using a Monte Carlo simulation. This analysis reflects the contractual terms of the OPP, including the performance
periods and total return hurdles, as well as observable market-based inputs, including interest rate curves, and unobservable inputs, such as expected volatility. As a
result, the Company has determined that its OPP valuation in its entirety is classified in Level 3 of the fair value hierarchy.
F-32
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
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 years ended December 31, 2016 or 2015 .
Level 3 Valuations
The following is a reconciliation of the beginning and ending balance for the changes in instruments with Level 3 inputs in the fair value hierarchy for the year
ended December 31, 2016 :
(In thousands)
Beginning balance as of December 31, 2015
Fair value adjustment
Ending balance as of December 31, 2016
OPP
14,300
(900)
13,400
$
$
The following table provides quantitative information about the significant Level 3 inputs used (in thousands):
Financial Instrument
Fair Value at December 31,
2016
(In thousands)
Principal Valuation Technique
Unobservable Inputs
Input Value
OPP
$
13,400
Monte Carlo Simulation
Expected volatility
28.0%
The following discussion provides a description of the impact on a fair value measurement of a change in each unobservable input in isolation. For the
relationship described below, the inverse relationship would also generally apply.
Expected volatility is a measure of the variability in possible returns for an instrument, parameter or market index given how much the particular instrument,
parameter or index changes in value over time. Generally, the higher the expected volatility of the underlying, the wider the range of potential future returns. An
increase in expected volatility, in isolation, would generally result in an increase in the fair value measurement of an instrument.
Financial Instruments not Measured at Fair Value on a Recurring Basis
The Company is required to disclose the fair value of financial instruments for which it is practicable to estimate value. The fair value of short-term financial
instruments such as cash and cash equivalents, due to/from affiliates, accounts payable and dividends payable approximates their carrying value on the
consolidated balance sheets due to their short-term nature. The fair values of the Company's remaining financial instruments that are not reported at fair value on
the consolidated balance sheets are reported below.
(In thousands)
Level
Carrying Amount (1)
December 31,
2016
Fair Value
December 31,
2016
Carrying Amount (2)
December 31,
2015
Fair Value
December 31,
2015
Mortgage notes payable (1) (2)
Credit facility
Mezzanine facility (3)
3
3
3
$
$
$
752,484 $
616,614 $
55,383 $
747,870 $
616,614 $
55,400 $
532,384 $
717,286 $
— $
534,041
717,286
—
_____________________________
(1) Carrying value includes $752.5 million gross mortgage notes payable and $2.5 million mortgage discounts, net as of December 31, 2016 .
(2) Carrying value includes $531.7 million gross mortgage notes payable and $0.7 million mortgage premiums, net as of December 31, 2015 .
(3) Carrying value includes $55.4 million Mezzanine Facility and $17,000 mezzanine discounts, net as of December 31, 2016 .
The fair value of the gross mortgage notes payable is estimated using a discounted cash flow analysis, based on the Advisor's experience with similar types of
borrowing arrangements. On July 25, 2016 the Company extended the maturity date of the Credit Facility to July 25, 2017 , with an additional one -year extension
option remaining, subject to certain conditions. Advances under the Credit Facility are considered to be reported at fair value due to the short-term nature of the
maturity. The Mezzanine Facility carries a fixed interest rate and as such advances under the Mezzanine Facility are considered to approximate fair value.
F-33
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
Note 8 — Derivatives and Hedging Activities
Risk Management Objective
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 foreign investments expose the Company to fluctuations of foreign interest rates and
exchange rates. These fluctuations may impact the value of the Company’s cash receipts and payments in terms of the Company’s functional currency. The
Company enters into derivative financial instruments to protect the value or fix the amount of certain obligations in terms of its functional currency, the USD.
The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company's operating and financial structure as well as to
hedge specific anticipated transactions. The Company does not intend to utilize derivatives for speculative or other purposes other than interest rate and currency
risk management. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are
not able to perform under the agreements. To mitigate this risk, the Company only enters into derivative financial instruments with counterparties with high credit
ratings and with major financial institutions with which the Company and its affiliates may also have other financial relationships. The Company does not
anticipate that any such counterparties will fail to meet their obligations.
The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the consolidated balance sheets as of
December 31, 2016 and 2015 :
(In thousands)
Derivatives designated as hedging instruments:
Interest rate swaps (GBP)
Foreign currency forwards (EUR-USD)
Cross currency swaps (EUR)
Cross currency swaps (GBP)
Interest rate swaps (GBP)
Interest rate swaps (EUR)
Total
Derivatives not designated as hedging instruments:
Foreign currency forwards (GBP-USD)
Foreign currency forwards (EUR-USD)
Put options (GBP)
Put options (EUR)
Interest rate swaps (EUR)
Cross currency swaps (GBP)
Cross currency swaps (EUR)
Total
Balance Sheet Location
2016
2015
December 31,
Derivative assets, at fair value
Derivative assets, at fair value
Derivative assets, at fair value
Derivative assets, at fair value
Derivative liabilities, at fair value
Derivative liabilities, at fair value
Derivative assets, at fair value
Derivative assets, at fair value
Derivative assets, at fair value
Derivative assets, at fair value
Derivative liabilities, at fair value
Derivative assets, at fair value
Derivative assets, at fair value
F-34
$
— $
$
$
972
3,003
16,868
(8,595)
(4,262)
7,986 $
3,918 $
2,108
131
392
(2,600)
477
831
$
5,257 $
567
—
—
—
(3,313)
(2,715)
(5,461)
1,090
1,113
—
—
—
509
2,533
5,245
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company's derivatives as of December 31, 2016 and 2015
. 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
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
$
$
28,700 $
(15,457) $
5,812 $
(6,028) $
— $
— $
13,243 $
(216) $
— $
— $
— $
13,243
— $
(216)
(In thousands)
December 31,
2016
December 31,
2015
In addition to the above derivative arrangements, the Company also uses non-derivative financial instruments to hedge its exposure to foreign currency
exchange rate fluctuations as part of its risk management program, including foreign denominated debt issued and outstanding with third parties to protect the
value of its net investments in foreign subsidiaries against exchange rate fluctuations. The Company draws foreign currency advances under its Credit Facility to
fund certain investments in the respective local currency which creates a natural hedge against the original equity invested in the real estate investments, removing
the need for the final cross currency swaps (See Note 5 — Credit Borrowings ). As further discussed below, in conjunction with the restructuring of the cross
currency swaps on February 4, 2015, foreign currency advances of €110.5 million and £68.5 million were drawn under the Company’s Credit Facility. The
Company separately designated each foreign currency draw as a net investment hedge under ASC 815. Effective May 17, 2015, the Company modified the
hedging relationship and designated all foreign currency draws as net investment hedges.
Interest Rate Swaps
The Company’s objectives in using interest rate swaps are to add stability to interest expense and to manage its exposure to interest rate movements. To
accomplish this objective, the Company primarily uses interest rate swaps. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate
amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying
notional amount.
As of December 31, 2016 and 2015 , the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest
rate risk:
Derivatives
Interest rate swaps (GBP)
Interest rate swaps (EUR)
Total
December 31, 2016
December 31, 2015
Number of
Instruments
21
14
35
Notional Amount
(In thousands)
$
$
474,161
431,213
905,374
Number of
Instruments
27
16
43
Notional Amount
(In thousands)
$
$
697,925
561,282
1,259,207
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 2016 ,
such derivatives were used to hedge the variable cash flows associated with variable-rate debt. The ineffective portion of the change in fair value of the derivatives
is recognized directly in earnings. During the years ended December 31, 2016 and 2015 , the Company recorded losses of $0.1 million and $0.4 million of
ineffectiveness in earnings, respectively. During the year ended December 31, 2014 there were no losses due to ineffectiveness.
During the year ended December 31, 2015 , the Company terminated/partially terminated two of its interest rate swaps and accelerated the reclassification of
amounts in other comprehensive income (loss) to net income (loss) as a result of the hedged forecasted transactions becoming probable not to occur. The
accelerated amounts were a loss of $38,000 .
As a result of negative interest rates, specifically the Euro LIBOR, two interest rate swap positions fell out of designation during the quarter ended June 30,
2016 due to the fact that they were no longer highly effective. These positions did not have a zero percent interest rate floor embedded into the positions.
F-35
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are
made on the Company's variable-rate debt. During the next 12 months , the Company estimates that an additional $5.6 million will be reclassified from other
comprehensive income (loss) as an increase to interest expense.
The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the
years ended December 31, 2016 , 2015 and 2014 .
(In thousands)
Amount of (loss) gain recognized in accumulated other comprehensive (loss) income
from derivatives (effective portion)
Amount of loss reclassified from accumulated other comprehensive income (loss) into
income as interest expense (effective portion)
Amount of loss recognized in income on derivative instruments (ineffective portion,
reclassifications of missed forecasted transactions and amounts excluded from
effectiveness testing)
$
$
$
Cross Currency Swaps Previously Designated as Net Investment Hedges
Year Ended December 31,
2016
2015
2014
(12,634) $
8,800 $
(5,318) $
(4,166) $
5,670
(2,087)
(99) $
(371) $
—
The Company is exposed to fluctuations in foreign exchange rates on property investments in foreign countries which pay rental income, incur property
related expenses and hold debt instruments in currencies other than its functional currency, the USD. The Company uses foreign currency derivatives including
cross currency swaps to hedge its exposure to changes in foreign exchange rates on certain of its foreign investments. Cross currency swaps involve fixing the
applicable exchange rate for delivery of a specified amount of foreign currency on specified dates.
On February 4, 2015, the Company restructured its cross currency swaps and replaced its initial USD equity funding in certain foreign real estate investments
with foreign currency debt. As part of the restructuring, foreign currency advances of €110.5 million and £68.5 million were drawn under the Company’s Credit
Facility which created a natural hedge against the original equity invested in the real estate investments, thus removing the need for the final equity notional
component of the cross currency swaps. The cross currency swaps had been designated as net investment hedges through the date of restructure. For derivatives
designated as net investment hedges, the effective portion of changes in the fair value of the derivatives are reported in accumulated other comprehensive income
(loss) (outside of earnings) as part of the cumulative translation adjustment. The ineffective portion of the change in fair value of the derivatives is recognized
directly in earnings. Amounts are reclassified out of accumulated other comprehensive income (loss) into earnings when the hedged net investment is either sold or
substantially liquidated. The restructuring and settlement of the cross currency swaps resulted in a gain of approximately $19.0 million , with $10.1 million in
proceeds received and $8.9 million retained by the bank as a reduction of outstanding Credit Facility balance as of December 31, 2015 . The gain will remain in the
cumulative translation adjustment (CTA) until such time as the net investments are sold or substantially liquidated in accordance with ASC 830. Following the
restructuring noted above, these cross currency swaps no longer qualified for net investment hedge accounting treatment and as such, subsequent to February 5,
2015, all changes in fair value are recognized in earnings.
Foreign Denominated Debt Designated as Net Investment Hedges
Effective May 17, 2015, all foreign currency draws under the Credit Facility were designated as net investment hedges. As such, the effective portion of
changes in value due to currency fluctuations are reported in accumulated other comprehensive income (loss) (outside of earnings) as part of the cumulative
translation adjustment. The 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 December 31, 2016 , total foreign currency advances under the Credit Facility were approximately $491.2 million , which reflects advances of £177.2
million ( $218.7 million based upon an exchange rate of £1.00 to $1.23 as of December 31, 2016 ) and advances of €258.9 million ( $272.4 million based upon an
exchange rate of €1.00 to $1.05 , as of December 31, 2016 ).
F-36
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
Prior to May 16, 2015 , foreign currency advances which were comprised of $92.1 million of Pound Sterling ("GBP") draws (based upon an exchange rate of
$1.58 to £1.00 , as of May 16, 2015 ) and $126.0 million of Euro ("EUR") draws (based upon an exchange rate of $1.14 to €1.00 , as of May 16, 2015 ) were not
designated as net investment hedges and, accordingly, the changes in value through May 16, 2015 due to currency fluctuations were reflected in earnings. As a
result, the Company recorded remeasurement losses on the foreign denominated draws of $3.6 million for the year ended December 31, 2015 . As of December 31,
2016 , total outstanding draws under the Credit Facility denominated in foreign currency was $491.2 million , and total net investments in real estate denominated
in foreign currency was $405.7 million , this resulted in an undesignated excess position of $85.5 million (comprised of £44.2 million and €29.4 million draws) at
the previously mentioned exchange rates. The Company recorded gains of $10.3 million and $5.1 million for the years ended December 31, 2016 and 2015 ,
respectively, due to currency changes on the undesignated excess foreign currency advances over the related net investments. The Company recorded gains of $1.4
million for the year ended December 31, 2014 due to currency changes on the undesignated excess foreign currency advances over the related net investments. For
the portion of foreign draws now designated as net investment hedges there were no additional remeasurement gains (losses) for the year ended December 31, 2016
.
As of December 31, 2016 , the Company had the following outstanding foreign currency derivatives that were used to hedge its net investments in foreign
operations:
Derivatives
Cross currency swaps (EUR-USD)
Cross currency swaps (GBP-USD)
Foreign currency forwards (EUR-USD)
Total
Non-designated Derivatives
December 31, 2016
Number of
Instruments
3
1
1
5
Notional Amount
(In thousands)
$
37,957
60,626
10,100
$
108,683
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 currency forward and cross currency swap agreements to manage its exposure to fluctuations in GBP-USD and EUR-USD exchange
rates. While these derivatives are hedging the fluctuations in foreign currencies, they do not meet the strict hedge accounting requirements to be classified as
hedging instruments. Changes in the fair value of derivatives not designated as hedges under qualifying hedging relationships are recorded directly in net income
(loss). During the year ended December 31, 2015 , the Company identified errors in accounting for the cross currency derivatives that were no longer designated as
hedges subsequent to their restructuring on February 4, 2015 which resulted in the Company recording additional gain on derivative investments of $0.5 million
(see Note 2 — Summary of Significant Accounting Policies). The Company recorded total gains of $7.4 million and $3.9 million on the non-designated hedges for
the years ended December 31, 2016 and 2015 , respectively. The Company recorded total gains of $1.9 million on the non-designated hedges for the year ended
December 31, 2014 .
As of December 31, 2016 and 2015 , the Company had the following outstanding derivatives that were not designated as hedges under qualifying hedging
relationships.
Derivatives
Foreign currency forwards (GBP - USD)
Foreign currency forwards (EUR - USD)
Cross currency swaps (GBP - USD)
Cross currency swaps (EUR - USD)
Interest rate swaps (EUR)
Options (GBP-USD)
Options (EUR-USD)
Total
December 31, 2016
December 31, 2015
Number of
Instruments
Notional Amount
(In thousands)
Number of
Instruments
Notional Amount
(In thousands)
21
20
3
3
5
5
5
$
18,058
28,424
43,457
30,604
127,570
3,375
6,250
62
$
257,738
40
15
9
5
—
—
—
69
$
6,628
6,139
82,843
99,847
—
—
—
$
195,457
F-37
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
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 December 31, 2016 , the fair value of derivatives in net liability position including accrued interest but excluding any adjustment for nonperformance
risk related to these agreements was $17.4 million . As of December 31, 2016 , 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.
Note 9 — Common Stock
The Company listed its Common Stock on the NYSE under the symbol "GNL" on June 2, 2015 . As of December 31, 2016 and 2015 , the Company had
198,775,675 and 168,936,633 , respectively, shares of Common Stock outstanding, including shares issued under the DRIP, but not including unvested restricted
shares, the OP Units issued to limited partners other than the Company or long-term incentive units issued in accordance with the OPP which are currently, or may
be in the future, convertible into shares of Common Stock. On September 2, 2016, 1,264,148 OP Units were converted to Common Stock, of which 916,231 were
issued to individual members and employees of AR Global, 347,903 were issued to the Service Provider, and 14 were issued to the Special Limited Partner. There
were 545,530 of OP Units outstanding that were held by parties other than the Company as of December 31, 2016 .
In addition, in connection with the Merger Agreement, each outstanding share of Global II Common Stock, including restricted shares, other than shares
owned by the Company or any wholly owned subsidiary of Global II, was converted into the right to receive 2.27 shares of Common Stock of the Company in
connection with the Mergers. Additionally, all outstanding Global II OP Units were converted into the right to receive 2.27 shares of Company Common Stock.
The Company issued 28.7 million of Company Common Shares as consideration in the Merger. Based on the closing price of the shares of Company Common
Stock on December 22, 2016, as reported on the NYSE, the aggregate value of the Merger Consideration paid or payable to former holders of Global II Common
Stock and former holders of units of Global II OP Units was approximately $220.9 million .
Monthly Dividends and Change to Payment Dates
The Company pays dividends on the 15th day of each month at a rate of $0.059166667 per share to stockholders of record as of close of business on the 8th
day of such month. 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 defined in Note 13 — Share-Based Compensation) as dividends.
On April 7, 2015, the Company suspended the DRIP. The final issuance of shares of Common Stock pursuant to the DRIP occurred in connection with the
Company’s April dividend which was paid on May 1, 2015.
The following table details from a tax perspective, the portion of a distribution classified as return of capital and ordinary dividend income, per share per
annum, for the years ended December 31, 2016 , 2015 and 2014 :
(In thousands)
Return of capital
Ordinary dividend income
Total
Share Repurchase Program
Year Ended December 31,
December 31, 2016
December 31, 2015
December 31, 2014
61.3% $
38.7%
100.0% $
0.44
0.27
0.71
63.1% $
36.9%
100.0% $
0.45
0.26
0.71
70.4% $
29.6%
100.0% $
0.50
0.21
0.71
On April 7, 2015, the Company's board of directors approved the termination of the Company’s SRP. The Company processed all of the requests received
under the SRP in the first quarter of 2015 and will not process further requests.
F-38
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
The following table reflects the cumulative number of common shares repurchased as of December 31, 2015 and 2016 :
Cumulative repurchases as of December 31, 2015
Redemptions
Cumulative repurchases as of December 31, 2016
Implementation of “At-the-Market” Program
Number of Shares
Repurchased
Weighted Average Price
per Share
12,139,854 $
—
12,139,854 $
10.49
—
10.49
On December 12, 2016, the Company entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) , pursuant to which the Company
may, from time to time, offer, issue and sell to the public shares of the Company’s Common Stock having an aggregate offering price of up to $175.0 million . As
of February 28, 2017 , the Company has not sold any shares pursuant to the Equity Distribution Agreement.
Subject to the terms and conditions of the Equity Distribution Agreement, the sales agents will use their commercially reasonable efforts to sell the Company’s
shares of Common Stock offered by the Company under and in accordance with the Equity Distribution Agreement. The sales, if any will be made by means of
ordinary brokers’ transactions or otherwise at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices.
Actual sales will depend on a variety of factors to be determined by the Company from time to time.
The Company intends to use any net proceeds from the offering for general corporate purposes, including funding investment activity, repaying outstanding
indebtedness (including borrowings under the Company’s Credit Facility), and for working capital. The Equity Distribution Agreement provides that the applicable
sales agents will be compensated for its services to 1.0% of the gross sales price. The Company has no obligation to sell any of the Shares under the Equity
Distribution Agreement, and may at any time suspend solicitation and offers under the Equity Distribution Agreement.
Note 10 — Commitments and Contingencies
Operating Ground Leases
Certain properties are subject to ground leases, which are accounted for as operating leases. The ground leases have varying ending dates, renewal options, and
rental rate escalations, with the latest leases extending to April 2105. Future minimum rental payments to be made by the Company under these noncancelable
ground leases, excluding increases resulting from increases in the consumer price index, are as follows:
(In thousands)
2017
2018
2019
2020
2021
2022
Thereafter
Total (1)
Future Ground Lease Payments
$
$
1,261
1,261
1,261
1,261
1,261
1,261
38,540
46,106
(1) Ground lease rental payments due for ING Amsterdam are not included in the table above as the Company's ground for this property is prepaid through 2050.
The Company incurred rent expense on ground leases of $1.3 million and $0.3 million during the years ended December 31, 2016 and 2015 , 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.
F-39
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
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 December 31, 2016 , the Company had not been notified by any governmental authority of any non-compliance, liability or other claim, and is not aware of
any other environmental condition that it believes will have a material adverse effect on the results of operations.
Note 11 — Related Party Transactions
As of December 31, 2016 and 2015 , the Sponsor, the Special Limited Partner and a subsidiary of the Service Provider owned, in the aggregate, 244,444
shares of the Company's outstanding Common Stock. The Advisor, the Service Provider, and their affiliates may incur costs and fees on behalf of the Company. As
of December 31, 2016 and 2015 , the Company had $5.2 million and $0.1 million of receivable from affiliated entities $2.2 million and $0.4 million of payable to
their affiliates, respectively.
