UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549 

FORM 10-Q

(Mark One)

 

 

GLADSTONE COMMERCIAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Gladstone Commercial Corporation

Condensed Consolidated Balance Sheets

(Dollars in Thousands, Except Share and Per Share Data)

(Unaudited) 

Gladstone Commercial Corporation

Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss)

(Dollars in Thousands, Except Share and Per Share Data)

(Unaudited) 

 

Gladstone Commercial Corporation

Condensed Consolidated Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

Gladstone Commercial Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Gladstone Commercial Corporation is a real estate investment trust (“REIT”) that was incorporated under the General Corporation Law of the State of Maryland on February 14, 2003. We focus on acquiring, owning and managing primarily office and industrial properties. On a selective basis, we may make long term industrial and commercialoffice mortgage loans; however, we do not have any mortgage loans currently outstanding. Subject to certain restrictions and limitations, our business is managed by Gladstone Management Corporation, a Delaware corporation ("Adviser"(the “Adviser”), and administrative services are provided by Gladstone Administration, LLC, a Delaware limited liability company ("Administrator"(the “Administrator”), each pursuant to a contractual arrangement with us. Our Adviser and Administrator collectively employ all of our personnel and pay their salaries, benefits, and other general expenses directly. Gladstone Commercial Corporation conducts substantially all of its operations through a subsidiary, Gladstone Commercial Limited Partnership, a Delaware limited partnership or the Operating Partnership.(the “Operating Partnership”).

All further references herein to “we,” “our,” “us” and “us”the “Company” mean Gladstone Commercial Corporation and its consolidated subsidiaries, except where it is made clear that the term means only Gladstone Commercial Corporation.

Our interim financial statements are prepared in accordance with generally accepted accounting principles ("GAAP"(“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and in accordance with Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. The year-end balance sheet data presented herein was derived from audited financial statements, but does not include all disclosures required by GAAP. In the opinion of our management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim period, have been included. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016,2018, as filed with the U.S. Securities and Exchange Commission on February 15, 2017.13, 2019. The results of operations for the three and nine months ended September 30, 2017March 31, 2019 are not necessarily indicative of the results that may be expected for other interim periods or for the full fiscal year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could materially differ from those estimates.

InThe preparation of our financial statements in accordance with GAAP, we apply certain critical accounting policies which requirerequires management to make judgments that are subjective in nature to make certain estimates and assumptions. Application of ourthese accounting policies involves the exercise of judgment regarding the use of assumptions as to future uncertainties, and as a result, actual results could materially differ from these estimates. A summary of all of our significant accounting policies is provided in Note 1, “Organization, Basis of Presentation and Significant Accounting Policies,” to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.2018. There were no material changes to our critical accounting policies during the three and nine months ended September 30, 2017.

In May 2014, the FASBFinancial Accounting Standards Board (“FASB”) issued guidance regarding the recognition of revenue from contracts with customers. Under this guidance, an entity will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We expectadopted this guidance for our annual and interim periods beginning January 1, 2018 and used the modified retrospective method, under which the cumulative effect of initially applying the guidance is recognized at the date of initial application. Our adoption of this guidance did not have a material impact on our consolidated financial statements. Further, as discussed below, we adopted the new guidance regarding the principles for the recognition measurement, presentation and disclosure of leases on January 1, 2019. The new revenue standard will apply to executory costs and other components of revenue due under leases that are deemed to be non-lease components (examples include common area maintenance and provision of utilities), even when the revenue for such activities is not separately stipulated in the lease. Revenue from these non-lease components, which were previously recognized on a straight-line basis under currentprevious lease guidance, would beare recognized under the new revenue guidance as the related services are delivered. As a result, while theour total revenue recognized over the lease term would not differ under the new guidance, the revenue recognition pattern could be different. We are in the processThe new leasing guidance allows for an accounting election to account for each separate lease component and its associated nonlease components as a single lease component. As a lessor, we have made an accounting election to account for each separate lease component and its associated nonlease components as a single lease component. As a result of evaluating the significance of the difference in thethis election, our revenue recognition pattern that would result from this change, and adjustments infor our leasing arrangements will be consistent with how we recognized lease revenue recognition attributableprior to non-lease components will take effect in tandem withour adoption of the new leasing standard described below, which is effective January 1, 2019. We will adopt this guidance for our annual and interim periods beginning January 1, 2018 and expect to use the modified retrospective method, under which the cumulative effect of initially applying the guidance is recognized at the date of initial application.standard.

