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

Quarterly report pursuant to Section 13 or 15(d)

Mortgage Notes Payable, Line of Credit and Term Loan Facility

Mortgage Notes Payable, Line of Credit and Term Loan Facility

9 Months Ended

Sep. 30, 2016

Mortgage Notes Payable, Line of Credit and Term Loan Facility

Our mortgage notes payable and line of credit as of September 30, 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
	September 30, 2016		September 30, 2016			December 31, 2015			September 30, 2016	(4)	September 30, 2016
Mortgage and Other Secured Loans:
Fixed rate mortgage loans	54		$	385,102		$	427,334		(1)		(2)
Variable rate mortgage loans	17		64,161			33,044			(3)		(2)
Premiums and discounts, net	-		247			392			N/A		N/A
Deferred financing costs, mortgage loans, net	-		(4,988		)	(4,907		)	N/A		N/A
Total Mortgage Notes Payable, net	71		$	444,522		$	455,863		(5)
Variable rate Line of Credit	25	(6)	47,300			45,300			LIBOR + 2.50%		8/7/2018
Deferred financing costs, line of credit	-		(528		)	(709		)	N/A		N/A
Total Line of Credit, net	25		$	46,772		$	44,591
Variable rate Term Loan Facility	-		25,000			25,000			LIBOR + 2.45%		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, Line of Credit and Term Loan Facility	96		$	516,186		$	525,332


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


(2)	We have 43 mortgage notes payable with maturity dates ranging from 12/1/2016 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 + 2.75%. At September 30, 2016, one month LIBOR was approximately 0.53%.


(4)	The weighted average interest rate on all debt outstanding at September 30, 2016 was approximately 4.47%.


(5)	The weighted average interest rate on the mortgage notes outstanding at September 30, 2016 was approximately 4.71%.


(6)	The amount we may draw under our line of credit and term loan facility is based on a percentage of the fair value of a combined pool of 25 unencumbered properties as of September 30, 2016.

N/A - Not Applicable

Mortgage Notes Payable

As of September 30, 2016, we had 43 mortgage notes payable, collateralized by a total of 71 properties with a net book value of $638.5 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 $7.4 million of the mortgages notes payable outstanding, or 1.7% 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, 2016, we repaid 6 mortgages, collateralized by 12 properties, and issued 5 long-term mortgages, collateralized by 10 properties, which are summarized below (dollars in thousands):

Date of Issuance/Repayment

Issuing Bank

New Debt Issued

Interest Rate

Maturity Date

Principal Balance Repaid

Previous Interest Rate

3/1/2016

Key Bank

18,475

LIBOR + 2.35%

(1)

3/1/2023

21,197

6.14%

4/22/2016

Great Southern Bank

9,530

LIBOR + 2.75%

(2)

4/22/2019

3,667

6.25%

4/28/2016

N/A

(3)

N/A

22,510

6.34%

5/26/2016

Prudential

9,900

4.684%

(4)

6/1/2026

N/A

9/1/2016

N/A

(5)

N/A

12,677

5.76%

9/12/2016

Union Fidelity Life Insurance Company

14,100

4.25%

(6)

10/5/2026

N/A

9/30/2016

Huntington Bank

4,000

LIBOR + 2.50%

(7)

9/30/2018

N/A


(1)	We refinanced maturing debt on our Chalfont, Pennsylvania, Big Flats, New York and Franklin and Eatontown, New Jersey properties, which was originally set to mature during second quarter 2016. We entered into an interest rate cap agreement with Key Bank, which caps LIBOR at 3% through March 1, 2019.


(2)	We refinanced maturing debt on our Coppell, Texas property, which was originally set to mature during second quarter 2016. We pooled the new mortgage debt with unencumbered properties located in Allen and Colleyville, Texas. We entered into an interest rate cap agreement with Great Southern Bank, which caps LIBOR at 2.5% through April 22, 2019.

