Quarterly report pursuant to Section 13 or 15(d)

Mortgage Notes Payable and Credit Facility

v3.23.3
Mortgage Notes Payable and Credit Facility
 9 Months Ended
Sep. 30, 2023
Debt Disclosure [Abstract]  
Mortgage Notes Payable and Credit Facility Mortgage Notes Payable and Credit Facility
Our $125.0 million unsecured revolving credit facility (“Revolver”), $160.0 million term loan facility (“Term Loan A”), $60.0 million term loan facility (“Term Loan B”), and $150.0 million term loan facility (“Term Loan C”), are collectively referred to herein as the Credit Facility.

Our mortgage notes payable and Credit Facility as of September 30, 2023 and December 31, 2022 are summarized below (dollars in thousands):

Encumbered properties at Carrying Value at Stated Interest Rates at Scheduled Maturity Dates at
September 30, 2023 September 30, 2023 December 31, 2022 September 30, 2023 September 30, 2023
Mortgage and other secured loans:
Fixed rate mortgage loans 49  $ 313,400  $ 362,037  (1) (2)
Premiums and discounts, net —  (52) (83) N/A N/A
Deferred financing costs, mortgage loans, net —  (2,374) (2,565) N/A N/A
Total mortgage notes payable, net 49  $ 310,974  $ 359,389  (3)
Variable rate revolving credit facility 82  (6) $ 70,950  $ 23,250 
SOFR + 1.50%
 (4) 8/18/2026
Total revolver 82  $ 70,950  $ 23,250 
Variable rate term loan facility A —  (6) $ 160,000  $ 160,000 
SOFR + 1.45%
 (4) 8/18/2027
Variable rate term loan facility B —  (6) 60,000  60,000 
SOFR + 1.45%
 (4) 2/11/2026
Variable rate term loan facility C —  (6) 150,000  150,000 
SOFR + 1.45%
 (4) 2/18/2028
Deferred financing costs, term loan facility —  (2,915) (3,433) N/A N/A
Total term loan, net N/A $ 367,085  $ 366,567 
Total mortgage notes payable and credit facility 131  $ 749,009  $ 749,206  (5)
(1)As of September 30, 2023, interest rates on our fixed rate mortgage notes payable varied from 2.80% to 6.63%.
(2)As of September 30, 2023, we had 43 mortgage notes payable with maturity dates ranging from January 1, 2024 through August 1, 2037.
(3)The weighted average interest rate on the mortgage notes outstanding as of September 30, 2023 was approximately 4.20%.
(4)As of September 30, 2023, Secured Overnight Financing Rate (“SOFR”) was approximately 5.31%.
(5)The weighted average interest rate on all debt outstanding as of September 30, 2023 was approximately 5.70%.
(6)The amount we may draw under our Credit Facility is based on a percentage of the fair value of a combined pool of 82 unencumbered properties as of September 30, 2023.
N/A - Not Applicable

Mortgage Notes Payable

As of September 30, 2023, we had 43 mortgage notes payable, collateralized by a total of 49 properties with a net book value of $496.5 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. As of September 30, 2023, we did not have any mortgages subject to recourse. 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, 2023, we repaid four mortgages, collateralized by four properties, which are summarized in the table below (dollars in thousands):
Fixed Rate Debt Repaid Interest Rate on Fixed Rate Debt Repaid
$ 46,530  4.78  %

During the nine months ended September 30, 2023, 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
$ 9,000  6.10  %

During the nine months ended September 30, 2023, we extended the maturity date of one mortgage, collateralized by one property, which is summarized in the table below (dollars in thousands):

Fixed Rate Debt Extended Interest Rate on Fixed Rate Debt Extended Extension Term
$ 8,769  6.50  % 1.0 year

We made payments of $0.3 million and $0.4 million for deferred financing costs during the three and nine months ended September 30, 2023. We made payments of $5.6 million and $6.2 million for deferred financing costs during the three and nine months ended September 30, 2022.