The Company is the sole general partner of the OP and holds the majority of OP Units. At Listing, the Advisor held a total of 1,461,753 OP Units, the Service
Provider held a total of 347,903 OP Units, and the Special Limited Partner held 22 OP Units. Subsequent to the Listing all OP Units issued to the Advisor were
transferred to individual investors. On September 2, 2016 , 1,264,148 of the OP Units were converted into Common Stock, of which 916,231 were issued to
individual members and employees of AR Global, 347,903 were issued to the Service Provider, and 14 were issued to the Special Limited Partner. There were
545,530 of OP Units outstanding that were held by parties other than the Company as of December 31, 2016 .
On June 2, 2015, the Advisor and the Service Provider exchanged 1,726,323 previously-issued Class B Units for 1,726,323 OP Units pursuant to the OP
Agreement. These OP Units are redeemable for shares of Common Stock of the Company on a one-for-one basis, or the cash value of shares of Common Stock (at
the option of the Company), 12 months from the Listing Date subject to the terms of the limited partnership agreement of the OP. The Advisor and the OP also
entered into a Contribution and Exchange Agreement pursuant to which the Advisor contributed $0.8 million in cash to the OP in exchange for 83,333 OP Units.
The OP made distributions to partners other than the Company of $1.0 million and $0.6 million during the year ended December 31, 2016 and 2015 , respectively.
There were no OP Unit distributions during the year ended December 31, 2014 .
In addition, in connection with the OPP, the Company paid $1.0 million in distributions related to LTIP Units (as defined in Note 13 — Share-Based
Compensation) during the year ended December 31, 2016 , which are included in non-controlling interest in the consolidated statements of equity. As of
December 31, 2016 , the Company had no unpaid distributions relating to LTIP distributions. As of December 31, 2015 , the Company had $0.4 million of unpaid
LTIP distributions. No such distributions were paid during the year ended December 31, 2015 .
A holder of OP Units, other than the Company, has the right to convert OP Units for a corresponding number of shares of the Company's Common Stock, or
the cash value equivalent of those corresponding shares, at the Company's option, in accordance with the limited partnership agreement of the OP. The remaining
rights of the holders of OP Units are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of
the OP's assets. AR Global indirectly owns 90% of the membership interests in the Advisor and Company's chief executive officer and president, directly owns the
other 10% of the membership interests in the Advisor.
Realty Capital Securities, LLC (the "Former Dealer Manager") served as the dealer manager of the IPO, 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 Investments, LLC (the successor business to AR Capital LLC, "AR Global"),
parent of the Sponsor. In May 2016, RCAP and its affiliated debtors emerged from bankruptcy under the new name, Aretec Group, Inc.
Acquired Related Party Receivable
As more fully described in Note 3 — Merger Transaction , the Company acquired a $5.1 million receivable from an affiliate of the Advisor which is payable
in equal monthly installments beginning on January 15, 2017 .
Fees Paid in Connection With the Operations of the Company
Until June 2, 2015, the Advisor was paid an acquisition fee of 1.0% of the contract purchase price of each acquired property and 1.0% of the amount advanced
for a loan or other investment. Solely with respect to investment activities in Europe, the Service Provider was paid 50% of the acquisition fees and the Advisor
was paid the remaining 50% , as set forth in the service provider agreement. The Advisor was also reimbursed for insourced expenses incurred in the process of
acquiring properties, which were limited to 0.5% of the contract purchase price and 0.5% of the amount advanced for a loan or other investment. Additionally, the
Company will pay third party acquisition expenses.
F-40
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
The Company's Advisor provides services in connection with the origination or refinancing of any debt that the Company obtained and used to acquire
properties or to make other permitted investments, or that is assumed, directly or indirectly, in connection with the acquisition of properties. Until June 2, 2015, the
Company paid the Advisor a financing coordination fee equal to 0.75% of the amount available and/or outstanding under such financing, subject to certain
limitations. Solely with respect to the Company's investment activities in Europe, the Service Provider was paid 50% of the financing coordination fees and the
Advisor received the remaining 50% .
Until the Listing, the Company compensated the Advisor for its asset management services in an amount equal to 0.75% per annum of the total of: the cost of
the Company's assets (cost includes the purchase price, acquisition expenses, capital expenditures and other customarily capitalized costs, but excluding acquisition
fees) plus costs and expenses incurred by the Advisor in providing asset management services, less the excess, if any, of dividends over FFO plus acquisition fees
expenses and restricted share grant amortization. Until April 1, 2015, as compensation for this arrangement, the Company caused the OP to issue (subject to
periodic approval by the board of directors) to the Advisor and Service Provider performance-based restricted partnership units of the OP ("Class B Units"), which
were intended to be profits interests and would vest, and no longer be subject to forfeiture, at such time as: (x) the value of the OP's assets plus all dividends made
equaled or exceeded the total amount of capital contributed by investors plus a 6.0% cumulative, pre-tax, non-compounded annual return thereon (the "economic
hurdle"); (y) any one of the following had occurred: (1) the termination of the advisory agreement by an affirmative vote of a majority of the Company's
independent directors without cause; (2) a listing; or (3) another liquidity event; and (z) the Advisor is still providing advisory services to the Company (the
"performance condition"). The value of issued Class B Units was determined and expensed when the Company deemed the achievement of the performance
condition was probable, which occurred as of the Listing. As of June 2, 2015, in aggregate the board of directors had approved the issuance of 1,726,323 Class B
Units to the Advisor and the Service Provider in connection with this arrangement. The Advisor and the Service Provider received distributions on unvested Class
B Units equal to the dividend rate received on the Company's Common Stock. Such distributions on issued Class B Units in the amount of $0.3 million and $0.2
million were included in general and administrative expenses in the consolidated statements of operations for the years ended December 31, 2015 and 2014 ,
respectively. Subsequent to the Listing, the Company recorded OP Unit distributions which are included in consolidated statements of equity. From April 1, 2015
to the Listing Date, the Advisor was paid for its asset management services in cash.
The performance condition related to these Class B Units was satisfied upon completion of the Listing, and the Class B Units vested at a cost of $14.5 million
on June 2, 2015 . Concurrently, the Class B Units were converted to OP Units on a one-to-one basis. The vested value was calculated based, in part, on the closing
price of Company's Common Stock on June 2, 2015 less an estimated discount for the one year lock-out period of transferability or liquidity of the OP Units.
On the Listing Date, the Company entered into the Fourth Amended and Restated Advisory Agreement (the “Advisory Agreement”) by and among the
Company, the OP and the Advisor, which, among other things, eliminated the acquisition fee and finance coordination fee payable to the Advisor under the
original Advisory Agreement, as amended, except for fees with respect to properties under contract, letter of intent or under negotiation as of the Listing Date.
Under the terms of the Advisory Agreement, the Company pays the Advisor:
(i)
a base fee of $18.0 million per annum payable in cash monthly in advance (“Minimum Base Management Fee”);
(ii) plus a variable fee, payable monthly in advance in cash, equal to 1.25% of the cumulative net proceeds realized by the Company from the issuance of any
common equity, including any common equity issued in exchange for or conversion of preferred stock or exchangeable notes, as well as, from any other
issuances of common, preferred, or other forms of equity of the Company, including units of any operating partnership (“Variable Base Management
Fee”); and
(iii) an incentive fee (“Incentive Compensation”), 50% payable in cash and 50% payable in shares of the Company’s Common Stock (which shares are subject
to certain lock up restrictions), equal to: (a) 15% of the Company’s Core AFFO (as defined in the Advisory Agreement) per weighted average share
outstanding for the applicable period (“Core AFFO Per Share”)(1) in excess of an incentive hurdle based on an annualized Core AFFO Per Share of $0.78
, plus (b) 10% of the Core AFFO Per Share in excess of an incentive hurdle of an annualized Core AFFO Per Share of $1.02 . The $0.78 and $1.02
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.
F-41
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
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); (e) other non-cash income and expense items; (f) non-cash dividends related to the Class B Units of the OP and certain non-cash
interest expenses related to securities that are convertible to Common Stock; (g) gains (or losses) from the sale of Investments; (h) impairment losses on real estate; (i) acquisition and
transaction related costs; (j) straight-line rent; (k) amortization of above and below market leases and liabilities; (l) amortization of deferred financing costs; (m) accretion of discounts and
amortization of premiums on debt investments; (n) mark-to-market adjustments included in Net income; (o) unrealized gains or losses resulting from consolidation from, or
deconsolidation to, equity accounting, and (p) consolidated and unconsolidated partnerships and joint ventures. (ii) divided by the weighted average outstanding shares of Common Stock
on a fully diluted basis for such period.
(2) For purposes of the Advisory Agreement, "AUM" means, for a specified period, an amount equal to (A) (i) the aggregate costs of the Company's investments (including acquisition fees
and expenses) at the beginning of such period (before reserves for depreciation of bad debts, or similar non-cash reserves) plus (ii) the aggregate cost of 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).
In addition, 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, the
special dividend(s) related thereto.
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.
Solely with respect to the Company's investments in properties located in Europe, the Service Provider receives a portion of the fees payable to the Advisor
equal to: (i) with respect to single-tenant net leased properties which are not part of a shopping center, 1.75% of the gross revenues from such properties and (ii)
with respect to all other types of properties, 3.5% of the gross revenues from such properties. The Property Manager is paid 0.25% of the gross revenues from
European single-tenant net leased properties which are not part of a shopping center and 0.5% of the gross revenues from all other types of properties, reflecting a
split of the oversight fee with the Service Provider.
F-42
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
The following table reflects related party fees incurred, forgiven and contractually due as of and for the periods presented:
(In thousands)
Incurred
Forgiven
Incurred
Forgiven
Incurred
Forgiven
2016
2015
2014
Year Ended December 31,
2016
2015
2014
(Receivable) Payable as of December 31,
One-time fees and reimbursements:
Related party notes receivable acquired in
Merger
Acquisition fees and related cost
reimbursements (1)
Strategic advisory fees
Fees on gain from sale of investments
Financing coordination fees (2)
Ongoing fees:
Asset management fees (3)
Property management and leasing fees (4)
Total related party operational fees and
reimbursements
$
— $
— $
— $
— $
— $
— $
(5,138) (10) $
—
$
—
—
923
16
—
—
—
—
735
—
—
1,159
—
—
—
—
32,915
561
—
6,546
18,230
3,802
—
2,281
13,501
3,982
—
2,507
—
1,316
—
—
—
—
—
690
—
—
923 (5)
16 (5)
447 (5)
252 (5)
—
—
—
466 (7)
217 (8)
91 —
$
22,971 $
2,281 $
19,377 $
2,507 $
41,338 $
690 $
(3,500)
(6)
$
774
(9)
$
—
2
—
—
—
—
52
54
___________________________________________________________________________
(1) These related party fees are recorded within acquisition and transaction related costs on the consolidated statements of operations.
(2) These related party fees are recorded as deferred financing costs and amortized over the term of the respective financing arrangement.
(3) From January 1, 2013 to April 1, 2015, the Company caused the OP to issue to the Advisor (subject to periodic approval by the board of directors) restricted performance based Class B
Units for asset management services, which would vest if certain conditions occur. At the Listing Date, all Class B Units held by the Advisor converted to OP Units. From April 1, 2015
until the Listing Date, the Company paid the Advisor asset management fees in cash (as elected by the Advisor). From the Listing Date, the Advisor received asset management fees in
cash in accordance with the Advisory Agreement. No Incentive Compensation or variable compensation was paid for the years ended December 31, 2016 and 2015 .
(4) The Advisor waived 100% of fees from U.S. assets and its allocated portion of 50% of fees from European assets.
(5) Balance included within due to related parties on the consolidated balance sheets as of December 31, 2016 .
(6)
In addition, as of December 31, 2016 due to related parties includes $0.5 million of accruals, of which $0.2 million of costs accrued for transfer agent and personnel services received from
the Company's related parties including ANST and $0.3 million to Advisor and RCS, of which $0.3 million are recorded within offering costs, $0.2 million in general and administrative
expenses, and $20,000 in other expense reimbursement on the consolidated statements of operations for the year ended December 31, 2016 , are not reflected in the table above.
(7) Balance included within accounts payable and accrued expenses on the consolidated balance sheets as of December 31, 2015 .
(8) Balance included within due to related parties on the consolidated balance sheets as of December 31, 2015 . In addition, due to affiliates includes $0.8 million of costs accrued for transfer
asset and personnel services received from the Company's affiliated parties including ANST, Advisor and RCS which are recorded within general and administrative expenses on the
consolidated statements of operations for the year ended December 31, 2015 and the expense is not reflected in the table above.
(9)
In addition, as of December 31, 2015 due to related parties includes $0.2 million , of which $36,253 of costs accrued for transfer agent and personnel services received from the Company's
related parties including ANST and $0.1 million to Advisor and RCS, which are recorded within general and administrative expenses on the consolidated statements of operations for the
year ended December 31, 2015 , are not reflected in the table above.
(10) Balance included within r elated party notes receivable acquired in Merger on the on the consolidated balance sheets as of December 31, 2016 . In addition, the $16,000 due from
related parties as of December 31, 2016 is not included in the table above.
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 it
affiliates incurred on behalf of the Company, except for those expenses that are specifically the responsibility of the Advisor under the Advisory Agreement as fees
and compensation paid to the Service Provider 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 years ended December 31, 2016 , 2015 and 2014 .
F-43
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
In order to improve operating cash flows and the ability to pay dividends from operating cash flows, the Advisor may waive certain fees including asset
management and property management fees. Because the Advisor may waive certain fees, cash flow from operations that would have been paid to the Advisor may
be available to pay dividends to stockholders. The fees that may be forgiven are not deferrals and accordingly, will not be paid to the Advisor. In certain instances,
to improve the Company's working capital, the Advisor may elect to absorb a portion of the Company's general and administrative costs or property operating
expenses. These absorbed costs are presented net in the accompanying consolidated statements of operations. During the year ended December 31, 2016 , the
Advisor waived some of the property management fees. During the year ended December 31, 2015 , there were no property operating and general administrative
expenses absorbed by the Advisor.
The predecessor to the parent of the Sponsor was party to a services agreement with RCS Advisory Services, LLC, a subsidiary of the parent company of the
Former Dealer Manager (“RCS Advisory”), pursuant to which RCS Advisory and its affiliates provided the Company and certain other companies sponsored by
AR Global with services (including, without limitation, transaction management, compliance, due diligence, event coordination and marketing services, among
others) on a time and expenses incurred basis or at a flat rate based on services performed. The predecessor to the parent of the Sponsor instructed RCS Advisory
to stop providing such services in November 2015 and no services have since been provided by RCS Advisory.
The Company was also party to a transfer agency agreement with American National Stock Transfer, LLC, a subsidiary of the parent company of the Former
Dealer Manager (“ANST”), pursuant to which ANST provided the Company with transfer agency services (including broker and stockholder servicing, transaction
processing, year-end IRS reporting and other services), and supervisory services overseeing the transfer agency services performed by DST Systems, Inc., a third-
party transfer agent ("DST"). The Sponsor received written notice from ANST on February 10, 2016 that it would wind down operations by the end of the month
and would withdraw as the transfer agent effective February 29, 2016. On February 26, 2016, the Company entered into a definitive agreement with DST to
provide the Company directly with transfer agency services (including broker and stockholder servicing, transaction processing, year-end IRS reporting and other
services). On April 22, 2016, the Company terminated its agreement with DST and entered into a definitive agreement American Stock Transfer and Trust
Company, LLC ("AST") appointing AST as the Company's side transfer agent and registrar.
During the years ended December 31, 2016 and 2015 , the Company incurred approximately $0.2 million and $0.8 million , respectively, of recurring transfer
agent services fees to ANST which were included in general and administrative expenses in the consolidated statements of operations.
The following table details property operating and general and administrative expenses absorbed by the Advisor during the three years ended December 31,
2016 , 2015 , and 2014 :
(In thousands)
Property operating expenses absorbed
General and administrative expenses absorbed
Total expenses absorbed (1)
___________________________________________________
Year Ended December 31,
2016
2015
2014
$
$
— $
—
— $
— $
—
— $
178
—
178
(1) The Company had $0.5 million of receivables from the Advisor related to absorbed costs as of December 31, 2014.
Fees Paid in Connection with the Liquidation or Listing of the Company's Real Estate Assets
In connection with the Listing and the Advisory Agreement, the Company terminated the subordinated termination fee that would be due to the Advisor in the
event of termination of the advisory agreement.
In connection with the Sale of any investment, subject to the terms in section 6(i) of the Advisory Agreement, the Company will pay to the Advisor a fee in
connection with net Gain recognized by the Company in connection such sale (the Gain Fee). The Gain Fee shall be 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 will be calculated by aggregating all of the Gains and Losses from the
preceding month. During the year ended December 31, 2016 , the Company has sold 34 properties and calculated the Gain Fee of $0.9 million due to the Advisor,
as defined in the Advisory Agreement, which has been accrued to the Advisor if the proceeds are not reinvested within 180 days of the transaction. As of
December 31, 2016 , such Gain Fee is included in the due to related parties on the consolidated balance sheets and been deducted from gains on the consolidated
statement of operations.
On December 31, 2014, the Company entered into an agreement with RCS Capital, the investment banking and capital markets division of the Former Dealer
Manager, for strategic and financial advice and assistance in connection with (i) a possible sale transaction involving the Company (ii) the possible listing of the
Company’s securities on a national securities exchange, and (iii)
F-44
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
a possible acquisition transaction involving the Company. The Company also retained Barclays Capital Inc. as a strategic advisor. Both RCS Capital and Barclays
Capital Inc., were each entitled to receive a transaction fee equal to 0.23% of the transaction value in connection with a possible sale transaction, listing or
acquisition, if any. In connection with Listing, the Company incurred approximately $18.7 million of listing related fees during the year ended December 31, 2015
of which $6.0 million was paid to RCS Capital and $6.1 million to Barclays Capital Inc., including out of pocket expense in connection with these agreements. The
Company did not incur any additional listing fees during the years ended December 31, 2016 and 2014 . In addition, the Company incurred and paid to RCS
Capital $2.5 million for personnel and support services in connection with the Listing. The Company also incurred $0.6 million of transfer agent fees to ANST in
relation to the Listing. In connection with the Listing and the Advisory Agreement, the Company terminated the subordinated termination fee that would be due to
the Advisor in the event of termination of the advisory agreement. All costs noted above were included in listing fees in the consolidated statements of operations
under listing fees for the year ended December 31, 2015.
Note 12 — Economic Dependency
Under various agreements, the Company has engaged or will engage the Advisor, its affiliates and entities under common control with the Advisor, and the
Service Provider, to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of
properties owned by the Company, asset acquisition and disposition decisions, the sale of shares of the Company's Common Stock available for issue, transfer
agency services, as well as other administrative responsibilities for the Company including accounting services and investor relations.
As a result of these relationships, the Company is dependent upon the Advisor and its affiliates and the Service Provider. In the event that these companies are
unable to provide the Company with the respective services, the Company will be required to find alternative providers of these services.
Note 13 — Share-Based Compensation
Stock Option Plan
The Company has a stock option plan (the "Plan") which authorizes the grant of nonqualified stock options to the Company's independent directors, officers,
advisors, consultants and other personnel, subject to the absolute discretion of the board of directors and the applicable limitations of the Plan. The exercise price
for all stock options granted under the Plan will be equal to the fair market value of a share on the last business day preceding the annual meeting of stockholders.
A total of 0.5 million shares have been authorized and reserved for issuance under the Plan. As of December 31, 2016 , 2015 and 2014 , no stock options were
issued under the Plan.
Restricted Share Plan
The Company's employee and director incentive restricted share plan ("RSP") provides the Company with the ability to grant awards of restricted shares to the
Company's directors, officers and employees (if the Company ever has employees), employees of the Advisor and its affiliates, employees of entities that provide
services to the Company, directors of the Advisor or of entities that provide services to the Company, certain consultants to the Company and the Advisor and its
affiliates or to entities that provide services to the Company.
Prior to April 8, 2015 , the RSP provided for the automatic grant of 3,000 restricted shares of Common Stock to each of the independent directors, without any
further action by the Company's board of directors or the stockholders, on the date of initial election to the board of directors and on the date of each annual
stockholder's meeting. Restricted stock issued to independent directors will vest over a five -year period beginning on the first anniversary of the date of grant in
increments of 20% per annum. On April 8, 2015 , the Company amended the RSP ("the Amended RSP"), among other things, to remove the fixed amount of
shares that are automatically granted to the independent directors and remove the fixed vesting period of five years . Under the Amended RSP, the annual amount
granted to the independent directors is determined by the board of directors.