In February 2016, the FASB issued ASUAccounting Standards Update (“ASU”) 2016-02, “Leases: Amendments to the FASB Accounting Standards Codification” (“ASU 2016-02”). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. We adopted ASU 2016-02, is expected to minimally impact our consolidated financial statements as we currently haveamended, as of January 1, 2019, which resulted in the recording of additional right-of-use assets from operating leases and operating lease liabilities of approximately $6.0 million for the four operating ground lease arrangements with terms greater than one year for which we are the lessee, and we don't expect the purchase of properties with ground leases to be crucial to our acquisition strategy.lessee. We also expect our general and administrative expense to increase as the new standard requires us to expense indirect leasing costs that were previously capitalized to leasing commissions. ASC 2016-02 supersedes the previous leases standard, ASC 840 "Leases." The standard is effective on January 1, 2019, with early adoption permitted and we expect to useadopted the modified retrospective method, under whichwhere we recorded the cumulative effect of initially applying the guidance as of January 1, 2019. We also adopted the full suite of practical expedients provided under this guidance, whereby we are not reassessing whether a contract is recognized ator contains a lease, the lease classification and the initial direct costs incurred upon onset of our leases. We have also elected to adopt the hindsight practical expedient whereby we can use hindsight to determine the lease term as of the date of initial application.

Gladstone Management and Gladstone Administration

We are externally managed pursuant to contractual arrangements with our Adviser and our Administrator, which collectively employ all of our personnel and pay their salaries, benefits, and other general expenses directly. Both our Adviser and Administrator are affiliates of ours, as their parent company is owned and controlled by Mr. David Gladstone, our chairman and chief executive officer. Two of our executive officers, Mr. Gladstone and Mr. Terry Lee Brubaker (our vice chairman and chief operating officer) serve as directors and executive officers of our Adviser and our Administrator. Our president, Mr. Robert Cutlip, is an executive managing director of our Adviser. Mr. Michael LiCalsi, our general counsel and secretary, also serves as our Administrator’s president, general counsel and secretary. We have entered into an advisory agreement with our Adviser, as amended from time to time or the Advisory Agreement,(the “Advisory Agreement”), and an administration agreement with our Administrator or the Administration Agreement.(the “Administration Agreement”). The services and fees under the Advisory Agreement and Administration Agreement are described below. As of September 30, 2017March 31, 2019 and December 31, 2016, $2.32018, $2.6 million and $2.1$2.5 million, respectively, were collectively due to our Adviser and Administrator.

As a result ofUnder the July 2015 amendment,Advisory Agreement, the calculation of the annual base management fee equals 1.5% of our adjusted total stockholders’ equity,Total Equity, which is our total stockholders’ equity plus total mezzanine equity (before giving effect to the base management fee and incentive fee), adjusted to exclude the effect of any unrealized gains or losses that do not affect realized net income (including impairment charges) and, adjusted for any one-time events and certain non-cash items (the later to occur for a given quarter only upon the approval of our Compensation Committee)., and adjusted to include OP Units held by Non-controlling OP Unitholders. The fee is calculated and accrued quarterly as 0.375% per quarter of such adjusted total stockholders’ equityTotal Equity figure. As a result of the July 2016 amendment, the definition of adjusted total stockholders' equity in the calculation of the base management fee and the incentive fee (described below) includes total mezzanine equity. Our Adviser does not charge acquisition or disposition fees when we acquire or dispose of properties, as is common in other externally managed REITs; however, our Adviser may earn fee income from our borrowers, tenants or other sources. Prior to the 2015 amendment, the Advisory Agreement provided for an annual base management fee equal to 2.0% of our common stockholders’ equity, which was our total stockholders’ equity, less the recorded value of any preferred stock and adjusted to exclude the effect of any unrealized gains, losses, or other items that did not affect realized net income (including impairment charges).

