7. Mortgage Notes Payable and Line of Credit

Our mortgage notes payable and line of credit as of June 30, 2015 and December 31, 2014 are summarized below (dollars in thousands):

 

						Carrying Value at
		Encumbered properties at June 30, 2015				June 30, 2015				December 31, 2014				Stated Interest Rates at June 30, 2015 (4)				Scheduled Maturity Dates at June 30, 2015
Mortgage and Other Secured Loans:
Fixed rate mortgage loans			73			$	458,806			$	450,392				(1	)			(2	)
Variable rate mortgage loans			7				27,980				8,200				(3	)			(2	)
Premiums and discounts (net)			N/A				553				707				N/A				N/A
Total Mortgage Notes Payable			80			$	487,339			$	459,299
Variable rate Line of Credit			19				45,200				43,300				LIBOR + 2.75	% (3)			8/1/2017
Total Mortgage Notes Payable and Line of Credit			99			$	532,539			$	502,599

 

(1)	Interest rates on our fixed rate mortgage notes payable vary from 3.75% to 6.80%.

(2)	We have 44 mortgage notes payable with maturity dates ranging from 9/1/2015 through 1/6/2039.

(3)	Interest rates on our variable rate mortgage notes payable vary from one month LIBOR + 2.15% to one month LIBOR + 2.25%. At June 30, 2015, one month LIBOR was approximately 0.19%.

(4)	The weighted average interest rate on all debt outstanding at June 30, 2015, was approximately 4.93%.

N/A - Not Applicable

Mortgage Notes Payable

As of June 30, 2015, we had 44 mortgage notes payable, collateralized by a total of 80 properties with a net book value of $692.0 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. 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. The weighted-average interest rate on the mortgage notes payable as of June 30, 2015 was 5.11%.

During the six months ended June 30, 2015, we issued four long-term mortgages, collateralized by five properties, which are summarized below (dollars in thousands):

 

Date of Issuance		Issuing Bank		Debt Issued				Interest Rate				Maturity Date				Amortization Period (months)
3/6/2015		PNC Bank, NA		$	14,573				3.86	%			4/1/2025				300
5/28/2015		FC Bank			4,466				3.75	%			6/1/2022				85
6/16/2015		Guggenheim Partners			13,000				3.99	%			7/1/2045
6/29/2015		Synovus Bank			19,780				LIBOR + 2.25	%			7/1/2018	(1)
				$	51,819

 

(1)	We refinanced maturing debt on our Duncan, South Carolina and Charlotte, North Carolina properties which had aggregate balloon principal payments of $19.1 million. We completed this refinance on June 29, 2015.

We made payments of $0.4 million and $0.9 million for deferred financing costs during the three and six months ended June 30, 2015, respectively, and payments of $0.4 million and $0.8 million during the three and six months ended June 30, 2014, respectively.

Scheduled principal payments of mortgage notes payable for the remainder of 2015, and each of the five succeeding fiscal years and thereafter are as follows (dollars in thousands):

 

Year		Scheduled Principal Payments
Six Months ending December 31, 2015		$	19,282	(1)
2016			100,110
2017			68,873
2018			39,205
2019			35,603
2020			7,688
Thereafter			216,025
		$	486,786	(2)

 

(1)	This figure includes two balloon principal payments that mature in the second half of 2015. We refinanced one of these mortgages subsequent to June 30, 2015, using a combination of new mortgage debt and equity, repaying $11.3 million of principal.

(2)	This figure is exclusive of premiums and discounts (net) on assumed debt, which were $553,000 as of June 30, 2015.

Refinancing

On June 29, 2015, through a wholly-owned subsidiary, we refinanced our $19.1 million mortgage loan, originally set to mature on September 1, 2015. This note had an original interest rate of 5.3% and was collateralized by security interests in our Charlotte, North Carolina and Duncan, South Carolina properties. We borrowed $19.8 million in the refinancing pursuant to a long-term note payable from Synovus Bank. The new loan is variable rate, in which the interest rate resets monthly and is calculated as the one month London Interbank Offered Rate, or LIBOR, plus a margin of 2.25%. Subsequent to the end of the quarter, we entered into an interest rate cap agreement with Synovus Bank, which caps LIBOR at 3.0%. As of June 30, 2015, one month LIBOR was 0.19%. The new note has a maturity date of July 1, 2018, with one, two-year extension option.

Interest Rate Cap

We have entered into an interest rate cap agreement with Wells Fargo that caps the interest rate on the note payable for our Champaign, Illinois property at a certain interest rate when one-month LIBOR is in excess of 3.0%. The fair value of the interest rate cap agreement is recorded in Other assets on our accompanying condensed consolidated balance sheets. We record changes in the fair value of the interest rate cap agreement quarterly based on the current market valuations at quarter end as Other income (loss) on our accompanying condensed consolidated statements of operations. Generally, we will estimate the fair value of our interest rate cap using estimates of value provided by the counterparty and our own assumptions in the absence of observable market data, including estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. At June 30, 2015 and December 31, 2014, our interest rate cap agreement was valued using Level 3 inputs. The following table summarizes the key terms of each interest rate cap agreement (dollars in thousands):

 

														As of June 30, 2015								As of December 31, 2014
Interest Rate Cap		Notional Amount				LIBOR Cap				Maturity Date				Cost				Fair Value				Cost				Fair Value
November 26, 2013		$	8,200				3.00	%			Dec-16			$	31			$	—			$	31			$	4

 

Fair Value

The fair value of all mortgage notes payable outstanding as of June 30, 2015 was $498.6 million, as compared to the carrying value stated above of $486.8 million. The fair value is calculated based on a discounted cash flow analysis, using interest rates based on 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

In August 2013, we procured a $60.0 million senior unsecured revolving credit facility, or the Line of Credit, which was expanded to $75.0 million in November 2014, with KeyBank National Association (serving as a revolving lender, a letter of credit issuer and an administrative agent) and added Citizens Bank of Pennsylvania and Comerica Banks as additional lenders.

The Line of Credit initially matures in August 2017; however, we have a one-year extension option subject to the payment of an extension fee equal to 25 basis points on the initial maturity date and certain other customary conditions.

As of June 30, 2015, there was $45.2 million outstanding under our Line of Credit at an interest rate of approximately 2.94% and $3.9 million outstanding under letters of credit at a weighted average interest rate of 2.75%. As of August 3, 2015, the maximum additional amount we could draw was $9.2 million. We were in compliance with all covenants under the Line of Credit as of June 30, 2015.