F-45
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
Effective upon the Listing Date, the Company’s board of directors approved the following changes to independent director compensation: (i) increasing in the
annual retainer payable to all independent directors to $100,000 per year, (ii) increase in the annual retainer for the non-executive chair to $105,000 , (iii) increase
in the annual retainer for independent directors serving on the audit committee, compensation committee or nominating and corporate governance committee to
$30,000 . All annual retainers are payable 50% in the form of cash and 50% in the form of restricted stock units ("RSU") which vest over a three -year period. In
addition, the directors have the option to elect to receive the cash component in the form of RSUs which would vest over a three -year period. Under the Amended
RSP, restricted share awards entitle the recipient to receive shares of Common Stock from the Company under terms that provide for vesting over a specified
period of time or upon attainment of pre-established performance objectives. Such awards would typically be forfeited with respect to the unvested shares upon the
termination of the recipient's employment or other relationship with the Company. In connection with the Listing, the Company's board of directors also approved
a one-time retention grant of 40,000 RSUs to each of the directors valued at $8.52 per unit, which vest over a five -year period. On July 13, 2015 , the Company
granted an annual retainer to each of its independent directors comprised of $0.1 million in cash and 7,352 RSUs which vest over a three -year period with the
vesting period beginning on June 15, 2015 . In addition, the Company granted $0.1 million in non-executive chair compensation in cash and 5,882 RSUs which
vest over a three -year period with the vesting period beginning on June 15, 2015 . On August 18, 2016, the Company granted an annual retainer to each of its
independent directors comprised of $0.1 million and 8,642 RSUs which vest over a three -year period with the vesting period beginning on June 28, 2016. In
addition, the Company granted $0.1 million in non-executive chair compensation in cash and 6,981 RSUs which vest over a three -year period with the vesting
period beginning on June 28, 2016 .
On January 3, 2017, following approval by the Board, 32,000 unvested restricted shares of Common Stock owned by Mr. Kahane became vested
simultaneously with his resignation as a member of the Board. Effective, January 3, 2017, the Board had accelerated the vesting of 24,000 of these unvested
restricted and the remaining 8,000 unvested shares automatically vested upon Mr. Kahane’s voluntary resignation.
Prior to April 8, 2015 , the total number of shares of Common Stock granted under the RSP could not exceed 5.0% of the Company's outstanding shares on a
fully diluted basis at any time, and in any event could not exceed 7.5 million shares (as such number may be adjusted for stock splits, stock dividends,
combinations and similar events). The Amended RSP increased the number of shares the Company's Common Stock, par value $0.01 per share, available for
awards thereunder to 10% of the Company’s outstanding shares of Common Stock on a fully diluted basis at any time. The Amended RSP also eliminated the limit
of 7.5 million shares of Common Stock permitted to be issued as RSUs.
Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares
may receive cash dividends prior to the time that the restrictions on the restricted shares have lapsed. Any dividends payable in common shares shall be subject to
the same restrictions as the underlying restricted shares.
F-46
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
The following table reflects restricted share award activity for the years ended December 31, 2016 , 2015 and 2014 .
Unvested, December 31, 2013
Granted
Vested
Unvested, December 31, 2014
Granted prior to Listing Date (1)
One-time Listing Grant
Granted (2)
Vested (3)
Unvested, December 31, 2015
Granted
Vested
Unvested, December 31, 2016
____________________________
Number of
Restricted Shares
Weighted-Average Issue
Price
16,200 $
9,000
(10,800)
14,400
3,000
160,000
27,938
(17,400)
187,938
36,634
(41,274)
183,298 $
9.00
9.00
9.00
9.00
9.00
8.52
8.84
9.00
8.57
7.53
8.59
8.36
(1) Based on the original RSP in place prior to April 8, 2015 .
(2) Based on the Amended RSP which provides an annual retainer to: (i) all independent directors; (ii) independent directors serving on the Audit Committee, Compensation Committee and
Nominating and Corporate Governance Committee; and (iii) the non-executive chair.
(3) RSUs granted prior to April 8, 2015 vested immediately prior to the Listing.
The fair value of the restricted shares granted prior to the Listing Date is based on the per share price in the IPO and the fair value of the restricted shares
granted on or after the Listing Date is based on the market price of Common Stock as of the grant date, and is expensed over the vesting period. Compensation
expense related to restricted stock was approximately $0.4 million , $0.2 million and $0.1 million during the years ended December 31, 2016 , 2015 and 2014 ,
respectively, and is recorded as equity based compensation during 2016 and 2015 and general and administrative expenses during 2014 in the accompanying
consolidated statements of operations. As of December 31, 2016 , the Company had $1.3 million of unrecognized compensation cost related to unvested restricted
share awards granted under the Company’s RSP. That cost is expected to be recognized over a weighted average period of 3.1 years .
Multi-Year Outperformance Agreement
In connection with the Listing, the Company entered into the OPP with the OP and the Advisor. Under the OPP, the Advisor was issued 9,041,801 long term
incentive plan units ("LTIP Units") in the OP with a maximum award value on the issuance date equal to 5.00% of the Company’s market capitalization (the “OPP
Cap”). The LTIP Units are structured as profits interests in the OP.
F-47
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
The Advisor will be eligible to earn a number of LTIP Units with a value equal to a portion of the OPP Cap upon the first, second and third anniversaries of
the Effective Date, which is the Listing Date, June 2, 2015 , based on the Company’s achievement of certain levels of total return to its stockholders (“Total
Return”), including both share price appreciation and Common Stock dividends, as measured against a peer group of companies, as set forth below, for the three-
year performance period commencing on the Effective Date (the “ Three -Year Period”); each 12-month period during the Three -Year Period (the “ One -Year
Periods”); and the initial 24-month period of the Three -Year Period (the “ Two -Year Period”), as follows:
Absolute Component: 4% of any excess Total Return attained above an absolute hurdle measured from the
beginning of such period:
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:
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:
Performance
Period
Annual
Period
Interim Period
21%
7%
14%
18%
—%
—%
6%
—%
—%
12%
—%
—%
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 is calculated at the end of each One -Year Period, the Two -Year Period and the Three -Year Period. The award earned
for the Three -Year Period is based on the formula in the table above less any awards earned for the Two -Year Period and One -Year Periods, but not less than
zero; the award earned for the Two -Year Period is based on the formula in the table above less any award earned for the first and second One -Year Period, but not
less than zero. Any LTIP Units that are unearned at the end of the Performance Period will be forfeited.
Subject to the Advisor’s continued service through each vesting date, one third of any earned LTIP Units will vest on each of the third, fourth and fifth
anniversaries of the Effective Date. Any earned and vested LTIP Units may be converted into OP Units in accordance with the terms and conditions of the limited
partnership agreement of the OP. The OPP provides for early calculation of LTIP Units earned and for the accelerated vesting of any earned LTIP Units in the
event Advisor is terminated or in the event the Company incurs a change in control, in either case prior to the end of the Three -Year Period. On June 2, 2016, no
LTIP units were earned by the Advisor under the terms of the OPP.
The Company records equity based compensation expense associated with the awards over the requisite service period of five years on a graded vesting basis.
Equity-based compensation expense is adjusted each reporting period for changes in the estimated market-related performance. Compensation expense related to
the OPP was $3.4 million and $2.2 million for the years ended December 31, 2016 and 2015 , respectively. There was no compensation expense related to the OPP
for the year ended December 31, 2014 . Subject to the Advisor’s continued service through each vesting date, one third of any earned LTIP Units will vest on each
of the third, fourth and fifth anniversaries of the Effective Date. Until such time as an LTIP Unit is earned in accordance with the provisions of the OPP, the holder
of such LTIP Unit is entitled to distributions on such LTIP Unit equal to 10% of the distributions (other than distributions of sale proceeds) made per OP Unit. If
real estate assets are sold and net sales proceeds distributed prior to June 2, 2018, the end of the Three -Year Period, the holders of LTIP Units generally would be
entitled to a portion of those net sales proceeds with respect to both the earned and unearned LTIP Units (although the amount per LTIP Unit, which would be
determined in accordance with a formula in the limited partnership agreement of the OP, would be less than the amount per OP Unit until the average capital
account per LTIP Unit equals the average capital account per OP Unit). The Company has paid $1.0 million in distributions related to LTIP Units during the year
ended December 31, 2016 , which is included in non-controlling interest in the consolidated statements of equity. After an LTIP Unit is earned, the holder of such
LTIP Unit is entitled to a catch-up distribution and then the same distributions as the holders of an OP Unit. At the time the Advisor’s capital account with respect
to an LTIP Unit is economically equivalent to the average capital account balance of an OP Unit, the LTIP Unit has been earned and it has been vested for 30 days
, the Advisor, in its sole discretion, will be entitled to convert such LTIP Unit into an OP Unit in accordance with the provisions of the limited partnership
agreement of the OP. The OPP provides for early calculation of LTIP Units earned and for the accelerated vesting of any earned LTIP Units in the event Advisor is
terminated by the Company or in the event the Company incurs a change in control, in either case prior to the end of the Three -Year Period.
F-48
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
On February 25, 2016 , the OPP was amended and restated to reflect the merger of two of the companies in the Peer Group.
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 years ended December 31, 2016 and 2015 . There were 1,056 such shares of Common Stock issued in lieu of cash during the year ended
December 31, 2014 which resulted in additional share based compensation of $10,000 .
Note 14 — Earnings Per Share
The following is a summary of the basic and diluted net income (loss) per share computation for the years ended December 31, 2016 , 2015 and 2014 :
(In thousands, except share and per share data)
Net income (loss) attributable to stockholders
Adjustments to net income (loss) attributable to stockholders for common share equivalents
Adjusted net income (loss) attributable to stockholders
Year Ended December 31,
2016
2015
2014
$
47,140 $
(2,065) $
(53,594)
(773)
46,367
(442)
(2,507)
—
(53,594)
Basic and diluted net income (loss) per share
Basic and diluted weighted average shares outstanding
0.27 $
(0.01) $
(0.43)
170,161,344
174,309,894
126,079,369
Under current authoritative guidance for determining earnings per share, all nonvested share-based payment awards that contain non-forfeitable rights to
distributions are considered to be participating securities and therefore are included in the computation of earnings per share under the two-class method. The two-
class method is an earnings allocation formula that determines earnings per share for each class of common shares and participating security according to dividends
declared (or accumulated) and participation rights in undistributed earnings. The Company's unvested RSUs and LTIPs 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 below excludes the
non-forfeitable distributions to the unvested RSUs and LTIPs from the numerator.
Diluted net income (loss) per share assumes the conversion of all Common Stocks share equivalents into an equivalent number of common shares, unless the
effect is anti-dilutive. The Company considers unvested restricted stock, OP Units and LTIP Units to be common share equivalents. For the years ended
December 31, 2016 , 2015 and 2014 , the following common share equivalents were excluded from the calculation of diluted earnings per share:
Unvested restricted stock
OP Units (1)
Class B Units
OPP (LTIP Units)
Total anti-dilutive common share equivalents
December 31,
2016
2015
2014
183,298
545,530
—
187,938
1,809,678
—
9,041,801
9,041,801
9,770,629
11,039,417
14,400
22
705,743
—
720,165
(1) As of December 31, 2015 , OP Units included 1,726,323 converted Class B Units, 83,333 OP Units issued to the Advisor, and 22 OP Units issued to the Special Limited Partner. Subsequent
to the Listing all OP Units issued to the Advisor were transferred to individual investors. On September 2, 2016, 1,264,148 of OP Units were converted into Common Stock, of which
916,231 , 347,903 , and 14 belong to individual members and employees of AR Global, Service Provider, and, Special Limited Partner, respectively. There were 545,530 OP Units
outstanding that were held by parties other than the Company as of December 31, 2016 .
Conditionally issuable shares relating to the OPP award (See Note 13 — Share-Based Compensation ) would be included in the computation of fully diluted
EPS (if dilutive) based on shares that would be issued if the balance sheet date were the end of the measurement period. No LTIP share equivalents were included
in the computation for the year ended December 31, 2016 because no units or shares would have been issued based on the stock price at December 31, 2016 .
F-49
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
Note 15 — Quarterly Results (Unaudited)
Presented below is a summary of the unaudited quarterly financial information for years ended December 31, 2016 and 2015 :
(In thousands, except share and per share data)
Quarters Ended
$
$
$
$
$
$
52,773
15,946
(195)
15,751
173,343,587
0.09
December 31, (3)
56,043
12,312
(193)
12,119
March 31,
June 30,
September 30,
December 31,
2016
Total revenue
Net income (loss) attributable to stockholders
Adjustments to net income (loss) attributable to
stockholders for common share equivalents
Adjusted net income (loss) attributable to stockholders
Basic and diluted weighted average shares outstanding
Basic and diluted net income (loss) per share attributable to
stockholders
$
$
$
$
54,954 $
6,488 $
(195)
6,293 $
53,196
15,763
(193)
15,570
168,936,633
168,948,472
0.04 $
0.09
$
$
$
$
53,251
8,943
(190)
8,753
169,390,187
0.05
(In thousands, except share and per share data)
Quarters Ended
2015
Total revenue
Net income (loss) attributable to stockholders
Adjustments to net income (loss) attributable to
stockholders for common share equivalents
Adjusted net income (loss) attributable to stockholders
Basic and diluted weighted average shares outstanding
Basic and diluted net income (loss) per share attributable to
stockholders
_______________________
$
$
$
$
March 31, (1)
June 30,
September 30, (2)
49,969 $
25,855 $
49,068
(45,664)
$
$
—
—
50,252
5,432
(249)
25,855 $
(45,664) $— $
5,183 $— $
179,156,462
180,380,436
168,948,345
168,936,633
0.14
$
(0.25)
$
0.03
$
0.07
(1) As discussed in Note 2 — Summary of Significant Accounting Policies , the Company reflected adjustments in the three months periods ended March 31, 2015 and December 31, 2015 to
correct errors in straight-line rent and taxes relating to fiscal 2014.
(2) The Company identified errors in accounting for certain cross currency derivatives that were no longer designated as hedges subsequent to their restructuring on February 4, 2015 (see Note
8 — Derivatives and Hedging Activities ) where gains that should have been included in net income (loss) were instead included in other comprehensive income (loss) of approximately
$0.5 million and $0.6 million during the thee month periods ended March 31, 2015 and June 30, 2015, respectively. The Company has concluded that these adjustments are not material to
the financial position or results of operations for the current period or any of the respective prior periods, accordingly, the Company recorded the additional gains on these non-designated
derivative instruments of $1.1 million during the three month period ended September 30, 2015.
(3) During the fourth quarter of 2015, the Company recorded an out-of-period adjustment to correct for an error identified in accounting for certain accrued operating expense reimbursement
revenue totaling approximately $1.0 million , of which approximately $0.4 million , $0.3 million and $0.3 million related to three month periods ended March 31, 2015, June 30, 2015 and
September 30, 2015, respectively. The Company concluded that this adjustment was not material to its financial position and results of operations for the current period or any of the prior
periods, accordingly, the Company reversed the accrued operating expense reimbursement revenue of $1.0 million during the three month period ended December 31, 2015.
F-50
GLOBAL NET LEASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
Note 16 — Subsequent Events
The Company has evaluated subsequent events through the filing of this Annual Report on Form 10-K, 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 previously disclosed or disclosed below.
Dispositions
Subsequent to the year ended December 31, 2016 , the Company has sold one property as shown in the table below:
Portfolio
State
Disposition Date
Number of
Properties
Square Feet
Contract Sales Price
(In thousands)
Kulicke & Soffa
Pennsylvania
2/17/17
1
88,000 $
12,950
The sale of Kulickie & Soffa did not represent a strategic shift that has a major effect on the Company’s operations and financial results. Accordingly, the
results of operations of the Company remain classified within continuing operations for all periods presented until the respective dates of the sale.
Reverse Stock Split
On February 8, 2017 , the Company announced that its Board of Directors has approved a reverse stock split of the Company’s Common Stock and its
outstanding OP Units at a ratio of 1 -for- 3 (the “Reverse Stock Split”). The Reverse Stock Split is expected to take effect at approximately 5:00 p.m. Eastern time
on February 28, 2017 (the “Effective Time”). Accordingly, at the Effective Time, every three issued and outstanding shares of Common Stock will be converted
into one share of Common Stock and every three OP Units will be converted into one OP Unit. In addition, at the market open on March 1, 2017 , the Common
Stock will be assigned a new CUSIP number.
As a result of the Reverse Stock Split, the number of outstanding shares of the Company’s Common Stock will be reduced from approximately 198.8 million
to approximately 66.3 million . The Reverse Stock Split will not affect the timing of the payment of the Company’s previously announced March 2017 dividend,
which will continue to be paid on March 15, 2017 to stockholders of record at the close of business on March 8, 2017. Stockholders of record will receive the same
March dividend payment but adjusted to reflect the Reverse Stock Split equal to $0.1775 per share.
No fractional shares or OP Units will be issued in connection with the Reverse Stock Split. Instead, cash will be paid in lieu of any fractional share that would
have otherwise resulted from the Reverse Stock Split. No payments will be made in respect of any fractional OP Units. The Reverse Stock Split will apply to all of
the Company’s outstanding shares of Common Stock and therefore will not affect any stockholder’s relative ownership percentage. Stockholders will be receiving
information from the Company’s transfer agent regarding their stockholdings following the Reverse Stock Split as well as any cash in lieu payments that may
result from the Reverse Stock Split. Stockholders are not required to take any action to effectuate the exchange of their stock.
F-51
Global Net Lease, Inc.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2016
(dollar amounts in thousands)
Initial Costs
Costs Capitalized Subsequent to
Acquisition
U.S. State or
Country
Acquisition
Date
Encumbrances at
December 31, 2016 (1)
Land
Portfolio
City
McDonalds Corporation
Carlisle
Wickes
Blackpool
Everything Everywhere
Merthyr Tydfil
Thames Water
Swindon
Wickes
PPD Global Labs
Tunstall
Highland Heights
Northern Rock
Sunderland
Kulicke & Soffa
Fort Washington
Wickes
Con-Way Freight, Inc.
Clifton
Aurora
Con-Way Freight, Inc.
Grand Rapids
Con-Way Freight, Inc.
Con-Way Freight, Inc.
Riverton
Salina
Con-Way Freight, Inc.
Uhrichsville
Con-Way Freight, Inc.
Vincennes
Con-Way Freight, Inc.