For the three and nine months ended September 30, 2017,March 31, 2019 and 2018, we recorded a base management fee of $1.3 million and $3.7 million, respectively. For the three and nine months ended September 30, 2016, we recorded a base management fee of $1.1 million and $2.8$1.3 million, respectively.

As a result ofPursuant to the July 2015 amendment,Advisory Agreement, the calculation of the incentive fee was revised to rewardrewards the Adviser in circumstances where our quarterly Core FFO (defined at the end of this paragraph), before giving effect to any incentive fee, or pre-incentive fee Core FFO, exceeds 2.0% quarterly, or 8.0% annualized, of adjusted total stockholders’ equity (after giving effect to the base management fee but before giving effect to the incentive fee, and which, as a result of the July 2016 amendment to the Advisory Agreement, now includes total mezzanine equity)fee). We refer to this as the new hurdle rate. The Adviser will receive 15.0% of the amount of our pre-incentive fee Core FFO that exceeds the new hurdle rate. However, in no event shall the incentive fee for a particular quarter exceed by 15.0% (the cap) the average quarterly incentive fee paid by us for the previous four quarters (excluding quarters for which no incentive fee was paid). Core FFO (as defined in the Advisory Agreement) is GAAP net income (loss) available to common stockholders, excluding the incentive fee, depreciation and amortization, any realized and unrealized gains, losses or other non-cash items recorded in net income (loss) available to common stockholders for the period, and one-time events pursuant to changes in GAAP.

Under the Advisory Agreement, as amended in July 2015, we will pay to the Adviser a capital gains-based incentive fee that will be calculated and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement). In determining the capital gaingains fee, we will calculate aggregate realized capital gains and aggregate realized capital losses for the applicable time period. For this purpose, aggregate realized capital gains and losses, if any, equals the realized gain or loss calculated by the difference between the sales price of the property, less any costs to sell the property and the current gross value of the property (which is calculated as(equal to the property’s original acquisition price plus any subsequent non-reimbursed capital improvements). of the disposed property. At the end of the fiscal year, if this number is positive, then the capital gain fee payable for such time period shall equal 15.0% of such amount. No capital gain fee was recognized during the three and nine months ended September 30, 2017March 31, 2019 or 2016.

The Advisory Agreement includes a termination fee whereby, in the event of our termination thereofof the agreement without cause (with 120 days’ prior written notice and the vote of at least two-thirds of our independent directors), a termination fee would be payable to the Adviser equal to two times the sum of the average annual base management fee and incentive fee earned by the Adviser during the 24-month period prior to such termination. A termination fee is also payable if the Adviser terminates the Advisory Agreement after we have defaulted and applicable cure periods have expired. The Advisory Agreement may also be terminated for cause by us (with 30 days’ prior written notice and the vote of at least two-thirds of our independent directors), with no termination fee payable. Cause is defined in the agreement to include if the Adviser breaches any material provisions thereof, the bankruptcy or insolvency of the Adviser, dissolution of the Adviser and fraud or misappropriation of funds.

Under the terms of the Administration Agreement, we pay separately for our allocable portion of the Administrator’s overhead expenses in performing its obligations to us including, but not limited to, rent and our allocable portion of the salaries and benefits expenses of our Administrator’s employees, including, but not limited to, our chief financial officer, treasurer, chief compliance officer, general counsel and secretary (who also serves as our Administrator’s president, general counsel and secretary), and their respective staffs. Our allocable portion of the Administrator’s expenses are generally derived by multiplying our Administrator’s total expenses by the approximate percentage of time the Administrator'sAdministrator’s employees perform services for us in relation to their time spent performing services for all companies serviced by our Administrator under contractual agreements. We believe this approach helps approximate fees paid by us to actual services performed by the Administrator for us. For the three and nine months ended September 30, 2017,March 31, 2019 and 2018, we recorded an administration fee of $0.3$0.4 million and $1.0 million, respectively, and for the three and nine months ended September 30, 2016, we recorded an administration fee of $0.3 million and $1.1$0.4 million, respectively.

