Gladstone Commercial Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Mortgage Notes Payable and Credit Facility

Mortgage Notes Payable and Credit Facility

9 Months Ended

Sep. 30, 2019

Mortgage Notes Payable and Credit Facility

Our mortgage notes payable and Credit Facility as of September 30, 2019 and December 31, 2018 are summarized below (dollars in thousands):



	Encumbered properties at		Carrying Value at						Stated Interest Rates at	Scheduled Maturity Dates at
	September 30, 2019		September 30, 2019			December 31, 2018			September 30, 2019	September 30, 2019
Mortgage and other secured loans:
Fixed rate mortgage loans	51		$	393,220		$	385,051		(1)	(2)
Variable rate mortgage loans	12		45,514			60,659			(3)	(2)
Premiums and discounts, net	-		(254		)	(301		)	N/A	N/A
Deferred financing costs, mortgage loans, net	-		(3,791		)	(4,063		)	N/A	N/A
Total mortgage notes payable, net	63		$	434,689		$	441,346		(4)
Variable rate revolving credit facility	43	(6)	$	35,800		$	50,600		LIBOR + 1.65%	7/2/2023
Deferred financing costs, revolving credit facility	-		(885		)	(516		)	N/A	N/A
Total revolver, net	43		$	34,915		$	50,084
Variable rate term loan facility	-	(6)	$	122,300		$	75,000		LIBOR + 1.60%	7/2/2024
Deferred financing costs, term loan facility	-		(1,081		)	(371		)	N/A	N/A
Total term loan, net	N/A		$	121,219		$	74,629
Total mortgage notes payable and credit facility	106		$	590,823		$	566,059		(5)


(1)	Interest rates on our fixed rate mortgage notes payable vary from 3.42% to 6.63%.


(2)	We have 47 mortgage notes payable with maturity dates ranging from 12/6/2019 through 7/1/2045.


(3)	Interest rates on our variable rate mortgage notes payable vary from one month LIBOR + 2.00% to one month LIBOR + 2.75%. At September 30, 2019, one month LIBOR was approximately 2.02%.


(4)	The weighted average interest rate on the mortgage notes outstanding at September 30, 2019 was approximately 4.58%.


(5)	The weighted average interest rate on all debt outstanding at September 30, 2019 was approximately 4.33%.


(6)	The amount we may draw under our Credit Facility is based on a percentage of the fair value of a combined pool of 43 unencumbered properties as of September 30, 2019.

N/A - Not Applicable

Mortgage Notes Payable

As of September 30, 2019, we had 47 mortgage notes payable, collateralized by a total of 63 properties with a net book value of $632.3 million. We have 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 have full recourse for $16.2 million of the mortgages notes payable, net, or 3.7% of the outstanding balance. 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.

During the nine months ended September 30, 2019, we partially repaid one mortgage collateralized by three properties, releasing one of the collateralized properties that we sold on January 31, 2019, and we fully repaid three mortgages fully collateralized by seven properties, all of which are summarized below (dollars in thousands):



Aggregate Variable Rate Debt Repaid		Weighted Average Interest Rate on Variable Rate Debt Repaid		Aggregate Fixed Rate Debt Repaid		Weighted Average Interest Rate on Fixed Rate Debt Repaid
$	13,600	LIBOR +	2.47%	$	25,042	4.18	%

During the nine months ended September 30, 2019, we issued three mortgages, collateralized by three properties, which are summarized in the table below (dollars in thousands):



Aggregate Fixed Rate Debt Issued			Weighted Average Interest Rate on Fixed Rate Debt
$	41,140	(1)	3.95%

(1)

We issued $10.6 million of fixed rate debt in connection with one property acquired on December 27, 2018 with a maturity date of February 8, 2029. The interest rate is fixed at 4.70% for the first seven years of the mortgage. After the fixed interest rate period expires, we have the option to adjust the interest rate to a fixed interest rate equal to 1.8% plus the three year treasury rate per annum, or a variable interest rate equal to 1.8% plus the 30 day LIBOR rate per annum. On May 31, 2019, we issued $21.6 million of floating rate debt swapped to fixed rate debt of 3.42% in connection with refinancing mortgage debt at one property with a new maturity date of June 1, 2024. We issued $8.9 million of fixed rate debt in connection with our June 18, 2019 property acquisition with a maturity date of June 18, 2024 and a rate of 4.35%.