Waite Park
Wolverine
Howard City
Western Digital
Encanto Restaurants
Encanto Restaurants
Encanto Restaurants
Encanto Restaurants
Encanto Restaurants
Encanto Restaurants
Encanto Restaurants
Encanto Restaurants
San Jose
Baymon
Caguas
Carolina
Carolina
Guayama
Mayaguez
Ponce
Ponce
Encanto Restaurants
Puerto Neuvo
Encanto Restaurants
Quebrada Arena
Encanto Restaurants
Encanto Restaurants
Rio Piedras
Rio Piedras
Encanto Restaurants
San German
Encanto Restaurants
Encanto Restaurants
Encanto Restaurants
Encanto Restaurants
San Juan
San Juan
San Juan
Toa Baja
UK
UK
UK
UK
UK
KY
UK
PA
UK
NE
MI
IL
KS
OH
IN
MN
MI
CA
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
PR
$
Oct. 2012
May 2013
Jun. 2013
Jul. 2013
Jul. 2013
Aug. 2013
Sep. 2013
Sep. 2013
Nov. 2013
Nov. 2013
Nov. 2013
Nov. 2013
Nov. 2013
Nov. 2013
Nov. 2013
Nov. 2013
Dec. 2013
Dec. 2013
Dec. 2013
Dec. 2013
Dec. 2013
Dec. 2013
Dec. 2013
Dec. 2013
Dec. 2013
Dec. 2013
Dec. 2013
Dec. 2013
Dec. 2013
Dec. 2013
Dec. 2013
Dec. 2013
Dec. 2013
Dec. 2013
Dec. 2013
Improvements
Building and
$
924
938
$
396
1,666
3,394
3,394
864
2,001
1,234
2,272
1,234
295
945
344
461
380
220
367
719
9,021
1,150
—
1,840
615
673
410
600
655
—
844
963
505
391
389
153
1,235
68
2,402
4,936
7,405
2,036
—
6,479
—
2,345
—
—
—
—
—
—
—
—
17,682
1,757
1,528
2,826
840
917
840
1,222
1,337
496
1,474
1,680
1,031
687
955
474
1,680
420
F-52
1,789
2,160
4,011
1,975
6,002
4,319
12,874
1,728
1,670
1,417
804
1,843
886
712
681
13,667
16,729
1,724
2,481
2,761
751
822
957
1,399
1,528
782
1,566
1,788
1,179
726
1,168
612
1,509
616
Land
Building and
Improvements
Gross Amount at
December 31,
2016 (2)(3)
Accumulated
Depreciation (4)(5)
$
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
1,320
3,455
5,554
7,405
2,839
8,003
5,553
15,146
2,962
1,965
2,362
1,148
2,304
1,266
932
1,048
14,386
25,750
2,874
2,481
4,601
1,366
1,495
1,367
1,999
2,183
782
2,410
2,751
1,684
1,117
1,557
765
2,744
684
218
308
365
645
316
1,082
677
2,070
256
314
266
151
347
167
132
128
2,501
2,423
287
412
459
125
137
159
241
254
130
260
297
196
125
194
102
251
106
Global Net Lease, Inc.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2016
(dollar amounts in thousands)
U.S. State or
Country
Acquisition
Date
Encumbrances at
December 31, 2016 (1)
Land
Building and
Improvements
Land
Building and
Improvements
Gross Amount at
December 31,
2016 (2)(3)
Accumulated
Depreciation (4)(5)
Initial Costs
Costs Capitalized Subsequent to
Acquisition
PR
GER
MI
UK
UK
IA
UK
UK
UK
UK
UK
UK
TN
ND
UK
DE
PA
UK
UK
TX
TX
MN
IN
TX
TN
CO
IN
TX
TX
TX
TX
TX
LA
TX
Dec. 2013
Jan. 2014
Jan. 2014
Feb. 2014
Feb. 2014
Feb. 2014
Mar. 2014
Mar. 2014
Mar. 2014
Mar. 2014
Mar. 2014
Mar. 2014
Mar. 2014
Mar. 2014
Apr. 2014
Apr. 2014
Apr. 2014
Apr. 2014
Apr. 2014
Apr. 2014
Apr. 2014
Apr. 2014
May. 2014
May. 2014
May. 2014
May. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
1,435
11,152
—
15,735
23,757
—
19,376
2,614
1,448
3,118
3,261
2,072
—
—
4,721
—
—
4,734
1,107
1,822
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
822
5,409
3,174
1,245
7,092
291
2,681
1,253
286
1,053
1,232
724
4,161
211
724
1,097
1,098
1,179
—
—
484
618
350
891
282
966
1,220
3,195
826
416
294
260
301
260
131
F-53
1,527
15,187
27,076
23,094
29,288
1,968
30,384
3,552
2,052
4,171
3,163
2,585
30,083
3,513
8,605
1,715
3,573
7,036
1,290
1,681
2,934
3,145
11,182
7,677
5,015
19,573
7,928
6,883
6,132
5,186
2,310
1,445
323
1,054
1,420
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,349
20,596
30,250
24,339
36,380
2,259
33,065
4,805
2,338
5,224
4,395
3,309
254
1,271
2,163
1,668
2,410
182
2,199
284
173
309
258
248
34,244
2,200
3,724
9,329
2,812
4,671
8,215
1,290
1,681
3,418
3,763
11,532
8,568
5,297
20,539
9,148
10,078
6,958
5,602
2,604
1,705
624
1,314
1,551
347
637
137
256
590
135
118
210
237
817
578
272
1,326
538
478
402
368
169
122
30
123
101
Portfolio
City
Encanto Restaurants
Vega Baja
Rheinmetall
GE Aviation
Provident Financial
Crown Crest
Trane
Aviva
DFS Trading
DFS Trading
DFS Trading
DFS Trading
DFS Trading
Government Services
Administration
Neuss
Grand Rapids
Bradford
Leicester
Davenport
Sheffield
Brigg
Carcroft
Carcroft
Darley Dale
Somercotes
Fanklin
National Oilwell Varco
Williston
Talk Talk
Government Services
Administration
Government Services
Administration
OBI DIY
DFS Trading
DFS Trading
Government Services
Administration
Government Services
Administration
Government Services
Administration
Indiana Department of
Revenue
National Oilwell Varco
(6)
Nissan
Government Services
Administration
Manchester
Dover
Germantown
South Yorkshire
Yorkshire
Dallas
Mission
International Falls
Indianapolis
Pleasanton
Murfreesboro
Lakewood
Lippert Components
South Bend
Axon Energy Products
Axon Energy Products
Axon Energy Products
Conroe
Houston
Houston
Bell Supply Co
Carrizo Springs
Bell Supply Co
Bell Supply Co
Cleburne
Frierson
Bell Supply Co
Gainesville
Mayen
GER
Global Net Lease, Inc.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2016
(dollar amounts in thousands)
Portfolio
Bell Supply Co
Bell Supply Co
GE Oil & Gas
GE Oil & Gas
Lhoist
City
Killdeer
Williston
Canton
Odessa
Irving
Select Energy Services
DeBerry
Select Energy Services
Gainesville
Select Energy Services
Victoria
Bell Supply Co
Bell Supply Co
Select Energy Services
Select Energy Services
Select Energy Services
Select Energy Services
Superior Energy Services
Superior Energy Services
Jacksboro
Kenedy
Alice
Dilley
Kenedy
Laredo
Gainesville
Jacksboro
Amcor Packaging
Workington
Government Services
Administration
Nimble Storage
FedEx
FedEx
FedEx
Sandoz
Wyndham
Valassis
Government Services
Administration
Raton
San Jose
Amarillo
Chicopee
San Antonio
Princeton
Branson
Livonia
Fort Fairfield
AT&T Services, Inc.
San Antonio
PNC Bank
PNC Bank
Achmea
Continental Tire
Erie
Scranton
Leusden
Fort Mill
Fujitsu Office Properties
Manchester
BP Oil
HBOS
HBOS
Wootton Bassett
Derby
St. Helens
U.S. State or
Country
Acquisition
Date
Encumbrances at
December 31, 2016 (1)
Land
Building and
Improvements
Land
Building and
Improvements
Gross Amount at
December 31,
2016 (2)(3)
Accumulated
Depreciation (4)(5)
Initial Costs
Costs Capitalized Subsequent to
Acquisition
ND
ND
OH
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
TX
UK
NM
CA
TX
MA
TX
NJ
MO
MI
ME
TX
PA
PA
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jun. 2014
Jul. 2014
Jul. 2014
Jul. 2014
Jul. 2014
Jul. 2014
Jul. 2014
Jul. 2014
Jul. 2014
Jul. 2014
Jul. 2014
NETH
Jul. 2014
SC
UK
UK
UK
UK
Jul. 2014
Jul. 2014
Aug. 2014
Aug. 2014
Aug. 2014
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,858
—
—
—
—
—
—
—
—
—
33,550
—
—
—
—
30,581
1,800
3,579
1,829
307
163
437
1,611
173
533
519
354
51
190
518
429
815
2,472
322
408
1,074
93
30,227
889
1,030
3,283
7,766
881
1,735
26
5,312
242
1,324
2,678
780
3,485
565
567
215
F-54
1,250
2,323
3,039
3,322
2,154
7,551
7,482
1,698
657
1,669
1,331
1,777
8,355
944
480
312
6,333
875
10,795
6,446
7,022
17,729
31,994
3,307
8,119
9,315
41,201
6,195
3,004
20,872
14,259
37,725
2,444
5,714
3,238
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
180
—
—
—
11,558
—
—
—
—
—
—
46
—
—
—
—
—
1,557
2,486
3,476
4,933
2,327
8,084
8,001
2,052
708
1,859
1,849
2,206
9,170
3,416
802
720
7,407
968
41,202
7,335
8,052
21,012
51,318
4,188
9,854
9,341
46,513
6,437
4,328
23,596
15,039
41,210
3,009
6,281
3,453
103
172
223
440
185
852
501
149
75
150
103
162
654
109
34
30
495
65
734
521
597
1,197
4,037
236
532
575
2,515
386
192
1,324
887
2,300
158
382
218
Global Net Lease, Inc.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2016
(dollar amounts in thousands)
U.S. State or
Country
Acquisition
Date
Encumbrances at
December 31, 2016 (1)
Land
Building and
Improvements
Land
Building and
Improvements
Gross Amount at
December 31,
2016 (2)(3)
Accumulated
Depreciation (4)(5)
Initial Costs
Costs Capitalized Subsequent to
Acquisition
UK
UK
UK
OH
MI
UK
NJ
AL
SC
GA
AL
GA
LA
KY
TX
TX
MS
SC
TX
LA
SC
MS
VA
MI
MS
TX
NC
TX
IA
SC
MS
GA
TX
SC
NE
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
1,244
1,200
950
—
—
6,788
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
410
260
461
958
1,176
1,536
10,290
115
439
200
176
234
291
178
31
83
415
187
96
247
363
305
124
107
104
52
99
114
188
629
346
369
96
83
260
F-55
1,934
1,849
1,210
6,933
10,179
14,564
32,530
635
505
492
618
1,181
520
748
664
803
162
608
593
563
487
85
660
711
834
745
438
698
226
546
335
715
225
663
515
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,344
2,109
1,671
7,891
11,355
16,100
42,821
750
944
692
794
1,415
811
926
695
886
577
795
689
810
850
390
784
818
938
797
537
812
414
1,175
681
1,084
321
746
775
141
132
113
446
623
914
1,936
49
42
42
47
78
38
55
44
53
21
47
45
42
42
10
46
43
56
45
28
54
19
38
31
54
15
48
35
Portfolio
HBOS
Malthurst
Malthurst
City
Warrington
Shiptonthorpe
Yorkshire
Stanley Black & Decker
Westerville
Thermo Fisher
Capgemini
Merck
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Kalamazoo
Birmingham
Madison
Abbeville
Aiken
Alapaha
Anniston
Atlanta
Bossier City
Brandenburg
Brownfield
Brownsville
Caledonia
Camden
Camp Wood
Church Point
Columbia
Columbus
Danville
Detroit
Diamond Head
Falfurrias
Fayetteville
Fort Davis
Fort Madison
Greenwood
Grenada
Griffin
Hallsville
Hardeeville
Hastings
Global Net Lease, Inc.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2016
(dollar amounts in thousands)
Portfolio
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Government Services
Administration
Hewlett-Packard
Intier Automotive
Waste Management
City
Haw River
Kansas City
Knoxville
La Feria
Lancaster
Lillian
Louisville
Louisville
Madisonville
Memphis
Memphis
Memphis
Mendenhall
Mobile
Mohave Valley
N Platte
Nampa
Newberry
North Charleston
North Charleston
Oklahoma City
Paulden
Poteet
Rockford
Roebuck
San Angelo
St Louis
Tyler
Union
Williamston
Rangeley
Newcastle
Redditch
Winston-Salem
FedEx
Winona
U.S. State or
Country
Acquisition
Date
Encumbrances at
December 31, 2016 (1)
Land
Building and
Improvements
Land
Building and
Improvements
Gross Amount at
December 31,
2016 (2)(3)
Accumulated
Depreciation (4)(5)
Initial Costs
Costs Capitalized Subsequent to
Acquisition
NC
MO
TN
TX
SC
AL
KY
MS
KY
TN
TN
TN
MS
AL
AZ
NE
ID
MI
SC
SC
OK
AZ
TX
IL
SC
TX
MO
TX
MS
SC
ME
UK
UK
NC
MN
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Aug. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
310
52
82
124
229
410
511
235
389
158
79
356
61
258
284
117
133
172
376
458
144
468
141
183
306
96
226
217
52
211
—
11,461
5,831
—
—
1,377
1,061
1,096
494
83
F-56
554
986
714
956
721
508
503
410
576
301
342
507
720
682
575
255
1,126
1,562
588
593
1,211
306
169
1,179
508
342
1,325
682
622
558
4,746
17,667
8,676
3,235
1,785
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
262
—
—
—
—
864
1,038
796
1,080
950
918
1,014
645
965
459
421
863
781
940
859
372
1,259
1,734
964
1,051
1,355
774
310
1,362
814
438
1,551
899
674
769
6,385
18,728
9,772
3,729
1,868
52
58
52
61
57
39
40
34
45
26
28
41
50
47
52
15
75
103
46
50
72
33
19
76
47
27
85
45
44
43
305
1,015
555
195
125
Global Net Lease, Inc.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2016
(dollar amounts in thousands)
U.S. State or
Country
Acquisition
Date
Encumbrances at
December 31, 2016 (1)
Land
Building and
Improvements
Land
Building and
Improvements
Gross Amount at
December 31,
2016 (2)(3)
Accumulated
Depreciation (4)(5)
Initial Costs
Costs Capitalized Subsequent to
Acquisition
OK
KS
KS
NM
OK
NM
OK
OK
NM
KS
LA
NE
OK
OK
NM
OK
NE
OK
PA
KS
NE
NY
NY
FL
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
MO
Sep. 2014
MI
MI
MI
KY
KY
OH
UK
OH
GER
TX
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Sep. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
9,330
—
5,534
—
99
27
90
329
21
269
143
81
212
120
169
83
40
72
324
143
144
132
78
51
21
4,838
561
998
1,499
1,227
4,273
4,680
1,107
1,118
1,393
4,116
2,509
742
3,865
F-57
793
769
785
585
742
569
813
778
719
970
812
1,045
913
879
575
745
905
925
882
922
872
19,596
4,757
22,332
16,828
10,790
16,574
11,568
7,750
7,961
10,490
10,334
3,140
10,441
9,457
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
21
341
—
—
—
—
—
—
—
892
796
875
914
763
838
956
859
931
1,090
981
1,128
953
951
899
888
1,049
1,057
960
973
893
24,434
5,318
23,330
18,327
12,017
20,868
16,589
8,857
9,079
11,883
14,450
5,649
11,183
13,322
51
50
51
38
49
37
53
51
46
62
52
65
59
56
37
49
57
59
60
58
55
1,271
325
1,307
995
638
1,089
850
484
491
622
638
194
625
575
Portfolio
Dollar General
Dollar General
Dollar General
Dollar General
Dollar General
Dollar General
Dollar General
Dollar General
Dollar General
Dollar General
Dollar General
Dollar General
Dollar General
Dollar General
Dollar General
Dollar General
Dollar General
Dollar General
Dollar General
Dollar General
Dollar General
FedEx
FedEx
Shaw Aero
Mallinckrodt
City
Allen
Cherokee
Clearwater
Dexter
Elmore City
Eunice
Gore
Kingston
Lordsburg
Lyons
Mansfield
Neligh
Norman
Peggs
Santa Rosa
Sapulpa
Schuyler
Tahlequah
Townville
Valley Falls
Wymore
Bohemia
Watertown
Naples
St. Louis
Kuka Warehouse
Sterling Heights
Trinity Health
Trinity Health
FedEx
FedEx
GE Aviation
Bradford & Bingley
DNV GL
Rexam
Livonia
Livonia
Hebron
Lexington
Cincinnati
Bingley
Dublin
Reckinghausen
C&J Energy
Houston
Global Net Lease, Inc.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2016
(dollar amounts in thousands)
U.S. State or
Country
Acquisition
Date
Encumbrances at
December 31, 2016 (1)
Land
Building and
Improvements
Land
Building and
Improvements
Initial Costs
Costs Capitalized Subsequent to
Acquisition
LA
TN
TX
FL
AL
TN
GA
TX
NC
TN
SC
TX
LA
FL
MI
SC
MS
ID
AL
AL
FL
UT
AR
LA
FL
FL
AL
AL
TX
MS
TX
MS
NC
FL
NC
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
255
62
80
103
89
155
246
91
237
370
556
287
295
300
132
303
183
188
411
122
230
96
424
243
684
403
463
241
74
447
63
409
474
482
337
F-58
7,485
739
781
673
749
776
757
777
554
1,025
757
634
737
812
1,040
584
747
786
646
821
695
894
649
696
619
907
749
803
774
891
674
1,080
676
851
826
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Gross Amount at
December 31,
2016 (2)(3)
Accumulated
Depreciation (4)(5)
7,740
509
801
861
776
838
931
1,003
868
791
1,395
1,313
921
1,032
1,112
1,172
887
930
974
1,057
943
925
990
1,073
939
1,303
1,310
1,212
1,044
848
1,338
737
1,489
1,150
1,333
1,163
49
49
53
62
56
74
50
39
78
52
42
48
53
79
51
50
65
59
69
51
76
53
45
46
62
70
52
50
57
44
75
47
58
72
Portfolio
FedEx
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
Family Dollar
City
Lake Charles
Big Sandy
Boling
Bonifay
Brindidge
Brownsville
Buena Vista
Calvert
Chocowinty
Clarksville
Fort Mill
Hillsboro
Lake Charles
Lakeland
Lansing
Laurens
Marion
Marsing
Montgomery
Montgomery
Monticello
Monticello
North Little Rock
Oakdale
Orlando
Port St. Lucie
Prattville
Prichard
Quinlan
Rigeland
Rising Star
Southaven
Spout Springs
St. Petersburg
Swansboro
Global Net Lease, Inc.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2016
(dollar amounts in thousands)
U.S. State or
Country
Acquisition
Date
Encumbrances at
December 31, 2016 (1)
Land
Building and
Improvements
Land
Building and
Improvements
Gross Amount at
December 31,
2016 (2)(3)
Accumulated
Depreciation (4)(5)
Initial Costs
Costs Capitalized Subsequent to
Acquisition
Houten
NETH
Portfolio
Panasonic
Onguard
City
Hudson
Havre De Grace
Axon Energy Products
Houston
Metro Tonic
Tokmanni
Fife Council
Family Dollar
Family Dollar
Government Services
Administration
KPN BV
RWE AG
RWE AG
RWE AG
Halle Peissen
Matsala
Dunfermline
Doerun
Old Hickory
Rapid City
Essen
Essen
Essen
Follett School
McHenry
Quest Diagnostics, Inc.
Santa Clarita
Diebold
Weatherford International
AM Castle
FedEx
Constellium Auto
C&J Energy II
Fedex VII
Fedex VIII
Crown Group
Crown Group
Crown Group
Crown Group
Crown Group
Crown Group
Mapes & Sprowl Steel,
Ltd.
North Canton
Odessa
Wichita
Billerica
Wayne
Houston
Salina
Pierre
Fraser
Jonesville
Warren
Marion
Logansport
Madison
Elk Grove
JIT Steel Services
Chattanooga
JIT Steel Services
Chattanooga
Beacon Health System,
Inc.