Gladstone Securities

Gladstone Securities, LLC, or (“Gladstone Securities,Securities”), is a privately held broker dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation. Gladstone Securities is an affiliate of ours, as its parent company is owned and controlled by Mr. David Gladstone, our chairman and chief executive officer. Mr. Gladstone also serves on the board of managers of Gladstone Securities.

We entered into an agreement with Gladstone Securities, effective June 18, 2013, for it to act as our non-exclusive agent to assist us with arranging mortgage financing for properties we own.own (the “Financing Arrangement Agreement”). In connection with this engagement, Gladstone Securities will, from time to time, continue to solicit the interest of various commercial real estate lenders or recommend to us third party lenders offering credit products or packages that are responsive to our needs. We pay Gladstone Securities a financing fee in connection with the services it provides to us for securing mortgage financing on any of our properties. The amount of these financing fees, which are payable upon closing of the financing, are based on a percentage of the amount of the mortgage, generally ranging from 0.15% to a maximum of 1.0% of the mortgage obtained. The amount of the financing fees may be reduced or eliminated, as determined by us and Gladstone Securities, after taking into consideration various factors, including, but not limited to, the involvement of any third party brokers and market conditions. We paid financing fees to Gladstone Securities of $0.1$0.02 million and $0.2$0.02 million during the three and nine months ended September 30, 2017, respectively, which are included in mortgage notes payable, net, in the consolidated balance sheets, or 0.25%March 31, 2019 and 0.27%, respectively, of mortgage principal secured. We paid financing fees to Gladstone Securities of $0.1 million and $0.2 million during the three and nine months ended September 30, 2016,2018, respectively, which are included in mortgage notes payable, net, in the condensed consolidated balance sheets, or 0.28%0.15% and 0.36%0.25%, respectively, of the mortgage principal secured.secured and/or extended. Our Board of Directors renewed the agreementFinancing Arrangement Agreement for an additional year, through August 31, 2018,2019, at its July 20172018 meeting.

The following tables set forth the computation of basic and diluted lossearnings per share of common stock for the three and nine months ended September 30, 2017March 31, 2019 and 2016. 2018. The OP Units held by Non-controlling OP Unitholders (which may be redeemed for shares of common stock) have been excluded from the diluted earnings per share calculations, as there would be no effect on the amounts since the Non-controlling OP Unitholders’ share of income would also be added back to net income. Net income figures are presented net of such non-controlling interests in the earnings per share calculation.

We computed basic lossearnings per share for the three and nine months ended September 30, 2017March 31, 2019 and 20162018 using the weighted average number of shares outstanding during the respective periods. Diluted lossearnings per share for the three and nine months ended September 30, 2017March 31, 2019 and 2016,2018 reflects additional shares of common stock related to our convertible Seniorsenior common stock (the “Senior Common Stock (ifStock”), if the effect would be dilutive),dilutive, that would have been outstanding if dilutive potential shares of common stock had been issued, as well as an adjustment to net income available to common stockholders as applicable to common stockholders that would result from their assumed issuance (dollars in thousands, except per share amounts).

 

The following table sets forth the components of our investments in real estate as of September 30, 2017March 31, 2019 and December 31, 20162018, excluding real estate held for sale as of December 31, 20162018 (dollars in thousands):

 

Real estate depreciation expense on building and tenant improvements was $6.9$8.0 million and $19.8$7.3 million for the three and nine months ended September 30, 2017, respectively,March 31, 2019 and $6.1 million and $17.9 million for the three and nine months ended September 30, 2016,2018, respectively.