During the nine months ended September 30, 2019, we extended the maturity date of two mortgages, collateralized by four properties, which is summarized below (dollars in thousands):



Aggregate Variable Rate Debt Extended		Weighted Average Interest Rate on Variable Rate Debt Extended		Weighted Average Extension Term
$	12,561	LIBOR +	2.51%	2.4 years

We made payments of $1.4 million and $2.1 million for deferred financing costs during the three and nine months ended September 30, 2019, respectively, and $0.1 million and $0.3 million for deferred financing costs during the three and nine months ended September 30, 2018, respectively.

Scheduled principal payments of mortgage notes payable for the three months ending December 31, 2019, and each of the five succeeding years and thereafter are as follows (dollars in thousands):



Year	Scheduled Principal Payments
Three Months Ending December 31, 2019	$	8,804
2020	31,118
2021	37,838
2022	106,189
2023	70,465
2024	47,514
Thereafter	136,806
Total	$	438,734	(1)


(1)	This figure does not include $0.3 million of premiums and discounts, net, and $3.8 million of deferred financing costs, which are reflected in mortgage notes payable, net on the condensed consolidated balance sheets.

We believe we will be able to address all mortgage notes payable maturing over the next 12 months through a combination of refinancing our existing indebtedness, cash from operations, proceeds from one or more equity offerings and availability on our Credit Facility.

Interest Rate Cap and Interest Rate Swap Agreements

We have entered into interest rate cap agreements that cap the interest rate on certain of our variable-rate debt and we have assumed or entered into interest rate swap agreements in which we hedged our exposure to variable interest rates by agreeing to pay fixed interest rates to our respective counterparty. 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 and interest rate swaps, 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 September 30, 2019 and December 31, 2018, our interest rate cap agreements and interest rate swap were valued using Level 2 inputs.

The fair value of the interest rate cap agreements is recorded in other assets on our accompanying condensed 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. If the interest rate cap qualifies for hedge accounting, the change in the estimated fair value is recorded to accumulated other comprehensive income to the extent that it is effective, with any ineffective portion recorded to interest expense in our condensed consolidated statements of operations and comprehensive income. If the interest rate cap does not qualify for hedge accounting, or if it is determined the hedge is ineffective, any change in the fair value is recognized in interest expense in our consolidated statements of operations and comprehensive income. The following table summarizes the interest rate caps at September 30, 2019 and December 31, 2018 (dollars in thousands):



			September 30, 2019				December 31, 2018
Aggregate Cost			Aggregate Notional Amount		Aggregate Fair Value		Aggregate Notional Amount		Aggregate Fair Value
$	1,596	(1)	$	167,062	$	368	$	134,678	$	622


(1)	We have entered into various interest rate cap agreements on variable rate debt with LIBOR caps ranging from 2.50% to 3.00%.

We have assumed or entered into interest rate swap agreements in connection with certain of our acquisitions or mortgage financings, whereby we will pay our counterparty a fixed rate interest rate on a monthly basis, and receive payments from our counterparty equivalent to the stipulated floating rate. The fair values of our interest rate swap agreements are recorded in other assets or other liabilities on our accompanying condensed consolidated balance sheets. We have designated our interest rate swaps as cash flow hedges, and we record changes in the fair value of the interest rate swap agreement to accumulated other comprehensive income on the condensed consolidated balance sheets. We record changes in fair value on a quarterly basis, using current market valuations at quarter end. The following table summarizes our interest rate swaps at September 30, 2019 and December 31, 2018 (dollars in thousands):



September 30, 2019							December 31, 2018
Aggregate Notional Amount		Aggregate Fair Value Asset		Aggregate Fair Value Liability			Aggregate Notional Amount		Aggregate Fair Value Asset		Aggregate Fair Value Liability
$	45,919	$	—	$	(1,609	)	$	24,732	$	451	$	(396	)