Hannibal/Lex JV LLC
FedEx Ground
South Bend
Houston
Mankato
NJ
MD
TX
GER
FIN
UK
GA
TN
SD
GER
GER
GER
IL
CA
OH
TX
KS
MA
MI
TX
UT
SD
MI
MI
MI
SC
IN
IN
IL
TN
TN
IN
TX
Oct. 2014
Oct. 2014
Oct. 2014
Oct. 2014
Nov. 2014
Nov. 2014
Nov. 2014
Nov. 2014
Nov. 2014
Nov. 2014
Nov. 2014
Nov. 2014
Nov. 2014
Dec. 2014
Dec. 2014
Dec. 2014
Dec. 2014
Dec. 2014
Dec. 2014
Dec. 2014
Mar. 2015
Mar. 2015
Apr. 2015
Aug. 2015
Aug. 2015
Aug. 2015
Aug. 2015
Aug. 2015
Aug. 2015
Sep. 2015
Sep. 2015
Sep. 2015
Sep. 2015
Sep. 2015
MN
Sep. 2015
—
—
—
27,879
30,483
2,263
—
—
—
—
22,703
27,498
15,552
—
52,800
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,312
2,216
297
6,393
1,657
325
236
548
504
1,483
4,613
11,297
1,786
3,423
10,714
—
665
426
1,138
1,180
6,196
428
—
350
101
297
386
1,843
1,598
954
582
316
1,636
2,090
472
F-59
7,075
6,585
2,432
44,790
50,142
4,193
717
781
7,837
18,145
32,811
39,719
22,819
15,600
69,018
9,142
1,795
6,681
6,674
13,781
21,745
3,447
3,288
3,865
3,136
3,325
7,993
5,430
7,513
4,619
3,122
1,986
8,190
11,138
6,780
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
7,875
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
8,387
8,801
2,729
51,183
51,799
4,518
953
1,329
8,341
19,628
37,424
51,016
24,605
19,023
79,732
9,142
2,460
7,107
7,812
22,836
27,941
3,875
3,288
4,215
3,237
3,622
8,379
7,273
9,111
5,573
3,704
2,302
9,826
13,228
7,252
404
536
137
2,968
3,131
235
48
56
459
1,036
1,806
2,194
1,261
1,038
3,657
566
160
338
415
1,807
1,039
229
187
151
127
132
318
237
277
168
110
68
289
367
286
Global Net Lease, Inc.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2016
(dollar amounts in thousands)
Initial Costs
Costs Capitalized Subsequent to
Acquisition
Land
Building and
Improvements
Land
Building and
Improvements
Gross Amount at
December 31,
2016 (2)(3)
Accumulated
Depreciation (4)(5)
Portfolio
Office Depot
Finnair
Auchan (7)
Pole Emploi (7)
Veolia Water (7)
City
Venlo
Helsinki
Bordeaux
Marseille
Vandalia
Sagemcom (7)
Rueil-Malmaison
NCR Dundee (7)
FedEx Freight (7)
Dundee
Greensboro
U.S. State or
Country
NETH
FIN
FR
FR
US
FR
UK
US
Acquisition
Date
Sep. 2015
Sep. 2015
Dec. 2016
Dec. 2016
Dec. 2016
Dec. 2016
Dec. 2016
Dec. 2016
DB Luxembourg (7)
Kirchberg
LUX
Dec. 2016
ING Amsterdam (7)
Amsterdam
NETH
Dec. 2016
Worldline (7)
Foster Wheeler (7)
ID Logistics I (7)
ID Logistics II (7)
Harper Collins (7)
DCNS (7)
Total
Blois
Reading
Weilbach
Landersheim &
Moreuil
Glasgow
Brest
FR
UK
Dec. 2016
Dec. 2016
GER
Dec. 2016
FR
UK
FR
Dec. 2016
Dec. 2016
Dec. 2016
Encumbrances at
December 31, 2016
(1)
—
29,878
8,732
6,102
4,110
37,768
6,960
6,165
37,873
46,290
5,260
48,501
4,208
11,046
34,648
9,994
(8)
(8)
(8)
(8)
(8)
(8)
(8)
(8)
(8)
(8)
(8)
(8)
3,281
2,367
3,827
739
572
2,764
2,464
1,852
15,280
—
1,040
25,216
1,239
4,652
9,685
1,786
14,509
67,462
12,568
7,963
5,815
67,600
8,370
8,780
45,592
70,980
5,127
73,346
8,413
13,761
51,649
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
17,790
69,829
16,395
8,702
6,387
70,364
10,834
10,632
60,872
70,980
6,167
98,562
9,652
18,413
61,334
15,898
587
2,438
11
6
5
46
7
8
31
48
5
51
6
10
38
10
20,284
$
2,344,634
$
111,321
$
754,987
$ 376,704
14,112
$ 1,947,646
$
—
— $
___________________________________
(1) These are stated principal amounts at spot rates for those in local currency and exclude $5.1 million of deferred financing cost and $(2.5) million of mortgage (discount) premium, net.
(2) Acquired intangible lease assets allocated to individual properties in the amount of $587.1 million are not reflected in the table above.
(3) The tax basis of aggregate land, buildings and improvements as of December 31, 2016 is $3.0 billion . Assets acquired from the Merger, retain the prior tax basis.
(4) The accumulated depreciation column excludes approximately $104.7 million of amortization associated with acquired intangible lease assets.
(5) Each of the properties has a depreciable life of: 40 years for buildings, 15 years for improvements and five years for fixtures.
(6) The Company has expanded the property in September 2015 by purchasing additional land of $0.1 million , building and improvements of $3.4 million and an accumulated depreciation of
$0.1 million as of December 31, 2016 .
(7) These properties were acquired as part of Merger with Global II on December 22, 2016.
(8) These properties are encumbered by the Mezzanine Facility borrowings in the amount of $55.4 million and such amount of borrowings is excluded from the table above.
F-60
Global Net Lease, Inc.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2016
(dollar amounts in thousands)
A summary of activity for real estate and accumulated depreciation for the years ended December 31, 2016 , 2015 and 2014 :
Real estate investments, at cost:
Balance at beginning of year
Additions-Acquisitions
Asset remeasurement
Asset Dispositions
Currency translation adjustment
Balance at end of the year
Accumulated depreciation:
Balance at beginning of year
Depreciation expense
Asset Dispositions
Currency translation adjustment
Balance at end of the year
2016
December 31,
2015
2014
$
2,028,010 $
1,855,960 $
$
$
463,327
—
(77,063)
(69,640)
226,412
2,318
—
(56,680)
2,344,634 $
2,028,010 $
68,078 $
50,333
(3,012)
(4,078)
21,319 $
47,649
—
(890)
$
111,321 $
68,078 $
F-61
149,009
1,748,944
(675)
—
(41,318)
1,855,960
869
20,856
—
(406)
21,319
INDEMNIFICATION AGREEMENT
Exhibit 10.45
THIS INDEMNIFICATION AGREEMENT (“Agreement”) is made and entered into as of the 3 rd day of January 2017, by and between Global Net
Lease, Inc., a Maryland corporation (the “Company”), and Edward M. Weil, Jr. (the “Indemnitee”).
WHEREAS, at the request of the Company, Indemnitee currently serves as a director, officer or service provider of the Company and may, therefore, be
subjected to claims, suits or proceedings arising as a result of his or her service; and
WHEREAS, as an inducement to Indemnitee to serve or continue to serve as a director, officer or service provider, the Company has agreed to indemnify
Indemnitee and to advance expenses and costs incurred by Indemnitee in connection with any such claims, suits or proceedings, to the maximum extent permitted
by law; and
WHEREAS, the parties by this Agreement desire to set forth their agreement regarding indemnification and advance of expenses;
NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as
follows:
Section 1. Definitions . For purposes of this Agreement:
(a) “Change in Control” means a change in control of the Company occurring after the Effective Date of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), whether or not the Company is then subject to such reporting requirement; provided,
however, that, without limitation, such a Change in Control shall be deemed to have occurred if, after the Effective Date (i) any “person” (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 15% or more of the combined voting power of all of the Company’s then-outstanding securities entitled to vote generally in
the election of directors without the prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such person’s
attaining such percentage interest; (ii) the Company is a party to a merger, consolidation, sale of assets, plan of liquidation or other reorganization not approved by
at least two-thirds of the members of the Board of Directors then in office, as a consequence of which members of the Board of Directors in office immediately
prior to such transaction or event constitute less than a majority of the Board of Directors thereafter; or (iii) at any time, a majority of the members of the Board of
Directors are not individuals (A) who were directors as of the Effective Date or (B) whose election by the Board of Directors or nomination for election by the
Company’s stockholders was approved by the affirmative vote of at least two-thirds of the directors then in office who were directors as of the Effective Date or
whose election or nomination for election was previously so approved.
(b) “Corporate Status” means the status of a person as a present or former director, officer, employee or agent of the Company or as a director,
trustee, officer, partner, manager, managing member, fiduciary, employee or agent of any other foreign or domestic corporation, partnership, limited liability
company, joint venture, trust, employee benefit plan or other enterprise that such person is or was serving in such capacity at the request of the Company. As a
clarification and without limiting the circumstances in which Indemnitee may be serving at the request of the Company, service by Indemnitee shall be deemed to
be at the request of the Company: (i) if Indemnitee serves or served as a director, trustee, officer, partner, manager, managing member, fiduciary, employee or
agent of any corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise (1) of which a majority of the voting
power or equity interest is owned directly or indirectly by the Company or (2) the management of which is controlled directly or indirectly by the Company and (ii)
if, as a result of Indemnitee’s service to the Company or any of its affiliated entities, Indemnitee is subject to duties by, or required to perform services for, an
employee benefit plan or its participants or beneficiaries, including as deemed fiduciary thereof.
indemnification and/or advance of Expenses is sought by Indemnitee.
(c) “Disinterested Director” means a director of the Company who is not and was not a party to the Proceeding in respect of which
(d) “Effective Date” means the date set forth in the first paragraph of this Agreement.
(e) “Expenses” means any and all reasonable and out-of-pocket attorneys’ fees and costs, retainers, court costs, arbitration and mediation costs,
transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees,
federal, state, local or foreign taxes imposed on Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement, ERISA excise taxes
and penalties and any other disbursements or expenses incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or
preparing to be a witness in or otherwise participating in a Proceeding. Expenses shall also include Expenses incurred in connection with any appeal resulting from
any Proceeding including, without limitation, the premium for, security for and other costs relating to any cost bond supersede as bond or other appeal bond or its
equivalent.
(f) “Independent Counsel” means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither is, nor in
the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters
concerning Indemnitee under this Agreement or of other indemnitees under similar indemnification agreements), or (ii) any other party to or participant or witness
in the Proceeding giving rise to a claim for indemnification or advance of Expenses hereunder. Notwithstanding the foregoing, the term “Independent Counsel”
shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the
Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement.
(g) “Proceeding” means any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation,
inquiry, administrative hearing, claim, demand, discovery request or any other actual, threatened or completed proceeding, whether brought by or in the right of the
Company or otherwise and whether of a civil (including intentional or unintentional tort claims), criminal, administrative or investigative (formal or informal)
nature, including any appeal therefrom, except one pending or completed on or before the Effective Date, unless otherwise specifically agreed in writing by the
Company and Indemnitee. If Indemnitee reasonably believes that a given situation may lead to or culminate in the institution of a Proceeding, such situation shall
also be considered a Proceeding.
Section 2. Services by Indemnitee . Indemnitee will serve as a director, officer or service provider of the Company. However, this Agreement shall not
impose any independent obligation on Indemnitee or the Company to continue Indemnitee’s service to the Company. This Agreement shall not be deemed an
employment contract between the Company (or any other entity) and Indemnitee.
Section 3. Existing Agreement Superseded . The parties hereto agree that all of their rights and obligations under the Existing Agreement are hereby
replaced and superseded by the rights and obligations provided hereunder.
Section 4. General . The Company shall indemnify, and advance Expenses to, Indemnitee (a) as provided in this Agreement and (b) otherwise to the
maximum extent permitted by Maryland law in effect on the Effective Date and as amended from time to time; provided, however, that no change in Maryland law
shall have the effect of reducing the benefits available to Indemnitee hereunder based on Maryland law as in effect on the Effective Date. The rights of Indemnitee
provided in this Section 4 shall include, without limitation, the rights set forth in the other sections of this Agreement, including any additional indemnification
permitted by the Maryland General Corporation Law (the “MGCL”), including, without limitation, Section 2-418(g) of the MGCL.
Section 5. Standard for Indemnification . If, by reason of Indemnitee’s Corporate Status, Indemnitee is, or is threatened to be, made a party to any
Proceeding, the Company shall indemnify Indemnitee against all judgments, penalties, fines and amounts paid in settlement and all Expenses actually and
reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with any such Proceeding unless it is established by clear and convincing evidence that
(a) the act or omission of Indemnitee was material to the matter giving rise to the Proceeding and (i) was committed in bad faith or (ii) was the result of active and
deliberate dishonesty, (b) Indemnitee actually received an improper personal benefit in money, property or services or (c) in the case of any criminal Proceeding,
Indemnitee had reasonable cause to believe that his or her conduct was unlawful.
Section 6. Certain Limits on Indemnification . Notwithstanding any other provision of this Agreement (other than Section 7), Indemnitee shall not be
entitled to:
(a) indemnification hereunder if the Proceeding was one by or in the right of the Company and Indemnitee is adjudged, in a final adjudication of
the Proceeding not subject to further appeal, to be liable to the Company;
(b) indemnification hereunder if Indemnitee is adjudged, in a final adjudication of the Proceeding not subject to further appeal, to be liable on the
basis that personal benefit was improperly received in any Proceeding charging improper personal benefit to Indemnitee, whether or not involving action in the
Indemnitee’s Corporate Status; or
(c) indemnification or advance of Expenses hereunder if the Proceeding was brought by Indemnitee, unless: (i) the Proceeding was brought to
enforce indemnification under this Agreement, and then only to the extent in accordance with and as authorized by Section 13 of this Agreement, or (ii) the
Company’s charter or Bylaws, a resolution of the stockholders entitled to vote generally in the election of directors or of the Board of Directors or an agreement
approved by the Board of Directors to which the Company is a party expressly provide otherwise.
Section 7. Court-Ordered Indemnification . Notwithstanding any other provision of this Agreement, a court of appropriate jurisdiction, upon application
of Indemnitee and such notice as the court shall require, may order indemnification of Indemnitee by the Company in the following circumstances:
(a) if such court determines that Indemnitee is entitled to reimbursement under Section 2-418(d)(1) of the MGCL, the court shall order
indemnification, in which case Indemnitee shall be entitled to recover the Expenses of securing such reimbursement; or
(b) if such court determines that Indemnitee is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether
or not Indemnitee (i) has met the standards of conduct set forth in Section 2-418(b) of the MGCL or (ii) has been adjudged liable for receipt of an improper
personal benefit under Section 2-418(c) of the MGCL, the court may order such indemnification contemplated by Section 2-418(d)(2)(ii) of the MGCL.
Section 8. Indemnification for Expenses of an Indemnitee Who is Wholly or Partly Successful . Notwithstanding any other provision of this Agreement,
and without limiting any such provision, to the extent that Indemnitee was or is, by reason of his or her Corporate Status, made a party to (or otherwise becomes a
participant in) any Proceeding and is successful, on the merits or otherwise, in the defense of such Proceeding, Indemnitee shall be indemnified for all Expenses
actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is
successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee
under this Section 8 for all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with each such claim, issue or matter,
allocated on a reasonable and proportionate basis. For purposes of this Section 8, and without limitation, the termination of any claim, issue or matter in such a
Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.
Section 9. Advance of Expenses for an Indemnitee . If, by reason of Indemnitee’s Corporate Status, Indemnitee is, or is threatened to be, made a party to
any Proceeding, the Company shall, without requiring a preliminary determination of Indemnitee’s ultimate entitlement to indemnification hereunder, advance all
Expenses incurred by or on behalf of Indemnitee in connection with such Proceeding. The Company shall make such advance within ten days after the receipt by
the Company of a statement or statements requesting such advance from time to time, whether prior to or after final disposition of such Proceeding and may be in
the form of, in the reasonable discretion of the Indemnitee (but without duplication) (a) payment of such Expenses directly to third parties on behalf of Indemnitee,
(b) advance of funds to Indemnitee in an amount sufficient to pay such Expenses or (c) reimbursement to Indemnitee for Indemnitee’s payment of such Expenses.
Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by a written
affirmation by Indemnitee and a written undertaking by or on behalf of Indemnitee, in substantially the form attached hereto as Exhibit A or in such form as may
be required under applicable law as in effect at the time of the execution thereof. To the extent that Expenses advanced to Indemnitee do not relate to a specific
claim, issue or matter in the Proceeding, such Expenses shall be allocated on a reasonable and proportionate basis. The undertaking required by this Section 9 shall
be an unlimited general obligation by or on behalf of Indemnitee and shall be accepted without reference to Indemnitee’s financial ability to repay such advanced
Expenses and without any requirement to post security therefor.
Section 10. Indemnification and Advance of Expenses as a Witness or Other Participant . Notwithstanding any other provision of this Agreement, to the
extent that Indemnitee is or may be, by reason of Indemnitee’s Corporate Status, made a witness or otherwise asked to participate in any Proceeding, whether
instituted by the Company or any other person, and to which Indemnitee is not a party, Indemnitee shall be advanced and indemnified against all Expenses actually
and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith within ten days after the receipt by the Company of a statement or
statements requesting any such advance or indemnification from time to time, whether prior to or after final disposition of such Proceeding. Such statement or
statements shall reasonably evidence the Expenses incurred by Indemnitee. In connection with any such advance of Expenses, the Company may require
Indemnitee to provide an undertaking and affirmation substantially in the form attached hereto as Exhibit A.
Section 11. Procedure for Determination of Entitlement to Indemnification .
(a) To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith
such documentation and information as is reasonably available to Indemnitee and is reasonably necessary or appropriate to determine whether and to what extent
Indemnitee is entitled to indemnification. Indemnitee may submit one or more such requests from time to time and at such time(s) as Indemnitee deems appropriate
in Indemnitee’s sole discretion. The officer of the Company receiving any such request from Indemnitee shall, promptly upon receipt of such a request for
indemnification, advise the Board of Directors in writing that Indemnitee has requested indemnification.
(b) Upon written request by Indemnitee for indemnification pursuant to Section 11(a) above, a determination, if required by applicable law, with
respect to Indemnitee’s entitlement thereto shall promptly be made in the specific case: (i) if a Change in Control shall have occurred, by Independent Counsel, in a
written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee, which Independent Counsel shall be selected by Indemnitee and
approved by the Board of Directors in accordance with Section 2-418(e)(2)(ii) of the MGCL, which approval shall not be unreasonably withheld; or (ii) if a
Change in Control shall not have occurred, (A) by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors or, if such a quorum
cannot be obtained, then by a majority vote of a duly authorized committee of the Board of Directors consisting solely of one or more Disinterested Directors, (B)
if Independent Counsel has been selected by the Board of Directors in accordance with Section 2-418(e)(2)(ii) of the MGCL and approved by Indemnitee, which
approval shall not be unreasonably withheld or delayed, by Independent Counsel, in a written opinion to the Board of Directors, a copy of which shall be delivered
to Indemnitee or (C) if so directed by the Board of Directors, by the stockholders of the Company, other than directors or officers who are parties to the
Proceeding. If it is so determined that Indemnitee is entitled to indemnification, the Company shall make payment to Indemnitee shall be made within ten days
after such determination. Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee’s entitlement to
indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged
or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary or appropriate to such determination in the
discretion of the Board of Directors or Independent Counsel if retained pursuant to clause (ii)(B) of this Section 11(b). Any Expenses incurred by Indemnitee in so
cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee’s
entitlement to indemnification) and the Company shall indemnify and hold Indemnitee harmless therefrom.
(c) The Company shall pay the reasonable fees and expenses of Independent Counsel, if one is appointed.
Section 12. Presumptions and Effect of Certain Proceedings .
(a) In making any determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such
determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in
accordance with Section 11(a) of this Agreement, and the Company shall have the burden of overcoming that presumption in connection with the making of any
determination contrary to that presumption.
(b) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, upon a plea of nolo
contendere or its equivalent, or entry of an order of probation prior to judgment, does not create a presumption that Indemnitee did not meet the requisite standard
of conduct described herein for indemnification.
(c) The knowledge and/or actions, or failure to act, of any other director, officer, employee or agent of the Company or any other director,
trustee, officer, partner, manager, managing member, fiduciary, employee or agent of any other foreign or domestic corporation, partnership, limited liability
company, joint venture, trust, employee benefit plan or other enterprise shall not be imputed to Indemnitee for purposes of determining any other right to
indemnification under this Agreement.
Section 13. Remedies of Indemnitee .
(a) If (i) a determination is made pursuant to Section 11(b) of this Agreement that Indemnitee is not entitled to indemnification under this
Agreement, (ii) advance of Expenses is not timely made pursuant to Sections 9 or 10 of this Agreement, (iii) no determination of entitlement to indemnification
shall have been made pursuant to Section 11(b) of this Agreement within 60 days after receipt by the Company of the request for indemnification, (iv) payment of
indemnification is not made pursuant to Sections 8 or 10 of this Agreement within ten days after receipt by the Company of a written request therefor, or
(v) payment of indemnification pursuant to any other section of this Agreement or the charter or Bylaws of the Company is not made within ten days after a
determination has been made that Indemnitee is entitled to indemnification, Indemnitee shall be entitled to an adjudication in an appropriate court located in the
State of Maryland, or in any other court of competent jurisdiction, of Indemnitee’s entitlement to such indemnification or advance of Expenses. Alternatively,
Indemnitee, at Indemnitee’s option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the
American Arbitration Association. Indemnitee shall commence a proceeding seeking an adjudication or an award in arbitration within 180 days following the date
on which Indemnitee first has the right to commence such proceeding pursuant to this Section 13(a); provided, however, that the foregoing clause shall not apply to
a proceeding brought by Indemnitee to enforce his or her rights under Section 8 of this Agreement. Except as set forth herein, the provisions of Maryland law
(without regard to its conflicts of laws rules) shall apply to any such arbitration. The Company shall not oppose Indemnitee’s right to seek any such adjudication or
award in arbitration.
(b) In any judicial proceeding or arbitration commenced pursuant to this Section 13, Indemnitee shall be presumed to be entitled to
indemnification or advance of Expenses, as the case may be, under this Agreement and the Company shall have the burden of proving that Indemnitee is not
entitled to indemnification or advance of Expenses, as the case may be. If Indemnitee commences a judicial proceeding or arbitration pursuant to this Section 13,
Indemnitee shall not be required to reimburse the Company for any advances pursuant to Section 9 of this Agreement until a final determination is made with
respect to Indemnitee’s entitlement to indemnification (as to which all rights of appeal have been exhausted or lapsed). The Company shall, to the fullest extent not
prohibited by law, be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 13 that the procedures and
presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound
by all of the provisions of this Agreement.
