Gladstone Commercial Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Mortgage Notes Payable, Revolving Credit Facility, and Term Loan Facility

Mortgage Notes Payable, Revolving Credit Facility, and Term Loan Facility

12 Months Ended

Dec. 31, 2016

Mortgage Notes Payable, Revolving Credit Facility, and Term Loan Facility

Our revolving credit facility and term loan facility are collectively referred to herein as the Credit Facility.

Our mortgage notes payable and Credit Facility as of December 31, 2016 and December 31, 2015 are summarized below (dollars in thousands):



	Encumbered properties at		Carrying Value at						Stated Interest Rates at	Scheduled Maturity Dates at
	December 31, 2016		December 31, 2016			December 31, 2015			December 31, 2016	December 31, 2016
Mortgage and other secured loans:
Fixed rate mortgage loans	52		$	378,477		$	427,334		(1)	(2)
Variable rate mortgage loans	18		71,707			33,044			(3)	(2)
Premiums and discounts, net	-		217			392			N/A	N/A
Deferred financing costs, mortgage loans, net	-		(5,123		)	(4,907		)	N/A	N/A
Total mortgage notes payable, net	70		$	445,278		$	455,863		(4)
Variable rate revolving credit facility	24	(6)	39,700			45,300			LIBOR + 2.25%	8/7/2018
Deferred financing costs, revolving credit facility	-		(475		)	(709		)	N/A	N/A
Total revolving credit facility, net	24		$	39,225		$	44,591
Variable rate term loan facility	-		25,000			25,000			LIBOR + 2.20%	10/5/2020
Deferred financing costs, term loan facility	-		(108		)	(122		)	N/A	N/A
Total term loan facility, net	N/A		$	24,892		$	24,878
Total mortgage notes payable and credit facility	94		$	509,395		$	525,332		(5)


(1)	Interest rates on our fixed rate mortgage notes payable vary from 3.75% to 6.63%.


(2)	We have 44 mortgage notes payable with maturity dates ranging from 3/1/2017 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 +2.75%. At December 31, 2016, one month LIBOR was approximately 0.77%.


(4)	The weighted average interest rate on the mortgage notes outstanding at December 31, 2016, was approximately 4.69%.


(5)	The weighted average interest rate on all debt outstanding at December 31, 2016, was approximately 4.48%.


(6)	The amount we may draw under our Credit Facility is based on a percentage of the fair value of a combined pool of 24 unencumbered properties as of December 31, 2016.

N/A - Not Applicable

Mortgage Notes Payable

As of December 31, 2016, we had 44 mortgage notes payable, collateralized by a total of 70 properties with a net book value of $647.6 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. Gladstone Commercial Corporation has full recourse for $8.9 million of the mortgage notes payable outstanding or 2.0% 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 year ended December 31, 2016, we issued 7 long-term mortgages collateralized by 12 properties, which are aggregated below (dollars in thousands):



Aggregate Fixed Rate Debt Issued			Weighted Average Interest Rate on Fixed Rate Debt		Aggregate Variable Rate Debt Issued
$	38,800	(1)	4.68	%	$	39,905	(2)


(1)	We issued $38.8 million of new fixed rate debt in connection with our three property acquisitions with maturity dates ranging from 6/1/2026 to 1/1/2027.


(2)	The interest rate for all of our new variable rate debt is equal to one month LIBOR plus a spread ranging from 2.35% to 2.75%. Maturity dates on this new variable rate debt range from 4/22/2019 to 3/1/2023. We have entered into rate cap agreements on all new variable rate debt.

During the year ended December 31, 2016, we repaid 7 mortgages collateralized by 16 properties, which are aggregated below (dollars in thousands):



Aggregate Fixed Rate Debt Repaid		Weighted Average Interest Rate on Fixed Rate Debt Repaid
$	79,383	6.06	%

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
2017	$	58,940
2018	46,631
2019	46,269
2020	12,756
2021	31,774
Thereafter	253,814
	$	450,184	(1)


(1)	This figure is does not include $0.2 million premiums and (discounts), net, and $5.1 million of deferred financing costs, which are reflected in mortgage notes payable on the consolidated balance sheet.

We believe we will be able to address all mortgage notes payable maturing over the next 12 months through a combination of refinancings, cash from operations, equity proceeds and availability on our Credit Agreement.

Interest Rate Caps

We have entered into interest rate cap agreements that cap the interest rate on certain of our variable rate notes payable. 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, 2016 and 2015, 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 interest rate caps for the year ended December 31, 2016 and 2015 (dollars in thousands):



			December 31, 2016				December 31, 2015
Aggregate Cost			Aggregate Notional Amount		Aggregate Fair Value		Aggregate Notional Amount		Aggregate Fair Value
$	333	(1)	$	71,721	$	101	$	33,044	$	40

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

The fair value of all mortgage notes payable outstanding as of December 31, 2016 was $445.4 million, as compared to the carrying value stated above of $445.3 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

In August 2013, we procured a senior unsecured revolving credit facility, or the Revolver, with KeyBank National Association (serving as a revolving lender, a letter of credit issuer and an administrative agent). In October 2015, we expanded our Revolver to $85.0 million and extended the maturity date 1-year through August 2018, with a 1-year extension option through August 2019. We also added a $25.0 million 5-year term loan facility, or the Term Loan, which matures in October 2020. The Revolver and the Term Loan are referred to collectively herein as the Credit Facility. The interest rate on the Credit Facility was also reduced by 25 basis points at each of the leverage tiers and the total maximum commitment under the Credit Facility 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 a payment of $0.5 million for the modification of the agreement.

In connection with the Revolver expansion discussed above, we added a $25.0 million, 5-year, Term Loan, which matures in October 2020. The Term Loan is subject to the same leverage tiers as the Revolver, however the interest rate at each leverage tier is five basis points lower. 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.

As of December 31, 2016, there was $64.7 million outstanding under our Credit Facility at a weighted average interest rate of approximately 3.00% and $0.8 million outstanding under letters of credit at a weighted average interest rate of 2.25%. As of February 15, 2017, the maximum additional amount we could draw under the Credit Facility was $30.8 million. We were in compliance with all covenants under the Credit Facility as of December 31, 2016.

The amount outstanding under the Credit Facility approximates fair value as of December 31, 2016, as the debt is variable rate.