The following tables present the impact of our derivative instruments in the condensed consolidated financial statements (dollars in thousands):



	Amount of (Loss) Gain, net recognized in Comprehensive Income
	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
Derivatives in cash flow hedging relationships
Interest rate caps	$	(187	)	$	107	$	(671	)	$	576
Interest rate swaps	(437		)	138		(1,664		)	452

Total	$	(624	)	$	245	$	(2,335	)	$	1,028

The following table sets forth certain information regarding our derivative instruments (dollars in thousands):



		Asset (Liability) Derivatives Fair Value at
Derivatives Designated as Hedging Instruments	Balance Sheet Location	September 30, 2019			December 31, 2018
Interest rate caps	Other assets	$	366		$	552
Interest rate swaps	Other assets	—			451
Interest rate swaps	Other liabilities	(1,609		)	(396		)

Derivatives Not Designated as Hedging Instruments
Interest rate caps	Other assets	$	2		$	70

Total derivative (liabilities) assets		$	(1,241	)	$	677

The fair value of all mortgage notes payable outstanding as of September 30, 2019 was $447.8 million, as compared to the carrying value stated above of $438.7 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.”

Credit Facility

On August 7, 2013, we procured our senior unsecured revolving credit facility (“Revolver”) with KeyBank National Association (“KeyBank”) (serving as revolving lender, a letter of credit issuer and an administrative agent). In October 2015, we expanded our Revolver to $85.0 million and entered into a term loan facility (“Term Loan”) whereby we added a $25.0 million, five-year Term Loan subject to the same leverage tiers as the Revolver, with the interest rate at each leverage tier being five basis points lower than that of the Revolver. We have the option to repay the Term Loan in full, or in part, at any time without penalty or premium prior to the maturity date. We refer to the Revolver and Term Loan collectively herein as the Credit Facility.

On October 27, 2017, we amended the Credit Facility, increasing the Term Loan from $25.0 million, to $75.0 million, with the Revolver commitment remaining at $85.0 million. The Term Loan maturity date was extended to October 27, 2022, and the Revolver maturity date was extended to October 27, 2021. In connection with the amendment, the interest rate for the Credit Facility was reduced by 25 basis points at each of the leverage tiers. At the time of the amendment, we entered into multiple interest rate cap agreements on the amended Term Loan, which cap LIBOR at 2.75% to hedge our exposure to variable interest rates.

On July 2, 2019, we amended, extended and upsized our Credit Facility, increasing the Term Loan from $75.0 million to $160.0 million, inclusive of a delayed draw component whereby we can incrementally borrow on the Term Loan up to the $160.0 million commitment, and increasing the Revolver from $85.0 million to $100.0 million. The Term Loan has a new five-year term, with a maturity date of July 2, 2024, and the Revolver has a new four-year term, with a maturity date of July 2, 2023. The interest rate for the Credit Facility was reduced by 10 basis points at each of the leverage tiers. We entered into multiple interest rate cap agreements on the amended Term Loan, which cap LIBOR ranging from 2.50% to 2.75%, to hedge our exposure to variable interest rates. We used the net proceeds derived from the amended Credit Facility to repay all previously existing borrowings under the Revolver. We incurred fees of approximately $1.3 million in connection with the Credit Facility amendment. The bank syndicate is now comprised of KeyBank, Fifth Third Bank, U.S. Bank National Association, The Huntington National Bank, Goldman Sachs Bank USA, and Wells Fargo Bank, National Association.

As of September 30, 2019, there was $158.1 million outstanding under our Credit Facility, at a weighted average interest rate of approximately 3.63%, and $8.3 million outstanding under letters of credit, at a weighted average interest rate of 1.65%. As of September 30, 2019, the maximum additional amount we could draw under the Credit Facility was $25.8 million. We were in compliance with all covenants under the Credit Facility as of September 30, 2019.

The amount outstanding under the Credit Facility approximates fair value as of September 30, 2019.