(c) If a determination shall have been made pursuant to Section 11(b) of this Agreement that Indemnitee is entitled to indemnification, the
Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 13, absent a misstatement by
Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request
for indemnification that was not disclosed in connection with the determination.
(d) In the event that Indemnitee is successful in seeking, pursuant to this Section 13, a judicial adjudication of or an award in arbitration to
enforce Indemnitee’s rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be
indemnified by the Company for, any and all Expenses actually and reasonably incurred by him or her in such judicial adjudication or arbitration. If it shall be
determined in such judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advance of Expenses sought,
the Expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated.
(e) Interest shall be paid by the Company to Indemnitee at the maximum rate allowed to be charged for judgments under the Courts and Judicial
Proceedings Article of the Annotated Code of Maryland for amounts which the Company pays or is obligated to pay for the period (i) commencing with either the
tenth day after the date on which the Company was requested to advance Expenses in accordance with Sections 9 or 10 of this Agreement or the 60 th day after the
date on which the Company was requested to make the determination of entitlement to indemnification under Section 11(b) of this Agreement, as applicable, and
(ii) and ending on the date such payment is made to Indemnitee by the Company.
Section 14. Defense of the Underlying Proceeding .
(a) Indemnitee shall notify the Company promptly in writing upon being served with any summons, citation, subpoena, complaint, indictment,
request or other document relating to any Proceeding which may result in the right to indemnification or the advance of Expenses hereunder and shall include with
such notice a description of the nature of the Proceeding and a summary of the facts underlying the Proceeding. The failure to give any such notice shall not
disqualify Indemnitee from the right, or otherwise affect in any manner any right of Indemnitee, to indemnification or the advance of Expenses under this
Agreement unless the Company’s ability to defend in such Proceeding or to obtain proceeds under any insurance policy is materially and adversely prejudiced
thereby, and then only to the extent the Company is thereby actually so prejudiced.
(b) Subject to the provisions of the last sentence of this Section 14(b) and of Section 14(c) below, the Company shall have the right to defend
Indemnitee in any Proceeding which may give rise to indemnification hereunder; provided, however, that the Company shall notify Indemnitee of any such
decision to defend within 15 calendar days following receipt of notice of any such Proceeding under Section 14(a) above. The Company shall not, without the prior
written consent of Indemnitee, which shall not be unreasonably withheld or delayed, consent to the entry of any judgment against Indemnitee or enter into any
settlement or compromise which (i) includes an admission of fault of Indemnitee, (ii) does not include, as an unconditional term thereof, the full release of
Indemnitee from all liability in respect of such Proceeding, which release shall be in form and substance reasonably satisfactory to Indemnitee, or (iii) would
impose any Expense, judgment, fine, penalty or limitation on Indemnitee. This Section 14(b) shall not apply to a Proceeding brought by Indemnitee under Section
13 of this Agreement.
(c) Notwithstanding the provisions of Section 14(b) above, if in a Proceeding to which Indemnitee is a party by reason of Indemnitee’s
Corporate Status, (i) Indemnitee reasonably concludes, based upon an opinion of counsel approved by the Company, which approval shall not be unreasonably
withheld or delayed, that Indemnitee may have separate defenses or counterclaims to assert with respect to any issue which may not be consistent with other
defendants in such Proceeding, (ii) Indemnitee reasonably concludes, based upon an opinion of counsel approved by the Company, which approval shall not be
unreasonably withheld or delayed, that an actual or apparent conflict of interest or potential conflict of interest exists between Indemnitee and the Company, or
(iii) if the Company fails to assume the defense of such Proceeding in a timely manner, Indemnitee shall be entitled to be represented by separate legal counsel of
Indemnitee’s choice, subject to the prior approval of the Company, which approval shall not be unreasonably withheld or delayed, at the expense of the Company.
In addition, if the Company fails to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes any action
to declare this Agreement void or unenforceable, or institutes any Proceeding to deny or to recover from Indemnitee the benefits intended to be provided to
Indemnitee hereunder, Indemnitee shall have the right to retain counsel of Indemnitee’s choice, subject to the prior approval of the Company, which approval shall
not be unreasonably withheld or delayed, at the expense of the Company (subject to Section 13(d) of this Agreement), to represent Indemnitee in connection with
any such matter.
Section 15. Non-Exclusivity; Survival of Rights; Subrogation .
(a) The rights of indemnification and advance of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to
which Indemnitee may at any time be entitled under applicable law, the charter or Bylaws of the Company, any agreement or a resolution of the stockholders
entitled to vote generally in the election of directors or of the Board of Directors, or otherwise. Unless consented to in writing by Indemnitee, no amendment,
alteration or repeal of the charter or Bylaws of the Company, this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this
Agreement in respect of any action taken or omitted by such Indemnitee in his or her Corporate Status prior to such amendment, alteration or repeal, regardless of
whether a claim with respect to such action or inaction is raised prior or subsequent to such amendment, alteration or repeal. No right or remedy herein conferred is
intended to be exclusive of any other right or remedy, and every other right or remedy shall be cumulative and in addition to every other right or remedy given
hereunder or now or hereafter existing at law or in equity or otherwise. The assertion of any right or remedy hereunder, or otherwise, shall not prohibit the
concurrent assertion or employment of any other right or remedy.
(b) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are
necessary to enable the Company to bring suit to enforce such rights.
Section 16. Insurance . (a) The Company will use its reasonable best efforts to acquire directors and officers liability insurance, on terms and conditions
deemed appropriate by the Board of Directors, with the advice of counsel, covering Indemnitee or any claim made against Indemnitee by reason of Indemnitee’s
Corporate Status and covering the Company for any indemnification or advance of Expenses made by the Company to Indemnitee for any claims made against
Indemnitee by reason of Indemnitee’s Corporate Status. In the event of a Change in Control, the Company shall maintain in force any and all directors and officers
liability insurance policies that were maintained by the Company immediately prior to the Change in Control for a period of six years with the insurance carrier or
carriers and through the insurance broker in place at the time of the Change in Control; provided, however, (i) if the carriers will not offer the same policy and an
expiring policy needs to be replaced, a policy substantially comparable in scope and amount shall be obtained and (ii) if any replacement insurance carrier is
necessary to obtain a policy substantially comparable in scope and amount, such insurance carrier shall have an AM Best rating that is the same or better than the
AM Best rating of the existing insurance carrier; provided, further, however, in no event shall the Company be required to expend in the aggregate in excess of
250% of the annual premium or premiums paid by the Company for directors and officers liability insurance in effect on the date of the Change in Control. In the
event that 250% of the annual premium paid by the Company for such existing directors and officers liability insurance is insufficient for such coverage, the
Company shall spend up to that amount to purchase such lesser coverage as may be obtained with such amount.
(b) Without in any way limiting any other obligation under this Agreement, the Company shall indemnify Indemnitee for any payment by Indemnitee
which would otherwise be indemnifiable hereunder arising out of the amount of any deductible or retention and the amount of any excess of the aggregate of all
judgments, penalties, fines, settlements and Expenses incurred by Indemnitee in connection with a Proceeding over the coverage of any insurance referred to in
Section 16(a). The purchase, establishment and maintenance of any such insurance shall not in any way limit or affect the rights or obligations of the Company or
Indemnitee under this Agreement except as expressly provided herein, and the execution and delivery of this Agreement by the Company and the Indemnitee shall
not in any way limit or affect the rights or obligations of the Company under any such insurance policies. If, at the time the Company receives notice from any
source of a Proceeding to which Indemnitee is a party or a participant (as a witness or otherwise) the Company has director and officer liability insurance in effect,
the Company shall give prompt notice of such Proceeding to the insurers in accordance with the procedures set forth in the respective policies.
(c) The Indemnitee shall cooperate with the Company or any insurance carrier of the Company with respect to any Proceeding.
Section 17. Coordination of Payments . The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable
or payable or reimbursable as Expenses hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy,
contract, agreement or otherwise.
Section 18. Contribution . If the indemnification provided in this Agreement is unavailable in whole or in part and may not be paid to Indemnitee for any
reason, other than for failure to satisfy the standard of conduct set forth in Section 5 or due to the provisions of Section 6, then, in respect to any Proceeding in
which the Company is jointly liable with Indemnitee (or would be if joined in such Proceeding), to the fullest extent permissible under applicable law, the
Company, in lieu of indemnifying and holding harmless Indemnitee, shall pay, in the first instance, the entire amount incurred by Indemnitee, whether for
Expenses, judgments, penalties, and/or amounts paid or to be paid in settlement, in connection with any Proceeding without requiring Indemnitee to contribute to
such payment, and the Company hereby waives and relinquishes any right of contribution it may have at any time against Indemnitee.
Section 19. Reports to Stockholders . To the extent required by the MGCL, the Company shall report in writing to its stockholders the payment of any
amounts for indemnification of, or advance of Expenses to, Indemnitee under this Agreement arising out of a Proceeding by or in the right of the Company with
the notice of the meeting of stockholders of the Company next following the date of the payment of any such indemnification or advance of Expenses or prior to
such meeting.
Section 20. Duration of Agreement; Binding Effect .
(a) This Agreement shall continue until and terminate on the later of (i) the date that Indemnitee shall have ceased to serve as a director, officer,
employee or agent of the Company or as a director, trustee, officer, partner, manager, managing member, fiduciary, employee or agent of any other foreign or
domestic corporation, real estate investment trust, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise that such
person is or was serving in such capacity at the request of the Company and (ii) the date that Indemnitee is no longer subject to any actual or possible Proceeding
(including any rights of appeal thereto and any Proceeding commenced by Indemnitee pursuant to Section 13 of this Agreement).
(b) The indemnification and advance of Expenses provided by, or granted pursuant to, this Agreement shall be binding upon and be enforceable
by the parties hereto and their respective successors and assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business or assets of the Company), shall continue as to an Indemnitee who has ceased to be a director, officer, employee or agent of the
Company or a director, trustee, officer, partner, manager, managing member, fiduciary, employee or agent of any other foreign or domestic corporation,
partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise that such person is or was serving in such capacity at the
request of the Company, and shall inure to the benefit of Indemnitee and Indemnitee’s spouse, assigns, heirs, devisees, executors and administrators and other legal
representatives.
(c) The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all,
substantially all or a substantial part, of the business and/or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee,
expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such
succession had taken place.
(d) The Company and Indemnitee agree that a monetary remedy for breach of this Agreement, at some later date, may be inadequate,
impracticable and difficult of proof, and further agree that such breach may cause Indemnitee irreparable harm. Accordingly, the parties hereto agree that
Indemnitee may enforce this Agreement by seeking injunctive relief and/or specific performance hereof, without any necessity of showing actual damage or
irreparable harm and that by seeking injunctive relief and/or specific performance, Indemnitee shall not be precluded from seeking or obtaining any other relief to
which Indemnitee may be entitled. Indemnitee shall further be entitled to such specific performance and injunctive relief, including temporary restraining orders,
preliminary injunctions and permanent injunctions, without the necessity of posting bonds or other undertakings in connection therewith. The Company
acknowledges that, in the absence of a waiver, a bond or undertaking may be required of Indemnitee by a court, and the Company hereby waives any such
requirement of such a bond or undertaking.
Section 21. Severability . If any provision or provisions of this Agreement shall be held to be invalid, void, illegal or otherwise unenforceable for any
reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, each portion of any
Section, paragraph or sentence of this Agreement containing any such provision held to be invalid, illegal or unenforceable that is not itself invalid, illegal or
unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law; (b) such provision or
provisions shall be deemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the intent of the parties hereto; and
(c) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any Section, paragraph or sentence of this
Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to
give effect to the intent manifested thereby.
Section 22. Identical Counterparts . This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an
original but all of which together shall constitute one and the same Agreement. One such counterpart signed by the party against whom enforceability is sought
shall be sufficient to evidence the existence of this Agreement.
Section 23. Headings . The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of
this Agreement or to affect the construction thereof.
Section 24. Modification and Waiver . No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both
of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar) nor, unless otherwise expressly stated, shall such waiver constitute a continuing waiver.
Section 25. Notices . All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given
if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, on the day of such delivery, or
(ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed:
(a) If to Indemnitee, to the address set forth on the signature page hereto.
(b) If to the Company, to:
Global Net Lease, Inc.
405 Park Avenue, 14th Floor
New York, NY 10022
Attn: General Counsel
or to such other address as may have been furnished in writing to Indemnitee by the Company or to the Company by Indemnitee, as the case may be.
Section 26. Governing Law . This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Maryland,
without regard to its conflicts of laws rules.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
GLOBAL NET LEASE, INC.
By: /s/ Scott J. Bowman
Name: Scott J. Bowman
Title: Chief Executive Officer and President
INDEMNITEE
By:
/s/ Edward M. Weil, Jr.
Name: Edward M. Weil, Jr.
EXHIBIT A
AFFIRMATION AND UNDERTAKING TO REPAY EXPENSES ADVANCED
To: The Board of Directors of Global Net Lease, Inc.
Re: Affirmation and Undertaking
Ladies and Gentlemen:
This Affirmation and Undertaking is being provided pursuant to that certain Indemnification Agreement, dated the 3 rd day of January 2017, by and
between Global Net Lease, Inc., a Maryland corporation (the “Company”), and the undersigned Indemnitee (the “Indemnification Agreement”), pursuant to which
I am entitled to advance of Expenses in connection with [Description of Proceeding] (the “Proceeding”).
Terms used herein and not otherwise defined shall have the meanings specified in the Indemnification Agreement.
I am subject to the Proceeding by reason of my Corporate Status or by reason of alleged actions or omissions by me in such capacity. I hereby affirm my
good faith belief that at all times, insofar as I was involved as a director of the Company, in any of the facts or events giving rise to the Proceeding, I (1) did not act
with bad faith or active or deliberate dishonesty, (2) did not receive any improper personal benefit in money, property or services and (3) in the case of any
criminal proceeding, had no reasonable cause to believe that any act or omission by me was unlawful.
In consideration of the advance by the Company for Expenses incurred by me in connection with the Proceeding (the “Advanced Expenses”), I hereby
agree that if, in connection with the Proceeding, it is established that (1) an act or omission by me was material to the matter giving rise to the Proceeding and
(a) was committed in bad faith or (b) was the result of active and deliberate dishonesty or (2) I actually received an improper personal benefit in money, property or
services or (3) in the case of any criminal proceeding, I had reasonable cause to believe that the act or omission was unlawful, then I shall promptly reimburse the
portion of the Advanced Expenses, relating to the claims, issues or matters in the Proceeding as to which the foregoing findings have been established.
IN WITNESS WHEREOF, I have executed this Affirmation and Undertaking on this _____ day of _______________, 20____.
_____________________________
Name:
INDEMNIFICATION AGREEMENT
Exhibit 10.46
THIS INDEMNIFICATION AGREEMENT (“Agreement”) is made and entered into as of the 6 th day of January 2017, with an effective date of January
20, 2017, by and between Global Net Lease, Inc., a Maryland corporation (the “Company”), and Nicholas Radesca (the “Indemnitee”).
WHEREAS, at the request of the Company, Indemnitee currently serves as a director, officer or service provider of the Company and may, therefore, be
subjected to claims, suits or proceedings arising as a result of his or her service; and
WHEREAS, as an inducement to Indemnitee to serve or continue to serve as a director, officer or service provider, the Company has agreed to indemnify
Indemnitee and to advance expenses and costs incurred by Indemnitee in connection with any such claims, suits or proceedings, to the maximum extent permitted
by law; and
WHEREAS, the parties by this Agreement desire to set forth their agreement regarding indemnification and advance of expenses;
NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as
follows:
Section 1. Definitions . For purposes of this Agreement:
(a) “Change in Control” means a change in control of the Company occurring after the Effective Date of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), whether or not the Company is then subject to such reporting requirement; provided,
however, that, without limitation, such a Change in Control shall be deemed to have occurred if, after the Effective Date (i) any “person” (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 15% or more of the combined voting power of all of the Company’s then-outstanding securities entitled to vote generally in
the election of directors without the prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such person’s
attaining such percentage interest; (ii) the Company is a party to a merger, consolidation, sale of assets, plan of liquidation or other reorganization not approved by
at least two-thirds of the members of the Board of Directors then in office, as a consequence of which members of the Board of Directors in office immediately
prior to such transaction or event constitute less than a majority of the Board of Directors thereafter; or (iii) at any time, a majority of the members of the Board of
Directors are not individuals (A) who were directors as of the Effective Date or (B) whose election by the Board of Directors or nomination for election by the
Company’s stockholders was approved by the affirmative vote of at least two-thirds of the directors then in office who were directors as of the Effective Date or
whose election or nomination for election was previously so approved.
(b) “Corporate Status” means the status of a person as a present or former director, officer, employee or agent of the Company or as a director,
trustee, officer, partner, manager, managing member, fiduciary, employee or agent of any other foreign or domestic corporation, partnership, limited liability
company, joint venture, trust, employee benefit plan or other enterprise that such person is or was serving in such capacity at the request of the Company. As a
clarification and without limiting the circumstances in which Indemnitee may be serving at the request of the Company, service by Indemnitee shall be deemed to
be at the request of the Company: (i) if Indemnitee serves or served as a director, trustee, officer, partner, manager, managing member, fiduciary, employee or
agent of any corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise (1) of which a majority of the voting
power or equity interest is owned directly or indirectly by the Company or (2) the management of which is controlled directly or indirectly by the Company and (ii)
if, as a result of Indemnitee’s service to the Company or any of its affiliated entities, Indemnitee is subject to duties by, or required to perform services for, an
employee benefit plan or its participants or beneficiaries, including as deemed fiduciary thereof.
indemnification and/or advance of Expenses is sought by Indemnitee.
(c) “Disinterested Director” means a director of the Company who is not and was not a party to the Proceeding in respect of which
(d) “Effective Date” means the date set forth in the first paragraph of this Agreement.
(e) “Expenses” means any and all reasonable and out-of-pocket attorneys’ fees and costs, retainers, court costs, arbitration and mediation costs,
transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees,
federal, state, local or foreign taxes imposed on Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement, ERISA excise taxes
and penalties and any other disbursements or expenses incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or
preparing to be a witness in or otherwise participating in a Proceeding. Expenses shall also include Expenses incurred in connection with any appeal resulting from
any Proceeding including, without limitation, the premium for, security for and other costs relating to any cost bond supersede as bond or other appeal bond or its
equivalent.
(f) “Independent Counsel” means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither is, nor in
the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters
concerning Indemnitee under this Agreement or of other indemnitees under similar indemnification agreements), or (ii) any other party to or participant or witness
in the Proceeding giving rise to a claim for indemnification or advance of Expenses hereunder. Notwithstanding the foregoing, the term “Independent Counsel”
shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the
Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement.
(g) “Proceeding” means any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation,
inquiry, administrative hearing, claim, demand, discovery request or any other actual, threatened or completed proceeding, whether brought by or in the right of the
Company or otherwise and whether of a civil (including intentional or unintentional tort claims), criminal, administrative or investigative (formal or informal)
nature, including any appeal therefrom, except one pending or completed on or before the Effective Date, unless otherwise specifically agreed in writing by the
Company and Indemnitee. If Indemnitee reasonably believes that a given situation may lead to or culminate in the institution of a Proceeding, such situation shall
also be considered a Proceeding.
Section 2. Services by Indemnitee . Indemnitee will serve as a director, officer or service provider of the Company. However, this Agreement shall not
impose any independent obligation on Indemnitee or the Company to continue Indemnitee’s service to the Company. This Agreement shall not be deemed an
employment contract between the Company (or any other entity) and Indemnitee.
Section 3. Existing Agreement Superseded . The parties hereto agree that all of their rights and obligations under the Existing Agreement are hereby
replaced and superseded by the rights and obligations provided hereunder.
Section 4. General . The Company shall indemnify, and advance Expenses to, Indemnitee (a) as provided in this Agreement and (b) otherwise to the
maximum extent permitted by Maryland law in effect on the Effective Date and as amended from time to time; provided, however, that no change in Maryland law
shall have the effect of reducing the benefits available to Indemnitee hereunder based on Maryland law as in effect on the Effective Date. The rights of Indemnitee
provided in this Section 4 shall include, without limitation, the rights set forth in the other sections of this Agreement, including any additional indemnification
permitted by the Maryland General Corporation Law (the “MGCL”), including, without limitation, Section 2-418(g) of the MGCL.