(3)

We repaid our $10.7 million mortgage on our Springfield, Missouri property that was originally set to mature on July 1, 2016, and we repaid our $11.8 million mortgage on our Wichita, Kansas, Clintonville, Wisconsin, Angola, Indiana and Rock Falls, Illinois properties that was originally set to mature on May 5, 2016. We repaid both mortgages using existing cash on hand and borrowings from our line of credit.


(4)	We borrowed $9.9 million to acquire the property in Salt Lake City, Utah.


(5)	We repaid our $12.7 million mortgage on our Lexington, North Carolina, Arlington, Texas and San Antonio, Texas properties that was originally set to mature on December 1, 2016. We repaid this mortgage using existing cash on hand and borrowings from our line of credit.


(6)	We borrowed $14.1 million to acquire the property in Fort Lauderdale, Florida.


(7)	We obtained financing for our Maple Heights, Ohio property, which was previously in the unencumbered pool of assets on our line of credit. We entered into an interest rate cap agreement with Huntington Bank, which caps LIBOR at 2.5% through September 30, 2019.

We made payments of $0.4 million and $1.0 million for deferred financing costs during the three and nine months ended September 30, 2016, respectively, and payments of $0.3 million and $1.2 million during the three and nine months ended September 30, 2015, respectively.

Scheduled principal payments of mortgage notes payable for the remainder of 2016, 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, 2016	$	10,213
2017	70,441
2018	46,367
2019	45,818
2020	12,280
2021	24,507
Thereafter	239,637
Total	$	449,263	(1)

(1) This figure does not include $0.2 million of premiums and (discounts), net and $5.0 million of deferred financing costs, which are reflected in mortgage notes payable on the condensed consolidated balance sheet.

Interest Rate Cap Agreements

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 September 30, 2016 and December 31, 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 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 as interest expense on our accompanying condensed consolidated statements of operations. The following table summarizes the key terms of each interest rate cap agreement (dollars in thousands):



						September 30, 2016				December 31, 2015
Interest Rate Cap	LIBOR Cap		Maturity Date	Cost		Notional Amount		Fair Value		Notional Amount		Fair Value
11/2013	3.00	%	12/2016	$	31	$	8,200	$	—	$	8,200	$	—
7/2015	3.00	%	7/2018	68		20,709		—		21,204		14
12/2015	3.00	%	12/2020	52		3,574		5		3,640		26
3/2016	3.00	%	03/2019	33		18,260		2		—		—
4/2016	2.50	%	04/2019	27		9,441		2		—		—
9/2016	2.50	%	9/2019	46		4,000		46		—		—
				$	257	$	64,184	$	55	$	33,044	$	40

The fair value of all mortgage notes payable outstanding as of September 30, 2016 was $454.6 million, as compared to the carrying value stated above of $449.3 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.”

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, extended the maturity date one-year through August 2018, with a one year extension option through August 2019 and entered into a $25.0 million Term Loan Facility (discussed below). The interest rate on the Line of Credit was also reduced by 25 basis points at each of the leverage tiers.

In connection with the Line of Credit expansion in October 2015 mentioned above, we added a $25.0 million, five year term loan facility, or the Term Loan Facility, which was fully drawn at closing and matures in October 2020. The Term Loan Facility is subject to the same leverage tiers as the Line of Credit; however the interest rate at each leverage tier is five 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.

The total maximum commitment under the two facilities, including the Line of Credit and Term Loan Facility is $150.0 million. The bank syndicate is comprised of KeyBank, Comerica Bank, Fifth Third Bank, US Bank and Huntington Bank.

As of September 30, 2016, there was $72.3 million outstanding under our Line of Credit and Term Loan Facility at a weighted average interest rate of approximately 3.01% and $2.5 million outstanding under letters of credit at a weighted average interest rate of 2.5%. As of September 30, 2016, the maximum additional amount we could draw under the Line of Credit was $27.4 million. We were in compliance with all covenants under the Line of Credit and Term Loan Facility as of September 30, 2016.

The amount outstanding under the Line of Credit and Term Loan Facility approximates fair value as of September 30, 2016, as the debt is variable rate.