7. Mortgage Notes Payable and Line of Credit

Our mortgage notes payable and line of credit as of December 31, 2015 and December 31, 2014 are summarized below (dollars in thousands):

 

						Carrying Value at
		Encumbered properties at December 31, 2015				December 31, 2015				December 31, 2014				Stated Interest Rates at December 31, 2015 (4)		Scheduled Maturity Dates at December 31, 2015
Mortgage and Other Secured Loans:
Fixed rate mortgage loans			66			$	427,334			$	450,392			(1)		(2)
Variable rate mortgage loans			9				33,044				8,200			(3)		(2)
Premiums and discounts (net)			N/A				392				707			N/A		N/A
Total Mortgage Notes Payable			75			$	460,770			$	459,299			(5)
Variable rate Line of Credit							45,300				43,300			LIBOR + 2.50% (3)		8/7/2018
			22	(6)
Variable rate Term Loan Facility				(6)			25,000				—			LIBOR + 2.45% (3)		10/5/2020
Total Mortgage Notes Payable and Line of Credit			97			$	531,070			$	502,599

 

(1)	Interest rates on our fixed rate mortgage notes payable vary from 3.75% to 6.80%.

(2)	We have 44 mortgage notes payable with maturity dates ranging from 4/1/2016 through 7/1/2045.

(3)	Interest rates on our variable rate mortgage notes payable vary from one month LIBOR + 2.15% to one month LIBOR + 2.25%. At December 31, 2015, one month LIBOR was approximately 0.43%.

(4)	The weighted average interest rate on all debt outstanding at December 31, 2015, was approximately 4.75%.

(5)	The weighted average interest rate on the mortgage notes outstanding at December 31, 2015, was approximately 5.02%.

(6)	The Our Line of Credit and Term Loan Facility shared 22 encumbered properties during the year ended December 31, 2015.

N/A - Not Applicable

Mortgage Notes Payable

As of December 31, 2015, we had 44 mortgage notes payable, collateralized by a total of 75 properties with a net book value of $667.6 million. Gladstone Commercial Corporation has limited recourse liabilities that could result from any one or more of the following circumstances: a borrower voluntarily filing for bankruptcy, improper conveyance of a property, fraud or material misrepresentation, misapplication or misappropriation of rents, security deposits, insurance proceeds or condemnation proceeds, or physical waste or damage to the property resulting from a borrower’s gross negligence or willful misconduct. We will also indemnify lenders against claims resulting from the presence of hazardous substances or activity involving hazardous substances in violation of environmental laws on a property. The weighted-average interest rate on the mortgage notes payable as of December 31, 2015 was 5.02%.

During the year ended December 31, 2015, we issued eight long-term mortgages, collateralized by ten properties, which are summarized below (dollars in thousands):

 

Date of Issuance

Issuing Bank

Debt Issued

Interest Rate

Maturity Date

3/6/2015

PNC Bank, NA

$

14,573

3.86%

4/1/2025

5/28/2015

FC Bank

4,466

3.75%

6/1/2022

6/16/2015

Guggenheim Partners

13,000

3.99%

7/1/2045

(1)

6/29/2015

Synovus Bank

19,780

LIBOR + 2.25%

7/1/2018

(2)

7/1/2015

Synovus Bank

1,700

LIBOR + 2.25%

7/1/2018

(3)

7/15/2015

Prudential Mortgage Capital Company

7,540

4.53%

8/1/2022

10/20/2015

KeyBank NA

3,800

4.59%

11/1/2025

11/10/2015

First Niagara Bank

3,640

LIBOR + 2.25%

12/1/2020

(4)

$

68,499

 

(3)	The anticipated repayment date of this note is 7/1/2022.

(2)	We refinanced maturing debt on our Duncan, South Carolina and Charlotte, North Carolina properties which had aggregate balloon principal payments of $19.1 million.

(3)	We refinanced maturing debt on our Akron, Canton and Dayton, Ohio properties, which had aggregate balloon principal payments of $11.3 million.

(4)	We refinanced maturing debt on our Syracuse, NY property, which had a balloon principal payment of $3.9 million.

 

 

Scheduled principal payments of mortgage notes payable for each of the five succeeding fiscal years and thereafter are as follows (dollars in thousands):

 

Year		Scheduled Principal Payments
2016		$	76,681
2017			69,202
2018			41,068
2019			35,905
2020			11,161
Thereafter			226,361
		$	460,378	(1)

 

(1)	This figure is exclusive of premiums and discounts (net) on assumed debt, which were $392 as of December 31, 2015.