Section 5. Standard for Indemnification . If, by reason of Indemnitee’s Corporate Status, Indemnitee is, or is threatened to be, made a party to any
Proceeding, the Company shall indemnify Indemnitee against all judgments, penalties, fines and amounts paid in settlement and all Expenses actually and
reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with any such Proceeding unless it is established by clear and convincing evidence that
(a) the act or omission of Indemnitee was material to the matter giving rise to the Proceeding and (i) was committed in bad faith or (ii) was the result of active and
deliberate dishonesty, (b) Indemnitee actually received an improper personal benefit in money, property or services or (c) in the case of any criminal Proceeding,
Indemnitee had reasonable cause to believe that his or her conduct was unlawful.
Section 6. Certain Limits on Indemnification . Notwithstanding any other provision of this Agreement (other than Section 7), Indemnitee shall not be
entitled to:
(a) indemnification hereunder if the Proceeding was one by or in the right of the Company and Indemnitee is adjudged, in a final adjudication of
the Proceeding not subject to further appeal, to be liable to the Company;
(b) indemnification hereunder if Indemnitee is adjudged, in a final adjudication of the Proceeding not subject to further appeal, to be liable on the
basis that personal benefit was improperly received in any Proceeding charging improper personal benefit to Indemnitee, whether or not involving action in the
Indemnitee’s Corporate Status; or
(c) indemnification or advance of Expenses hereunder if the Proceeding was brought by Indemnitee, unless: (i) the Proceeding was brought to
enforce indemnification under this Agreement, and then only to the extent in accordance with and as authorized by Section 13 of this Agreement, or (ii) the
Company’s charter or Bylaws, a resolution of the stockholders entitled to vote generally in the election of directors or of the Board of Directors or an agreement
approved by the Board of Directors to which the Company is a party expressly provide otherwise.
Section 7. Court-Ordered Indemnification . Notwithstanding any other provision of this Agreement, a court of appropriate jurisdiction, upon application
of Indemnitee and such notice as the court shall require, may order indemnification of Indemnitee by the Company in the following circumstances:
(a) if such court determines that Indemnitee is entitled to reimbursement under Section 2-418(d)(1) of the MGCL, the court shall order
indemnification, in which case Indemnitee shall be entitled to recover the Expenses of securing such reimbursement; or
(b) if such court determines that Indemnitee is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether
or not Indemnitee (i) has met the standards of conduct set forth in Section 2-418(b) of the MGCL or (ii) has been adjudged liable for receipt of an improper
personal benefit under Section 2-418(c) of the MGCL, the court may order such indemnification contemplated by Section 2-418(d)(2)(ii) of the MGCL.
Section 8. Indemnification for Expenses of an Indemnitee Who is Wholly or Partly Successful . Notwithstanding any other provision of this Agreement,
and without limiting any such provision, to the extent that Indemnitee was or is, by reason of his or her Corporate Status, made a party to (or otherwise becomes a
participant in) any Proceeding and is successful, on the merits or otherwise, in the defense of such Proceeding, Indemnitee shall be indemnified for all Expenses
actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is
successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee
under this Section 8 for all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with each such claim, issue or matter,
allocated on a reasonable and proportionate basis. For purposes of this Section 8, and without limitation, the termination of any claim, issue or matter in such a
Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.
Section 9. Advance of Expenses for an Indemnitee . If, by reason of Indemnitee’s Corporate Status, Indemnitee is, or is threatened to be, made a party to
any Proceeding, the Company shall, without requiring a preliminary determination of Indemnitee’s ultimate entitlement to indemnification hereunder, advance all
Expenses incurred by or on behalf of Indemnitee in connection with such Proceeding. The Company shall make such advance within ten days after the receipt by
the Company of a statement or statements requesting such advance from time to time, whether prior to or after final disposition of such Proceeding and may be in
the form of, in the reasonable discretion of the Indemnitee (but without duplication) (a) payment of such Expenses directly to third parties on behalf of Indemnitee,
(b) advance of funds to Indemnitee in an amount sufficient to pay such Expenses or (c) reimbursement to Indemnitee for Indemnitee’s payment of such Expenses.
Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by a written
affirmation by Indemnitee and a written undertaking by or on behalf of Indemnitee, in substantially the form attached hereto as Exhibit A or in such form as may
be required under applicable law as in effect at the time of the execution thereof. To the extent that Expenses advanced to Indemnitee do not relate to a specific
claim, issue or matter in the Proceeding, such Expenses shall be allocated on a reasonable and proportionate basis. The undertaking required by this Section 9 shall
be an unlimited general obligation by or on behalf of Indemnitee and shall be accepted without reference to Indemnitee’s financial ability to repay such advanced
Expenses and without any requirement to post security therefor.
Section 10. Indemnification and Advance of Expenses as a Witness or Other Participant . Notwithstanding any other provision of this Agreement, to the
extent that Indemnitee is or may be, by reason of Indemnitee’s Corporate Status, made a witness or otherwise asked to participate in any Proceeding, whether
instituted by the Company or any other person, and to which Indemnitee is not a party, Indemnitee shall be advanced and indemnified against all Expenses actually
and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith within ten days after the receipt by the Company of a statement or
statements requesting any such advance or indemnification from time to time, whether prior to or after final disposition of such Proceeding. Such statement or
statements shall reasonably evidence the Expenses incurred by Indemnitee. In connection with any such advance of Expenses, the Company may require
Indemnitee to provide an undertaking and affirmation substantially in the form attached hereto as Exhibit A.
Section 11. Procedure for Determination of Entitlement to Indemnification .
(a) To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith
such documentation and information as is reasonably available to Indemnitee and is reasonably necessary or appropriate to determine whether and to what extent
Indemnitee is entitled to indemnification. Indemnitee may submit one or more such requests from time to time and at such time(s) as Indemnitee deems appropriate
in Indemnitee’s sole discretion. The officer of the Company receiving any such request from Indemnitee shall, promptly upon receipt of such a request for
indemnification, advise the Board of Directors in writing that Indemnitee has requested indemnification.
(b) Upon written request by Indemnitee for indemnification pursuant to Section 11(a) above, a determination, if required by applicable law, with
respect to Indemnitee’s entitlement thereto shall promptly be made in the specific case: (i) if a Change in Control shall have occurred, by Independent Counsel, in a
written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee, which Independent Counsel shall be selected by Indemnitee and
approved by the Board of Directors in accordance with Section 2-418(e)(2)(ii) of the MGCL, which approval shall not be unreasonably withheld; or (ii) if a
Change in Control shall not have occurred, (A) by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors or, if such a quorum
cannot be obtained, then by a majority vote of a duly authorized committee of the Board of Directors consisting solely of one or more Disinterested Directors, (B)
if Independent Counsel has been selected by the Board of Directors in accordance with Section 2-418(e)(2)(ii) of the MGCL and approved by Indemnitee, which
approval shall not be unreasonably withheld or delayed, by Independent Counsel, in a written opinion to the Board of Directors, a copy of which shall be delivered
to Indemnitee or (C) if so directed by the Board of Directors, by the stockholders of the Company, other than directors or officers who are parties to the
Proceeding. If it is so determined that Indemnitee is entitled to indemnification, the Company shall make payment to Indemnitee shall be made within ten days
after such determination. Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee’s entitlement to
indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged
or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary or appropriate to such determination in the
discretion of the Board of Directors or Independent Counsel if retained pursuant to clause (ii)(B) of this Section 11(b). Any Expenses incurred by Indemnitee in so
cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee’s
entitlement to indemnification) and the Company shall indemnify and hold Indemnitee harmless therefrom.
(c) The Company shall pay the reasonable fees and expenses of Independent Counsel, if one is appointed.
Section 12. Presumptions and Effect of Certain Proceedings .
(a) In making any determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such
determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in
accordance with Section 11(a) of this Agreement, and the Company shall have the burden of overcoming that presumption in connection with the making of any
determination contrary to that presumption.
(b) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, upon a plea of nolo
contendere or its equivalent, or entry of an order of probation prior to judgment, does not create a presumption that Indemnitee did not meet the requisite standard
of conduct described herein for indemnification.
(c) The knowledge and/or actions, or failure to act, of any other director, officer, employee or agent of the Company or any other director,
trustee, officer, partner, manager, managing member, fiduciary, employee or agent of any other foreign or domestic corporation, partnership, limited liability
company, joint venture, trust, employee benefit plan or other enterprise shall not be imputed to Indemnitee for purposes of determining any other right to
indemnification under this Agreement.
Section 13. Remedies of Indemnitee .
(a) If (i) a determination is made pursuant to Section 11(b) of this Agreement that Indemnitee is not entitled to indemnification under this
Agreement, (ii) advance of Expenses is not timely made pursuant to Sections 9 or 10 of this Agreement, (iii) no determination of entitlement to indemnification
shall have been made pursuant to Section 11(b) of this Agreement within 60 days after receipt by the Company of the request for indemnification, (iv) payment of
indemnification is not made pursuant to Sections 8 or 10 of this Agreement within ten days after receipt by the Company of a written request therefor, or
(v) payment of indemnification pursuant to any other section of this Agreement or the charter or Bylaws of the Company is not made within ten days after a
determination has been made that Indemnitee is entitled to indemnification, Indemnitee shall be entitled to an adjudication in an appropriate court located in the
State of Maryland, or in any other court of competent jurisdiction, of Indemnitee’s entitlement to such indemnification or advance of Expenses. Alternatively,
Indemnitee, at Indemnitee’s option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the
American Arbitration Association. Indemnitee shall commence a proceeding seeking an adjudication or an award in arbitration within 180 days following the date
on which Indemnitee first has the right to commence such proceeding pursuant to this Section 13(a); provided, however, that the foregoing clause shall not apply to
a proceeding brought by Indemnitee to enforce his or her rights under Section 8 of this Agreement. Except as set forth herein, the provisions of Maryland law
(without regard to its conflicts of laws rules) shall apply to any such arbitration. The Company shall not oppose Indemnitee’s right to seek any such adjudication or
award in arbitration.
(b) In any judicial proceeding or arbitration commenced pursuant to this Section 13, Indemnitee shall be presumed to be entitled to
indemnification or advance of Expenses, as the case may be, under this Agreement and the Company shall have the burden of proving that Indemnitee is not
entitled to indemnification or advance of Expenses, as the case may be. If Indemnitee commences a judicial proceeding or arbitration pursuant to this Section 13,
Indemnitee shall not be required to reimburse the Company for any advances pursuant to Section 9 of this Agreement until a final determination is made with
respect to Indemnitee’s entitlement to indemnification (as to which all rights of appeal have been exhausted or lapsed). The Company shall, to the fullest extent not
prohibited by law, be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 13 that the procedures and
presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound
by all of the provisions of this Agreement.
(c) If a determination shall have been made pursuant to Section 11(b) of this Agreement that Indemnitee is entitled to indemnification, the
Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 13, absent a misstatement by
Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request
for indemnification that was not disclosed in connection with the determination.
(d) In the event that Indemnitee is successful in seeking, pursuant to this Section 13, a judicial adjudication of or an award in arbitration to
enforce Indemnitee’s rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be
indemnified by the Company for, any and all Expenses actually and reasonably incurred by him or her in such judicial adjudication or arbitration. If it shall be
determined in such judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advance of Expenses sought,
the Expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated.
(e) Interest shall be paid by the Company to Indemnitee at the maximum rate allowed to be charged for judgments under the Courts and Judicial
Proceedings Article of the Annotated Code of Maryland for amounts which the Company pays or is obligated to pay for the period (i) commencing with either the
tenth day after the date on which the Company was requested to advance Expenses in accordance with Sections 9 or 10 of this Agreement or the 60 th day after the
date on which the Company was requested to make the determination of entitlement to indemnification under Section 11(b) of this Agreement, as applicable, and
(ii) and ending on the date such payment is made to Indemnitee by the Company.
Section 14. Defense of the Underlying Proceeding .
(a) Indemnitee shall notify the Company promptly in writing upon being served with any summons, citation, subpoena, complaint, indictment,
request or other document relating to any Proceeding which may result in the right to indemnification or the advance of Expenses hereunder and shall include with
such notice a description of the nature of the Proceeding and a summary of the facts underlying the Proceeding. The failure to give any such notice shall not
disqualify Indemnitee from the right, or otherwise affect in any manner any right of Indemnitee, to indemnification or the advance of Expenses under this
Agreement unless the Company’s ability to defend in such Proceeding or to obtain proceeds under any insurance policy is materially and adversely prejudiced
thereby, and then only to the extent the Company is thereby actually so prejudiced.
(b) Subject to the provisions of the last sentence of this Section 14(b) and of Section 14(c) below, the Company shall have the right to defend
Indemnitee in any Proceeding which may give rise to indemnification hereunder; provided, however, that the Company shall notify Indemnitee of any such
decision to defend within 15 calendar days following receipt of notice of any such Proceeding under Section 14(a) above. The Company shall not, without the prior
written consent of Indemnitee, which shall not be unreasonably withheld or delayed, consent to the entry of any judgment against Indemnitee or enter into any
settlement or compromise which (i) includes an admission of fault of Indemnitee, (ii) does not include, as an unconditional term thereof, the full release of
Indemnitee from all liability in respect of such Proceeding, which release shall be in form and substance reasonably satisfactory to Indemnitee, or (iii) would
impose any Expense, judgment, fine, penalty or limitation on Indemnitee. This Section 14(b) shall not apply to a Proceeding brought by Indemnitee under Section
13 of this Agreement.
(c) Notwithstanding the provisions of Section 14(b) above, if in a Proceeding to which Indemnitee is a party by reason of Indemnitee’s
Corporate Status, (i) Indemnitee reasonably concludes, based upon an opinion of counsel approved by the Company, which approval shall not be unreasonably
withheld or delayed, that Indemnitee may have separate defenses or counterclaims to assert with respect to any issue which may not be consistent with other
defendants in such Proceeding, (ii) Indemnitee reasonably concludes, based upon an opinion of counsel approved by the Company, which approval shall not be
unreasonably withheld or delayed, that an actual or apparent conflict of interest or potential conflict of interest exists between Indemnitee and the Company, or
(iii) if the Company fails to assume the defense of such Proceeding in a timely manner, Indemnitee shall be entitled to be represented by separate legal counsel of
Indemnitee’s choice, subject to the prior approval of the Company, which approval shall not be unreasonably withheld or delayed, at the expense of the Company.
In addition, if the Company fails to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes any action
to declare this Agreement void or unenforceable, or institutes any Proceeding to deny or to recover from Indemnitee the benefits intended to be provided to
Indemnitee hereunder, Indemnitee shall have the right to retain counsel of Indemnitee’s choice, subject to the prior approval of the Company, which approval shall
not be unreasonably withheld or delayed, at the expense of the Company (subject to Section 13(d) of this Agreement), to represent Indemnitee in connection with
any such matter.
Section 15. Non-Exclusivity; Survival of Rights; Subrogation .
(a) The rights of indemnification and advance of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to
which Indemnitee may at any time be entitled under applicable law, the charter or Bylaws of the Company, any agreement or a resolution of the stockholders
entitled to vote generally in the election of directors or of the Board of Directors, or otherwise. Unless consented to in writing by Indemnitee, no amendment,
alteration or repeal of the charter or Bylaws of the Company, this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this
Agreement in respect of any action taken or omitted by such Indemnitee in his or her Corporate Status prior to such amendment, alteration or repeal, regardless of
whether a claim with respect to such action or inaction is raised prior or subsequent to such amendment, alteration or repeal. No right or remedy herein conferred is
intended to be exclusive of any other right or remedy, and every other right or remedy shall be cumulative and in addition to every other right or remedy given
hereunder or now or hereafter existing at law or in equity or otherwise. The assertion of any right or remedy hereunder, or otherwise, shall not prohibit the
concurrent assertion or employment of any other right or remedy.
(b) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are
necessary to enable the Company to bring suit to enforce such rights.
Section 16. Insurance . (a) The Company will use its reasonable best efforts to acquire directors and officers liability insurance, on terms and conditions
deemed appropriate by the Board of Directors, with the advice of counsel, covering Indemnitee or any claim made against Indemnitee by reason of Indemnitee’s
Corporate Status and covering the Company for any indemnification or advance of Expenses made by the Company to Indemnitee for any claims made against
Indemnitee by reason of Indemnitee’s Corporate Status. In the event of a Change in Control, the Company shall maintain in force any and all directors and officers
liability insurance policies that were maintained by the Company immediately prior to the Change in Control for a period of six years with the insurance carrier or
carriers and through the insurance broker in place at the time of the Change in Control; provided, however, (i) if the carriers will not offer the same policy and an
expiring policy needs to be replaced, a policy substantially comparable in scope and amount shall be obtained and (ii) if any replacement insurance carrier is
necessary to obtain a policy substantially comparable in scope and amount, such insurance carrier shall have an AM Best rating that is the same or better than the
AM Best rating of the existing insurance carrier; provided, further, however, in no event shall the Company be required to expend in the aggregate in excess of
250% of the annual premium or premiums paid by the Company for directors and officers liability insurance in effect on the date of the Change in Control. In the
event that 250% of the annual premium paid by the Company for such existing directors and officers liability insurance is insufficient for such coverage, the
Company shall spend up to that amount to purchase such lesser coverage as may be obtained with such amount.
(b) Without in any way limiting any other obligation under this Agreement, the Company shall indemnify Indemnitee for any payment by Indemnitee
which would otherwise be indemnifiable hereunder arising out of the amount of any deductible or retention and the amount of any excess of the aggregate of all
judgments, penalties, fines, settlements and Expenses incurred by Indemnitee in connection with a Proceeding over the coverage of any insurance referred to in
Section 16(a). The purchase, establishment and maintenance of any such insurance shall not in any way limit or affect the rights or obligations of the Company or
Indemnitee under this Agreement except as expressly provided herein, and the execution and delivery of this Agreement by the Company and the Indemnitee shall
not in any way limit or affect the rights or obligations of the Company under any such insurance policies. If, at the time the Company receives notice from any
source of a Proceeding to which Indemnitee is a party or a participant (as a witness or otherwise) the Company has director and officer liability insurance in effect,
the Company shall give prompt notice of such Proceeding to the insurers in accordance with the procedures set forth in the respective policies.
(c) The Indemnitee shall cooperate with the Company or any insurance carrier of the Company with respect to any Proceeding.
Section 17. Coordination of Payments . The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable
or payable or reimbursable as Expenses hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy,
contract, agreement or otherwise.
Section 18. Contribution . If the indemnification provided in this Agreement is unavailable in whole or in part and may not be paid to Indemnitee for any
reason, other than for failure to satisfy the standard of conduct set forth in Section 5 or due to the provisions of Section 6, then, in respect to any Proceeding in
which the Company is jointly liable with Indemnitee (or would be if joined in such Proceeding), to the fullest extent permissible under applicable law, the
Company, in lieu of indemnifying and holding harmless Indemnitee, shall pay, in the first instance, the entire amount incurred by Indemnitee, whether for
Expenses, judgments, penalties, and/or amounts paid or to be paid in settlement, in connection with any Proceeding without requiring Indemnitee to contribute to
such payment, and the Company hereby waives and relinquishes any right of contribution it may have at any time against Indemnitee.
Section 19. Reports to Stockholders . To the extent required by the MGCL, the Company shall report in writing to its stockholders the payment of any
amounts for indemnification of, or advance of Expenses to, Indemnitee under this Agreement arising out of a Proceeding by or in the right of the Company with
the notice of the meeting of stockholders of the Company next following the date of the payment of any such indemnification or advance of Expenses or prior to
such meeting.
Section 20. Duration of Agreement; Binding Effect .
(a) This Agreement shall continue until and terminate on the later of (i) the date that Indemnitee shall have ceased to serve as a director, officer,
employee or agent of the Company or as a director, trustee, officer, partner, manager, managing member, fiduciary, employee or agent of any other foreign or
domestic corporation, real estate investment trust, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise that such
person is or was serving in such capacity at the request of the Company and (ii) the date that Indemnitee is no longer subject to any actual or possible Proceeding
(including any rights of appeal thereto and any Proceeding commenced by Indemnitee pursuant to Section 13 of this Agreement).
(b) The indemnification and advance of Expenses provided by, or granted pursuant to, this Agreement shall be binding upon and be enforceable
by the parties hereto and their respective successors and assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business or assets of the Company), shall continue as to an Indemnitee who has ceased to be a director, officer, employee or agent of the
Company or a director, trustee, officer, partner, manager, managing member, fiduciary, employee or agent of any other foreign or domestic corporation,
partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise that such person is or was serving in such capacity at the
request of the Company, and shall inure to the benefit of Indemnitee and Indemnitee’s spouse, assigns, heirs, devisees, executors and administrators and other legal
representatives.
