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, 2017

Mortgage Notes Payable and Credit Facility

Our mortgage notes payable and Credit Facility as of September 30, 2017 and December 31, 2016 are summarized below (dollars in thousands):



	Encumbered properties at		Carrying Value at						Stated Interest Rates at	Scheduled Maturity Dates at
	September 30, 2017		September 30, 2017			December 31, 2016			September 30, 2017	September 30, 2017
Mortgage and other secured loans:
Fixed rate mortgage loans	48		$	385,555		$	378,477		(1)	(2)
Variable rate mortgage loans	19		69,835			71,707			(3)	(2)
Premiums and discounts, net	-		(262		)	217			N/A	N/A
Deferred financing costs, mortgage loans, net	-		(5,096		)	(5,123		)	N/A	N/A
Total mortgage notes payable, net	67		$	450,032		$	445,278		(4)
Variable rate revolving credit facility	24	(6)	$	44,200		$	39,700		LIBOR + 2.00%	8/7/2018
Deferred financing costs, revolving credit facility	-		(267		)	(475		)	N/A	N/A
Total revolver, net	24		$	43,933		$	39,225
Variable rate term loan facility	-	(6)	$	25,000		$	25,000		LIBOR + 1.95%	10/5/2020
Deferred financing costs, term loan facility	-		(88		)	(108		)	N/A	N/A
Total term loan, net	N/A		$	24,912		$	24,892
Total mortgage notes payable and credit facility	91		$	518,877		$	509,395		(5)


(1)	Interest rates on our fixed rate mortgage notes payable vary from 3.55% to 6.63%.


(2)	We have 45 mortgage notes payable with maturity dates ranging from 12/1/2017 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 September 30, 2017, one month LIBOR was approximately 1.24%.


(4)	The weighted average interest rate on the mortgage notes outstanding at September 30, 2017 was approximately 4.52%.


(5)	The weighted average interest rate on all debt outstanding at September 30, 2017 was approximately 4.34%.


(6)	The amount we may draw under our Revolver and Term Loan is based on a percentage of the fair value of a combined pool of 24 unencumbered properties as of September 30, 2017.

N/A - Not Applicable

Mortgage Notes Payable

As of September 30, 2017, we had 45 mortgage notes payable, collateralized by a total of 67 properties with a net book value of $674.9 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 $11.7 million of the mortgages notes payable outstanding, or 2.6% 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, 2017, we repaid four mortgages, collateralized by ten properties, which are aggregated below (dollars in thousands):



Aggregate Fixed Rate Debt Repaid		Weighted Average Interest Rate on Fixed Rate Debt Repaid
$	41,077	6.25%



Aggregate Variable Rate Debt Repaid		Weighted Average Interest Rate on Variable Rate Debt Repaid
$	8,163	LIBOR +	2.50%

During the nine months ended September 30, 2017, we issued or assumed four mortgages, collateralized by seven properties, and drew an additional advance on an existing mortgage note, collateralized by one property, which are aggregated in the table below (dollars in thousands):



Aggregate Fixed Rate Debt Issued or Assumed			Weighted Average Interest Rate on Fixed Rate Debt		Aggregate Variable Rate Debt Issued or Assumed
$	54,887	(1)	3.78%	(2)	$	7,500	(3)


(1)	We issued or assumed $54.9 million of fixed rate or swapped to fixed rate debt in connection with our five property acquisitions with maturity dates ranging from April 1, 2026 to August 10, 2027.


(2)	We assumed an interest rate swap in connection with one property acquisition and will be paying an all in fixed rate of 3.55%. The newly issued fixed rate mortgages have rates ranging from 3.75% to 3.89%.

(3)

The interest rate for our issued variable rate mortgage debt is equal to one month LIBOR plus a spread of 2.75%. The maturity date on this new variable rate debt is May 15, 2020. We have entered into a rate cap agreement on our new variable rate debt and will record all fair value changes into interest expense on the condensed consolidated statement of operations and other comprehensive income (loss). The interest rate for our additional advance on the existing mortgage note is equal to one month LIBOR plus a spread of 2.50% and the maturity date is December 1, 2021.

We made payments of $0.6 million and $1.0 million for deferred financing costs during the three and nine months ended September 30, 2017, respectively. 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.

Scheduled principal payments of mortgage notes payable for the remainder of 2017, 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, 2017	$	10,405
2018	47,806
2019	47,474
2020	19,387
2021	33,367
2022	97,187
Thereafter	199,764
Total	$	455,390	(1)


(1)	This figure does not include $0.3 million of premiums and (discounts), net, and $5.1 million of deferred financing costs, which are reflected in mortgage notes payable on the condensed consolidated balance sheet.

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 an interest rate swap agreement in which we hedged our exposure to variable interest rates by agreeing to pay fixed interest rates to our 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 swap, 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, 2017 and December 31, 2016, 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 as interest expense on our accompanying condensed consolidated statements of operations and other comprehensive income (loss). The following table summarizes the interest rate caps at September 30, 2017 and December 31, 2016 (dollars in thousands):



			September 30, 2017				December 31, 2016
Aggregate Cost			Aggregate Notional Amount		Aggregate Fair Value		Aggregate Notional Amount		Aggregate Fair Value
$	482	(1)	$	93,920	$	49	$	71,721	$	101


(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 assumed an interest rate swap agreement in connection with our June 22, 2017 acquisition, whereby we will pay our counterparty an interest rate equivalent to 1.80% on a monthly basis, and receive payments from our counterparty equivalent to one month LIBOR. The fair value of our interest rate swap agreement is recorded in other assets on our accompanying condensed consolidated balance sheets. We have designated our interest rate swap as a cash flow hedge, and we record changes in the fair value of the interest rate swap agreement to accumulated other comprehensive income on the condensed consolidated balance sheet. We record changes in fair value on a quarterly basis, using current market valuations at quarter end. We assumed our interest rate swap with a value of $0.04 million on the date of assumption, and the fair market value increased to $0.2 million at September 30, 2017. The swap has a notional value equal to the debt we assumed of $11.2 million, and has a termination date of April 1, 2026, which is also the maturity date of the assumed debt.

The fair value of all mortgage notes payable outstanding as of September 30, 2017 was $461.8 million, as compared to the carrying value stated above of $455.4 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 (“KeyBank”) (serving as a lender, a letter of credit issuer and an administrative agent). On October 5, 2015, we expanded our Revolver to $85.0 million, extended the maturity date one year through August 2018, with a one-year extension option through August 2019. We also added a $25.0 million 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 Revolver 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 three new lenders to the bank syndicate, which is now comprised of KeyBank, Comerica Bank, Fifth Third Bank, US Bank and Huntington Bank.

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 September 30, 2017, there was $69.2 million outstanding under our Credit Facility at a weighted average interest rate of approximately 3.22% and $1.0 million outstanding under letters of credit at a weighted average interest rate of 2.00%. As of September 30, 2017, the maximum additional amount we could draw under the Revolver was $34.0 million. We were in compliance with all covenants under the Credit Facility as of September 30, 2017.

The amount outstanding under the Credit Facility approximates fair value as of September 30, 2017.