We acquired five properties during the nine months ended September 30, 2017, and two properties during the ninethree months ended September 30, 2016, whichMarch 31, 2019, and one property during the three months ended March 31, 2018. The acquisitions are summarized below (dollars in thousands):

We determined the fair value of assets acquired and liabilities assumed related to the properties acquired during the ninethree months ended September 30, 2017March 31, 2019 and 20162018 as follows (dollars in thousands):

During the ninethree months ended September 30, 2017March 31, 2019 and 2016,2018, we executed sixtwo and seven lease extensions and/or modifications, orone new leases, respectively, which are aggregatedsummarized below (dollars in thousands):

The following table summarizes the carrying value of intangible assets, liabilities and the accumulated amortization for each intangible asset and liability class as of September 30, 2017March 31, 2019 and December 31, 2016,2018, excluding real estate held for sale as of December 31, 20162018 (dollars in thousands):

Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $3.9$5.0 million and $10.9$4.2 million for the three and nine months ended September 30, 2017, respectively,March 31, 2019 and $3.4 million and $9.9 million for the three and nine months ended September 30, 2016,2018, respectively, and is included in depreciation and amortization expense in the condensed consolidated statements of operations and other comprehensive income (loss).income.

Total amortization related to above-market lease values was $0.2$0.3 million and $0.4$0.2 million for the three and nine months ended September 30, 2017, respectively,March 31, 2019 and $0.1 million and $0.4 million for the three and nine months ended September 30, 2016,2018, respectively, and is included in rentallease revenue in the condensed consolidated statements of operations and other comprehensive income (loss).income. Total amortization related to below-market lease values was $0.4$0.6 million and $1.1$0.5 million for the three and nine months ended September 30, 2017, respectively,March 31, 2019 and $0.3 million and $0.7 million for the three and nine months ended September 30, 2016,2018, respectively, and is included in rentallease revenue in the condensed consolidated statements of operations and other comprehensive income (loss).income.

The weighted average amortization periods in years for the intangible assets acquired and liabilities assumed during the ninethree months ended September 30, 2017March 31, 2019 and 20162018 were as follows:

 

During the ninethree months ended September 30, 2017,March 31, 2019, we continued to execute our capital recycling program, whereby we soldsell properties outside of our core markets and redeployedredeploy proceeds to either fund property acquisitions in our target secondary growth markets, as well asor repay outstanding debt. We expect to continue to execute our capital recycling plan and sell non-core properties as reasonable disposition opportunities become available. During the ninethree months ended September 30, 2017,March 31, 2019, we sold fourone non-core propertiesproperty, located in Franklin, New Jersey, Hazelwood, Missouri, Concord Township, Ohio, and Newburyport, Massachusetts,Maitland, Florida, which are summarizedis detailed in the table below (dollars in thousands):

Our dispositionsdisposition during the ninethree months ended September 30, 2017 wereMarch 31, 2019 was not classified as a discontinued operationsoperation because theyit did not represent a strategic shift in operations, nor will theyit have a major effect on our operations and financial results. Accordingly, the operating results of these properties arethis property is included within continuing operations for all periods reported.

The table below summarizes the components of operating income from the real estate and related assets disposed of during the three and nine months ended September 30, 2017,March 31, 2019, and 20162018 (dollars in thousands):

At September 30, 2017,March 31, 2019, we did not have any properties classified as held for sale. At December 31, 2016,2018, we had two propertiesone property classified as held for sale, located in Hazelwood, Missouri and Franklin, New Jersey. Both of these properties wereMaitland, Florida. This property was sold during the ninethree months ended September 30, 2017.March 31, 2019.

The table below summarizes the components of the assets and liabilities held for sale reflected on the accompanying condensed consolidated balance sheetsheets (dollars in thousands):

 

We evaluated our portfolio for triggering events to determine if any of our held and used assets were impaired during the ninethree months ended September 30, 2017March 31, 2019 and identified twodid not identify any held and used assets which were impaired during first quarter 2017. We did not identify any impairment on held and used assets during the second or third quarter of 2017. For these properties, during first quarter 2017, we received unsolicited interest from potential buyers, and as a result, we included a sale scenario and shortened our hold period when comparing the undiscounted cash flows against the respective carrying values. Based upon our analysis, we concluded that the undiscounted cash flows for these properties were below their respective carrying values indicating that these assets were impaired as of March 31, 2017, and accordingly, we recorded an impairment charge of $3.7 million during the three months ended March 31, 2017. During the three months ended June 30, 2017, we sold one of these impaired properties to the tenant for a further loss on sale of $1.8 million. During the second quarter of 2017, we became aware of a decline in the tenant's financial results. The tenant expressed interest in acquiring our property as part of their corporate reorganization. Due to the re-tenanting risk of the property if it were to go vacant and as the location was in a non-core market, we executed a sale with this tenant. We sold the other impaired property during the three months ended September 30, 2017, recognizing a gain on sale of $1,000.impaired.