(c) The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all,
substantially all or a substantial part, of the business and/or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee,
expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such
succession had taken place.
(d) The Company and Indemnitee agree that a monetary remedy for breach of this Agreement, at some later date, may be inadequate,
impracticable and difficult of proof, and further agree that such breach may cause Indemnitee irreparable harm. Accordingly, the parties hereto agree that
Indemnitee may enforce this Agreement by seeking injunctive relief and/or specific performance hereof, without any necessity of showing actual damage or
irreparable harm and that by seeking injunctive relief and/or specific performance, Indemnitee shall not be precluded from seeking or obtaining any other relief to
which Indemnitee may be entitled. Indemnitee shall further be entitled to such specific performance and injunctive relief, including temporary restraining orders,
preliminary injunctions and permanent injunctions, without the necessity of posting bonds or other undertakings in connection therewith. The Company
acknowledges that, in the absence of a waiver, a bond or undertaking may be required of Indemnitee by a court, and the Company hereby waives any such
requirement of such a bond or undertaking.
Section 21. Severability . If any provision or provisions of this Agreement shall be held to be invalid, void, illegal or otherwise unenforceable for any
reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, each portion of any
Section, paragraph or sentence of this Agreement containing any such provision held to be invalid, illegal or unenforceable that is not itself invalid, illegal or
unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law; (b) such provision or
provisions shall be deemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the intent of the parties hereto; and
(c) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any Section, paragraph or sentence of this
Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to
give effect to the intent manifested thereby.
Section 22. Identical Counterparts . This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an
original but all of which together shall constitute one and the same Agreement. One such counterpart signed by the party against whom enforceability is sought
shall be sufficient to evidence the existence of this Agreement.
Section 23. Headings . The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of
this Agreement or to affect the construction thereof.
Section 24. Modification and Waiver . No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both
of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar) nor, unless otherwise expressly stated, shall such waiver constitute a continuing waiver.
Section 25. Notices . All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given
if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, on the day of such delivery, or
(ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed:
(a) If to Indemnitee, to the address set forth on the signature page hereto.
(b) If to the Company, to:
Global Net Lease, Inc.
405 Park Avenue, 14th Floor
New York, NY 10022
Attn: General Counsel
or to such other address as may have been furnished in writing to Indemnitee by the Company or to the Company by Indemnitee, as the case may be.
Section 26. Governing Law . This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Maryland,
without regard to its conflicts of laws rules.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
GLOBAL NET LEASE, INC.
By: /s/ Scott J. Bowman
Name: Scott J. Bowman
Title: Chief Executive Officer and President
INDEMNITEE
By:
/s/ Nicholas Radesca
Name: Nicholas Radesca
EXHIBIT A
AFFIRMATION AND UNDERTAKING TO REPAY EXPENSES ADVANCED
To: The Board of Directors of Global Net Lease, Inc.
Re: Affirmation and Undertaking
Ladies and Gentlemen:
This Affirmation and Undertaking is being provided pursuant to that certain Indemnification Agreement, dated the 6 th day of January 2017, by and
between Global Net Lease, Inc., a Maryland corporation (the “Company”), and the undersigned Indemnitee (the “Indemnification Agreement”), pursuant to which
I am entitled to advance of Expenses in connection with [Description of Proceeding] (the “Proceeding”).
Terms used herein and not otherwise defined shall have the meanings specified in the Indemnification Agreement.
I am subject to the Proceeding by reason of my Corporate Status or by reason of alleged actions or omissions by me in such capacity. I hereby affirm my
good faith belief that at all times, insofar as I was involved as a director of the Company, in any of the facts or events giving rise to the Proceeding, I (1) did not act
with bad faith or active or deliberate dishonesty, (2) did not receive any improper personal benefit in money, property or services and (3) in the case of any
criminal proceeding, had no reasonable cause to believe that any act or omission by me was unlawful.
In consideration of the advance by the Company for Expenses incurred by me in connection with the Proceeding (the “Advanced Expenses”), I hereby
agree that if, in connection with the Proceeding, it is established that (1) an act or omission by me was material to the matter giving rise to the Proceeding and
(a) was committed in bad faith or (b) was the result of active and deliberate dishonesty or (2) I actually received an improper personal benefit in money, property or
services or (3) in the case of any criminal proceeding, I had reasonable cause to believe that the act or omission was unlawful, then I shall promptly reimburse the
portion of the Advanced Expenses, relating to the claims, issues or matters in the Proceeding as to which the foregoing findings have been established.
IN WITNESS WHEREOF, I have executed this Affirmation and Undertaking on this _____ day of _______________, 20____.
_____________________________
Name:
[AR Global Letterhead]
405 PARK AVENUE, NEW YORK, NY 10022
T: (212) 415-6500 F: (212) 230-1847
WWW.AR-GLOBAL.COM
Exhibit 10.47
December 16, 2016
VIA EMAIL
American Realty Capital Global Trust II, Inc.
405 Park Avenue, 14 th Floor
New York, NY 10022
Attention: Special Committee of the Board of Directors
Re:
Reimbursement of Offering and Related Costs (“ O&O ”) of American Realty Capital Global Trust II, Inc. (the “ Company ”)
Dear Special Committee:
On behalf of American Realty Capital Global II Advisors, LLC (the “ Advisor ”) and AR Global Investments, LLC (“Guarantor”), we write to confirm
the agreement between the Company and the Advisor and Guarantor regarding the resolution and reimbursement of excess O&O expenses paid by the Company in
connection with its initial public offering (the “ IPO ”). For good and valuable consideration, the sufficiency of which is hereby acknowledged, the undersigned
parties agree as follows:
1. Excess O&O.
a. The Company was responsible for reimbursing the Advisor and its affiliates for O&O expenses, up to a cap of 2.0% of gross proceeds from the
IPO (the “ Cap ”).
b. The IPO lapsed in accordance with its terms and, as of the date hereof, the Company has reimbursed the Advisor for an amount of O&O
expenses in excess of the Cap by $6,300,000 (the “ Excess Amount ”).
2. Class B Units. The Advisor currently owns 66,344 unvested Class B units in the Company (the “ Earned Units ”). Based on an agreed per unit value of
$22.50 when the Earned Units were issued, the aggregate value of the Earned Units would be $1,492,740 (the “ Deemed Earned Units Value ”). The
Earned Units will vest upon the consummation of the merger of the Company into a subsidiary of Global Net Lease, Inc. (the “ Merger ”) as contemplated
by the Merger Agreement, dated as of August 8, 2016 (the “Merger Agreement”). On the date of the consummation of the Merger, the aggregate value of
the Earned Units for purposes of this letter agreement will be equal to an amount determined by multiplying (i) the 30-day volume weighted average price
of the Global Net Lease, Inc. common stock determined at close of business on the next preceding business day by (ii) the number of Earned Units, and
multiplying the product of (i) and (ii) by 2.27 (such amount, the “ Earned Units Value ”).
American Realty Capital Global Trust II, Inc.
December 16, 2016
Page 2
3. Repayment of the Excess Amount. The Advisor and Company agree that the Excess Amount shall be repaid to the Company by the Advisor pursuant to
the following terms:
a. Upon the first to occur of (i) the closing of the Merger (or immediately prior thereto), or (ii) the termination of the Merger Agreement for any
reason, the Advisor shall tender to the Company the Earned Units as partial satisfaction of the Excess Amount, in an amount equal to either the
Earned Units Value (if on the date of closing of the Merger) or the Deemed Earned Units Value (if on the date the Merger Agreement is
terminated). Following tender of the Earned Units to the Company, the net Excess Amount owed by the Advisor shall be the “ Net Excess
Amount .”
b. The Advisor will pay to the Company the Net Excess Amount in eight (8) equal monthly installments (each, a “ Monthly Payment ”), with the
first Monthly Payment being due on the 15 th day of the month first following the earlier of the closing of the Merger or the termination of the
Merger Agreement. Each Monthly Payment thereafter shall be due on the 15 th of each successive month.
4. AR Global Guaranty . Guarantor hereby unconditionally and irrevocably guarantees to the Company the due and punctual payment in full (and not merely
the collectability) by the Advisor, an indirect wholly owned subsidiary of the Guarantor, of the payment obligation set forth in Paragraph 3.b of this letter
agreement (the “Obligation”). Guarantor’s obligations hereunder shall be primary; shall not be contingent upon pursuit by the Company of any remedies
it may have against the Advisor; and shall not be subject to any counterclaim, set-off, reduction or defense based upon any claim that Guarantor may have
against the Company or the Advisor. Guarantor agrees that the Company, in its absolute discretion, without notice to or further assent of Guarantor and
without in any way releasing, affecting or impairing the Guarantor’s obligations hereunder, may from time to time with respect to the Obligation:
(a) waive compliance, or any defaults, or grant any other indulgences; and (b) enter into amendments, modifications, substitutions and extensions.
Guarantor hereby unconditionally and irrevocably waives: (a) presentment, demand and presentment for payment and protest of non-payment; (b) notice
of acceptance of this guaranty; (c) notice of any default under the Obligation and notice of all indulgences; (d) demand for observance, performance or
enforcement of any of the terms or provisions of this guaranty or any other documents or agreements; and (e) all other notices and demands otherwise
required by law which Guarantor may lawfully waive.
5. Release of Claims . Reference is made to the Termination Agreement, dated as of August 8, 2016 (the “Termination Agreement”), by and among the
Company, American Realty Capital Global II Operating Partnership, L.P., the Advisor, and others. The undersigned parties acknowledge and agree that
the obligations set forth in this letter agreement are excluded from the release of claims set forth in Section 7 of the Termination Agreement and, as to any
claims for enforcement of this letter agreement, no release, waiver or discharge was intended to be or is given by Section 7 of the Termination Agreement
unless and until the Earned Units have been tendered and full payment of the Net Excess Amount has been made in accordance with the terms hereof.
American Realty Capital Global Trust II, Inc.
December 16, 2016
Page 3
6. Successor and Assigns; No Acceleration. The provisions of this letter agreement shall inure to the benefit of, and be binding upon, the Company, the
Advisor and Guarantor and their respective successors and assigns. The consummation of the Merger shall not accelerate any payment obligations of the
Advisor set forth herein.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
American Realty Capital Global Trust II, Inc.
December 16, 2016
Page 4
Please confirm your agreement with the above by countersigning this letter and returning to the undersigned.
Sincerely,
American Realty Capital Global Trust II Advisors, LLC
By:
Name:
Title
/s/ Jesse Galloway
Jesse Galloway
Authorized Signatory
AR Global Investments, LLC
By:
Name:
Title:
/s/ Jesse Galloway
Jesse Galloway
Authorized Signatory
Confirmed and Agreed to this 16th day of December 2016 by:
American Realty Capital Global Trust II, Inc.
By:
Name:
Title:
/s/ Lee M. Elman
Lee M. Elman
Director
GLOBAL NET LEASE, INC.
CALCULATION OF RATIOS OF EARNINGS TO FIXED CHARGES
EXHIBIT 12.1
Global Net Lease, Inc.’s ratios of earnings to fixed charges and ratios of earnings to combined fixed charges for the five years ended December 31, 2016 were as
follows:
2016
2015
Year Ended December 31,
2014
(Dollars in thousands)
2013
2012
Earnings:
Pre-tax income/(loss) from continuing operations before
adjustment for non-controlling interests in consolidated
subsidiaries
Add: Interest expense
$
Amortization of deferred financing costs
Amortization of mortgage (discount) premium, net
and mezzanine discount
51,999 $
32,860
6,698
3,874 $
26,826
8,527
(55,025) $
11,597
3,753
(6,989) $
720
250
(437)
(489)
(498)
(1)
Earnings
Fixed Charges:
$
91,120 $
38,738 $
(40,173) $
(6,020) $
Interest expense
Amortization of deferred financing costs
Amortization of mortgage (discount) premium, net
and mezzanine discount
$
32,860 $
6,698
26,826 $
8,527
11,597 $
3,753
(437)
(489)
(498)
720 $
250
(1)
Fixed Charges
$
39,121 $
34,864 $
14,852 $
969 $
Preferred distributions
Combined fixed charges
-
-
-
-
$
39,121 $
34,864 $
14,852 $
969 $
Ratio of earnings to fixed charges
Ratio of earnings to combined fixed charges
2.33
2.33
1.11
(2.70)
(6.21)
1.11
(2.70)
(6.21)
(413)
9
1
-
(403)
9
1
-
10
-
10
(40.30)
(40.30)
Name
ARC ACHNETH001, LLC
ARC ALSFDUK001, LLC
ARC AMWCHKS001, LLC
ARC AMWORUK001, LLC
ARC ATSNTTX001, LLC
ARC BBWYKUK001, LLC
ARC BKSCOUK001, LLC
ARC CABIRUK001, LLC
ARC CCLTRUK001, LLC
ARC CJHSNTX001, LLC
ARC CSVBTMI001, LLC
ARC CTFTMSC001, LLC
ARC CWARANE001, LLC
ARC CWGRDMI001, LLC
ARC CWRVTILI001, LLC
ARC CWSALKS001, LLC
ARC CWUVLOH001, LLC
ARC CWVININ001, LLC
ARC CWWPKMN001, LLC
ARC DBGESRG001, LLC
ARC DBGWSDG001, LLC
ARC DFSMCUK001, LLC
ARC DFSMCUK001, LLC
ARC DG40PCK001, LLC
ARC DINCNOH001, LLC
ARC DNDUBOH001, LLC
ARC DRINDIN001, LLC
ARC EEMTRUK001, LLC
ARC FD34PCK001, LLC
ARC FD73SLB001, LLC
ARC FEAMOTX001, LLC
ARC FEBHMNY001, LLC
ARC FEBILMA001, LLC
ARC FECPEMA001, LLC
ARC FEHBRKY001, LLC
ARC FELEXKY001, LLC
ARC FELKCLA001, LLC
ARC FESANTX001, LLC
ARC FEWNAMN001, LLC
ARC FEWTRNY001, LLC
Subsidiaries of Global Net Lease, Inc.
Exhibit 21.1
Jurisdiction of Formation/Incorporation
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
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Delaware
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Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
ARC FSMCHIL001, LLC
ARC FUMANUK001, LLC
ARC GBLMESA001, LLC
ARC GBLMESA001, LLC
ARC GBLMESA01, LLC
ARC GECINOH001, LLC
ARC GEGRDMI001, LLC
ARC Global Holdco, LLC
ARC GRLBKTX001, LLC
ARC GRLOUKY001, LLC
ARC GRMSAAZ001, LLC
ARC GRRALNC001, LLC
ARC GSDALTX001, LLC
ARC GSDVRDE001, LLC
ARC GSFFDME001, LLC
ARC GSFRNTN001, LLC
ARC GSGTNPA001, LLC
ARC GSIFLMN001, LLC
ARC GSMSSTX001, LLC
ARC GSRNGME001, LLC
ARC GSRPCSD001, LLC
ARC GSRTNNM001, LLC
ARC HPDFS Holdco, LLC
ARC HPNEWUK001, LLC
ARC HVHELFI001, LLC
ARC IAREDUK001, LLC
ARC JTCHATN001, LLC
ARC JTCHATN002, LLC
ARC KPHTNNE001, LLC
ARC KSFTWPA001, LLC
ARC KUSTHMI001, LLC
ARC LPSBDIN001, LLC
ARC MCCARUK001, LLC
ARC MEROXUK01, LLC
ARC METHAGER01, LLC
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
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Delaware
Delaware
Delaware
ARC MKMDNNJ001, LLC
ARC MPSTLMO001, LLC
ARC NNMFBTN001, LLC
ARC NOPLNTX001, LLC
ARC NOWILND001, LLC
ARC NRSLDUK001, LLC
ARC NSSNJCA001, LLC
ARC OBMYNGER01, LLC
ARC OGHDGMD001, LLC
ARC PFBFDUK001, LLC
ARC PNEREPA001, LLC
ARC PNSCRPA001, LLC
ARC PPHHTKY001, LLC
ARC REXREGER01, LLC
ARC RMNUSGER01, LLC
ARC SANPLFL001, LLC
ARC SLKRCP001 LLC
ARC SLSTCCA001, LLC
ARC SPHRSNJ001 Urban Renewal Entity, LLC
ARC SWWSVOH001, LLC
ARC SZPTNNJ001, LLC
ARC TFDTPIA001, LLC
ARC TFKMZMI001, LLC
ARC TKMANUK001, LLC
ARC TOMANFI001, LLC
ARC TRLIVMI001, LLC
ARC TWSWDUK001, LLC
ARC VALWDCO001, LLC
ARC VCLIVMI001, LLC
ARC WHAMSNE001, LLC
ARC WIODSTX001, LLC
ARC WKBPLUK001, LLC
ARC WKMCRUK001, LLC
ARC WKSOTUK001, LLC
ARC WMWSLNC001, LLC
ARC WNBRNMO001, LLC
ARC WWHWCMI001, LLC
Global Net Lease Operating Partnership, L.P.
ROCHESSGER01, LLC
ROCHESSGER02, LLC
ROCHESSGER03, LLC
MAYFLOWER ACQUISITION, LLC
ARC GLOBAL II (HOLDING)
ARC GLOBAL ORGANISME DE PLACEMENT COLLECTIF EN IMMOBILIER
ARC GLOBAL II BORDEAUX
ARC GLOBAL II MARSEILLE
ARC GLOBAL (FRANCE) HOLDINGS SARL
ARC GLOBAL II DB LUX SARL
ARC GLOBAL II RUEIL
ARC GLOBAL II BLOIS
ARC GLOBAL II WEILBACH SARL
ARC GLOBAL II AMIENS
ARC GLOBAL II (GERMANY) HOLDINGS SARL
ARC GLOBAL II (MIDCO) SARL
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
France
France
France
France
Luxembourg
Luxembourg
France
France
Luxembourg
France
Luxembourg
Luxembourg
ARC GLOBAL II (NETHERLANDS) HOLDINGS SARL
ARC GLOBAL II S A R L
ARC GLOBAL II STRASBOURG
ARC GLOBAL II (UK) HOLDINGS SARL
ARC GLOBAL II (LUXEMBOURG) HOLDINGS SARL
HC GLASGOW SARL
ARC GLOBAL II BREST
ARC GLOBAL II FOSTER WHEELER SARL
ARC GLOBAL II NCR SARL
CROWN PORTFOLIO SARL
ARC GLOBAL II ING SARL
Luxembourg
Luxembourg
France
Luxembourg
Luxembourg
Luxembourg
France
Luxembourg
Luxembourg
Luxembourg
Luxembourg
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (333-214579) and Form S-8 (333-214582) of Global Net Lease,
Inc. of our report dated February 28, 2017 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial
reporting, which appears in this Form 10-K.
Exhibit 23.1
/s/ PricewaterhouseCoopers LLP
New York, New York
February 28, 2017
CERTIFICATION PURSUANT TO RULE 13a-14(a) AND 15d-14(a) UNDER
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Exhibit 31.1
I, Scott J. Bowman , certify that:
1.
I have reviewed this Annual Report on Form 10-K of Global Net Lease, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Dated the 28th day of February, 2017
/s/ Scott J. Bowman
Scott J. Bowman
Chief Executive Officer and President
(Principal Executive Officer)
CERTIFICATION PURSUANT TO RULE 13a-14(a) AND 15d-14(a) UNDER
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Exhibit 31.2
I, Nicholas Radesca, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Global Net Lease, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Dated the 28th day of February, 2017
/s/ Nicholas Radesca
Nicholas Radesca
Chief Financial Officer, Treasurer and Secretary
(Principal Financial Officer and Principal Accounting Officer)
SECTION 1350 CERTIFICATIONS
Exhibit 32
This Certificate is being delivered pursuant to the requirements of Section 1350 of Chapter 63 (Mail Fraud) of Title 18 (Crimes and Criminal Procedures) of the
United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not, except to the extent required by the Sarbanes-Oxley Act
of 2002, be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
The undersigned, who are the Chief Executive Officer and Chief Financial Officer of Global Net Lease, Inc. (the “Company”), each hereby certify as follows:
The annual report on Form 10-K of the Company, which accompanies this Certificate, fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, and all information contained in this annual report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Dated the 28th day of February, 2017
/s/ Scott J. Bowman
Scott J. Bowman
Chief Executive Officer and President
(Principal Executive Officer)
/s/ Nicholas Radesca
Nicholas Radesca
Chief Financial Officer, Treasurer and Secretary
(Principal Financial Officer and Principal Accounting Officer)