Scheduled principal payments of mortgage notes payable for the three months ending December 31, 2023, and each of the five succeeding fiscal years and thereafter are as follows (dollars in thousands):
 
Year Scheduled Principal Payments
Three Months Ending December 31, 2023 $ 11,995 
2024 28,400 
2025 36,420 
2026 35,084 
2027 95,040 
2028 37,116 
Thereafter 69,345 
Total $ 313,400  (1)
(1)This figure does not include $(0.1) million of premiums and (discounts), net, and $2.4 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, 2023 and December 31, 2022, our interest rate cap agreements and interest rate swaps 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. During the next 12 months, we estimate that an additional $6.9 million will be reclassified out of accumulated other comprehensive income into interest expense in our condensed consolidated statements of operations and comprehensive income, as a reduction to interest expense. The following table summarizes the interest rate caps at September 30, 2023 and December 31, 2022 (dollars in thousands):
 
September 30, 2023 December 31, 2022
Aggregate Cost Aggregate Notional Amount Aggregate Fair Value Aggregate Notional Amount Aggregate Fair Value
$ 141  (1) $ 65,000  $ 1,340  $ 225,000  $ 4,629 
(1)We have entered into various interest rate cap agreements on variable rate debt with SOFR caps ranging from 1.49% to 1.75%.

We have assumed or entered into interest rate swap agreements in connection with certain of our mortgage financings and Credit Facility, 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 value of our interest rate swap agreements is 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, 2023 and December 31, 2022 (dollars in thousands):

September 30, 2023 December 31, 2022
Aggregate Notional Amount Aggregate Fair Value Asset Aggregate Fair Value Liability Aggregate Notional Amount Aggregate Fair Value Asset Aggregate Fair Value Liability
$ 361,969  $ 17,015  $ —  $ 362,832  $ 8,264  $ (897)

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

Amount of gain, net, recognized in Comprehensive Income
Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
Derivatives in cash flow hedging relationships
Interest rate caps $ (654) $ 1,758  $ (2,429) $ 4,520 
Interest rate swaps 5,743  5,032  9,647  9,140 
Total $ 5,089  $ 6,790  $ 7,218  $ 13,660 

The following table presents the reclassifications of our derivative instruments out of accumulated other comprehensive income into interest expense in the condensed consolidated financial statements (dollars in thousands):

Amount reclassified out of Accumulated Other Comprehensive Income
Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
Interest rate caps $ 409  $ (52) $ 937  $ (52)
Total $ 409  $ (52) $ 937  $ (52)

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, 2023 December 31, 2022
Interest rate caps Other assets $ 1,340  $ 4,629 
Interest rate swaps Other assets 17,015  8,264 
Interest rate swaps Other liabilities —  (897)
Total derivative liabilities, net $ 18,355  $ 11,996 

The fair value of all mortgage notes payable outstanding as of September 30, 2023 was $273.2 million, as compared to the carrying value stated above of $311.0 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 18, 2022, we amended, extended and upsized our Credit Facility, increasing our Revolver from $100.0 million to $120.0 million (and its term to August 2026), adding the new $140.0 million Term Loan C, decreasing the principal balance of Term Loan B to $60.0 million and extending the maturity date of Term Loan A to August 2027. Term Loan C has a maturity date of February 18, 2028 and a SOFR spread ranging from 125 to 195 basis points, depending on our leverage. On September 27, 2022, we further increased the Revolver to $125.0 million and Term Loan C to $150.0 million, as permitted under the terms of the Credit Facility. We entered into multiple interest rate swap agreements on Term Loan C, which swap the interest rate to fixed rates from 3.15% to 3.75%. We incurred fees of approximately $4.2 million in connection with extending and upsizing our Credit Facility. The net proceeds of the transaction were used to repay the then-outstanding borrowings on the Revolver, pay off mortgage debt, and fund acquisitions. The Credit Facility’s current bank syndicate is comprised of KeyBank, Fifth Third Bank, The Huntington National Bank, Bank of America, Synovus Bank, United Bank, First Financial Bank, and S&T Bank.

As of September 30, 2023, there was $441.0 million outstanding under our Credit Facility, at a weighted average interest rate of approximately 6.77%, and $2.9 million outstanding under letters of credit, at a weighted average interest rate of 1.50%. As of September 30, 2023, the maximum additional amount we could draw under the Credit Facility was $44.9 million. We were in compliance with all covenants under the Credit Facility as of September 30, 2023.

The amount outstanding under the Credit Facility approximates fair value as of September 30, 2023.