We recognized $2.0 million ofdid not recognize an impairment charges on five propertiescharge during the ninethree months ended September 30, 2016. These properties were impairedMarch 31, 2018. The property held for sale was reviewed through our held for sale carrying value analysis, during the three and nine months ended September 30, 2016,March 31, 2018, and we concluded that the fair market value less selling costs was belowgreater than the carrying value of thisthe property. We have sold four of these properties, and one of these properties is classified as a held and used assetthis property during the three and nine monthsyear ended September 30, 2017.

Our mortgage notes payable and Credit Facility as of September 30, 2017March 31, 2019 and December 31, 20162018 are summarized below (dollars in thousands):

 

 

N/A - Not Applicable

As of September 30, 2017,March 31, 2019, we had 4548 mortgage notes payable, collateralized by a total of 6768 properties with a net book value of $674.9$647.0 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$10.2 million of the mortgages notes payable, outstanding,net, or 2.6%2.3% 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 ninethree months ended September 30, 2017,March 31, 2019, we partially repaid four mortgages,one mortgage collateralized by tenthree properties, releasing one of the collateralized properties which are aggregatedwas sold on January 31, 2019, which is summarized below (dollars in thousands):

 

We made payments of $0.6$0.3 million and $1.0$0.2 million for deferred financing costs during the three and nine months ended September 30, 2017,March 31, 2019 and 2018, 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,nine months ending December 31, 2019, and each of the five succeeding fiscal years and thereafter are as follows (dollars in thousands):

 

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 anor entered into interest rate swap agreementagreements 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 swap,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, 2017March 31, 2019 and December 31, 2016,2018, 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 asend. 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 onin our accompanying condensed consolidated statements of operations and other comprehensive income (loss).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. The following table summarizes the interest rate caps at September 30, 2017March 31, 2019 and December 31, 20162018 (dollars in thousands):

 

We have assumed anor entered into interest rate swap agreementagreements in connection with certain of our June 22, 2017 acquisition,acquisitions, whereby we will pay our counterparty ana fixed rate interest rate equivalent to 1.80% on a monthly basis, and receive payments from our counterparty equivalent to one month LIBOR.the stipulated floating rate. The fair value of our interest rate swap agreement isagreements are recorded in other assets or other liabilities on our accompanying condensed consolidated balance sheets. We have designated our interest rate swapswaps as a cash flow hedge,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 sheet.sheets. We record changes in fair value on a quarterly basis, using current market valuations at quarter end. We assumedThe following table summarizes our interest rate swap with a valueswaps at March 31, 2019 and December 31, 2018 (dollars in thousands):

The fair value of all mortgage notes payable outstanding as of September 30, 2017March 31, 2019 was $461.8$450.4 million, as compared to the carrying value stated above of $455.4$449.7 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.”

InOn August 7, 2013, we procured aour senior unsecured revolving credit facility or the Revolver,(“Revolver”) with KeyBank National Association (“KeyBank”) (serving as arevolving lender, a letter of credit issuer and an administrative agent). OnIn October 5, 2015, we expanded our Revolver to $85.0 million extended the maturity date one year through August 2018, withand entered into a one-year extension option through August 2019. We alsoterm loan facility (“Term Loan”) whereby we added a $25.0 million, term loan facility, or thefive-year 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.

As of September 30, 2017,March 31, 2019, there was $69.2$107.8 million outstanding under our Credit Facility at a weighted average interest rate of approximately 3.22%4.21% and $1.0$7.4 million outstanding under letters of credit at a weighted average interest rate of 2.00%1.75%. As of September 30, 2017,March 31, 2019, the maximum additional amount we could draw under the Revolver was $34.0$39.5 million. We were in compliance with all covenants under the Credit Facility as of September 30, 2017.March 31, 2019.