Refinancing

On June 29, 2015, through a wholly-owned subsidiary, we refinanced our $19.1 million mortgage loan, originally set to mature on September 1, 2015. This note had an original interest rate of 5.3% and was collateralized by security interests in our Charlotte, North Carolina and Duncan, South Carolina properties. We borrowed $19.8 million in the refinancing pursuant to a long-term note payable from Synovus Bank. The new loan is variable rate, in which the interest rate resets monthly and is calculated as the one month London Interbank Offered Rate, or LIBOR, plus a margin of 2.25%. We entered into an interest rate cap agreement with Synovus Bank, which caps LIBOR at 3.0%. The new note has a maturity date of July 1, 2018, with one, two-year extension option.

On July 1, 2015, through a wholly-owned subsidiary, we repaid our $11.3 million mortgage on our Canton, Dayton, and Akron, Ohio properties. The mortgage was originally set to mature on September 1, 2015. We borrowed $1.7 million pursuant to a long-term note payable from Synovus Bank to refinance a portion of this debt. The new loan is variable rate and we entered into an interest rate cap with Synovus Bank to hedge against the variability of the LIBOR rate, at a cost of approximately $0.07 million through July 1, 2018. We will receive payments from Synovus Bank if the one month LIBOR rate increases above 3.0%.

On November 10, 2015, through a wholly-owned subsidiary, we repaid our $3.9 million mortgage on our Syracuse, New York property. The mortgage was originally set to mature on December 11, 2015. We borrowed $3.6 million pursuant to a long-term note payable from First Niagara Bank to refinance this debt. The new loan is variable rate and we entered into an interest rate cap with First Niagara Bank to hedge against the variability of the LIBOR rate, at a cost of approximately $0.05 million through December 1, 2020. We will receive payments from First Niagara Bank if the one month LIBOR rate increases above 3.0%.

Interest Rate Cap

We have entered into interest rate cap agreements that cap the interest rate on certain of our notes payable when one-month LIBOR is in excess of 3.0%. We have adopted the fair value measurement provisions for our financial instruments recorded at fair value. The fair value guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Generally, we will estimate the fair value of our interest rate caps, in the absence of observable market data, using estimates of value including estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. At December 31, 2015 and 2014, our interest rate cap agreements were valued using Level 2 inputs.

The fair value of the interest rate cap agreements is recorded in other assets on our accompanying consolidated balance sheets. We record changes in the fair value of the interest rate cap agreements quarterly based on the current market valuations at quarter end as interest expense on our accompanying consolidated statements of operations. The following table summarizes the key terms of each interest rate cap agreement (dollars in thousands):

 

										As of December 31,												As of December 31,
										2015												2014
Interest Rate Cap		LIBOR Cap				Maturity Date				Notional Amount				Cost				Fair Value				Notional Amount				Cost				Fair Value
Nov-13			3.00	%			Dec-16			$	8,200			$	31			$	—			$	8,200			$	31			$	4
Jul-15			3.00	%			Jul-18				21,204				68				14				—				—				—
Dec-15			3.00	%			Dec-20				3,640				52				26				—				—				—
										$	33,044			$	151			$	40			$	8,200			$	31			$	4

The fair value of all mortgage notes payable outstanding as of December 31, 2015 was $463.4 million, as compared to the carrying value stated above of $460.8 million. The fair value is calculated based on a discounted cash flow analysis, using management’s estimate of market interest rates on long-term debt with comparable terms and loan to value ratios. The fair value was calculated using Level 3 inputs of the hierarchy established by ASC 820, “Fair Value Measurements and Disclosures.”

Line of Credit and Term Loan Facility

In August 2013, we procured a senior unsecured revolving credit facility, or the Line of Credit, with KeyBank National Association (serving as a revolving lender, a letter of credit issuer and an administrative agent). On October 5, 2015, we expanded our Line of Credit to $85.0 million and extended the maturity date 1-year through August 2018, with a 1-year extension option through August 2019. The interest rate on the revolving line of credit was also reduced by 25 basis points at each of the leverage tiers and the total maximum commitment under the two facilities was increased from $100.0 million to $150.0 million. We also added 3 new lenders to the bank syndicate, which is now comprised of KeyBank, Comerica Banks, Fifth Third Bank, US Bank and Huntington Bank. We were subject to payment of $0.5 million for the modification of the agreement.

In connection with the Line of Credit expansion mentioned above, we added a $25.0 million 5-year term loan facility, or the Term Loan Facility, which matures in October 2020. The Term Loan is subject to the same leverage tiers as the Line of Credit, however the interest rate at each leverage tier is 5 basis points lower. We have the option to repay the Term Loan Facility in full, or in part, at any time without penalty or premium prior to the maturity date.

As of December 31, 2015, there was $70.3 million outstanding under our Line of Credit and Term Loan Facility at a weighted average interest rate of approximately 2.91% and $3.9 million outstanding under letters of credit at a weighted average interest rate of 2.5%. As of February 17, 2016, the maximum additional amount we could draw was $19.3 million. We were in compliance with all covenants under the Line of Credit as of December 31, 2015.

The amount outstanding under the Line of Credit and Term Loan Facility approximates fair value as of December 31, 2015, as the debt is short term.