NOTE 10—FAIR VALUE MEASUREMENTS

The carrying amounts of cash and cash equivalents, restricted cash, escrow, deposits and other assets and receivables (excluding interest rate swaps), dividends payable, and accrued expenses and other liabilities (excluding interest rate swaps), are not measured at fair value on a recurring basis, but are considered to be recorded at amounts that approximate fair value.

At December 31, 2018, the $420,396,000 estimated fair value of the Company’s mortgages payable is less than their $423,096,000 carrying value (before unamortized deferred financing costs) by approximately $2,700,000, assuming a blended market interest rate of 4.41% based on the 8.7 year weighted average remaining term to maturity of the mortgages.

At December 31, 2017, the $397,103,000 estimated fair value of the Company’s mortgages payable is greater than their $396,946,000 carrying value (before unamortized deferred financing costs) by approximately $157,000, assuming a blended market interest rate of 4.25% based on the 8.7 year weighted average remaining term to maturity of the mortgages.

At December 31, 2018 and 2017, the carrying amount of the Company’s line of credit (before unamortized deferred financing costs) of $30,000,000 and $9,400,000, respectively, approximates its fair value.

The fair value of the Company’s mortgages payable and line of credit are estimated using unobservable inputs such as available market information and discounted cash flow analysis based on borrowing rates the Company believes it could obtain with similar terms and maturities. These fair value measurements fall within Level 3 of the fair value hierarchy.

Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Fair Value on a Recurring Basis

The fair value of the Company’s derivative financial instruments, using Level 2 inputs, was determined to be the following (amounts in thousands):


	As of	Carrying and
	December 31,	Fair Value
Financial assets:
Interest rate swaps	2018	$	2,399
	2017		1,615
Financial liabilities:
Interest rate swaps	2018	$	505
	2017		1,492

The Company does not currently own any financial instruments that are measured on a recurring basis and that are classified as Level 1 or 3.

The Company’s objective in using interest rate swaps is to add stability to interest expense. The Company does not use derivatives for trading or speculative purposes.

Fair values are approximated using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivatives. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.

Although the Company has determined the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with it use Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparty. As of December 31, 2018, the Company has assessed and determined the impact of the credit valuation adjustments on the overall valuation of its derivative positions is not significant. As a result, the Company determined its derivative valuation is classified in Level 2 of the fair value hierarchy.

As of December 31, 2018, the Company had entered into 27 interest rate derivatives, all of which were interest rate swaps, related to 27 outstanding mortgage loans with an aggregate $117,348,000 notional amount and mature between 2019 and 2028 (weighted average remaining term to maturity of 5.9 years). Such interest rate swaps, all of which were designated as cash flow hedges, converted LIBOR based variable rate mortgages to fixed annual rate mortgages (with interest rates ranging from 3.02% to 5.38% and a weighted average interest rate of 4.13% at December 31, 2018). The fair value of the Company’s derivatives in asset and liability positions are reflected as other assets or other liabilities on the consolidated balance sheets.

The following table presents the effect of the Company’s derivative financial instruments on the consolidated statements of income for the periods presented (amounts in thousands):


	Year Ended December 31,
	2018		2017		2016
One Liberty Properties Inc. and Consolidated Subsidiaries
Amount of gain (loss) recognized on derivatives in Other comprehensive income (loss)	$	1,870	$	(221)	$	255
Amount of reclassification from Accumulated other comprehensive income into Interest expense		98		(1,786)		(2,624)

Unconsolidated Joint Ventures (Company's share)
Amount of gain (loss) recognized on derivatives in Other comprehensive income	$	69	$	15	$	(31)
Amount of reclassification from Accumulated other comprehensive income into Equity in earnings of unconsolidated joint ventures		103		(61)		(95)

During 2018, 2017 and 2016, the Company (including one of its unconsolidated joint ventures in 2018) discontinued hedge accounting on seven interest rate swaps as the forecasted hedged transactions were no longer probable of occurring. As a result, during 2018, 2017 and 2016, the Company reclassified $505,000, $201,000 and $178,000 of realized gain, loss and loss, respectively, from Accumulated other comprehensive income to earnings. No gain or loss was recognized with respect to hedge ineffectiveness or to amounts excluded from effectiveness testing on the Company’s cash flow hedges for the three years ended December 31, 2018.

During the twelve months ending December 31, 2019, the Company estimates an additional $401,000 will be reclassified from Accumulated other comprehensive income as a decrease to Interest expense.

The derivative agreements in effect at December 31, 2018 provide that if the wholly-owned subsidiary of the Company which is a party to the agreement defaults or is capable of being declared in default on any of its indebtedness, then a default can be declared on such subsidiary’s derivative obligation. In addition, the Company is a party to the derivative agreements and if there is a default by the subsidiary on the loan subject to the derivative agreement to which the Company is a party and if there are swap breakage losses on account of the derivative being terminated early, then the Company could be held liable for such swap breakage losses, if any.

As of December 31, 2018 and 2017, the fair value of the derivatives in a liability position, including accrued interest of $8,000 and $53,000, respectively, but excluding any adjustments for non-performance risk, was approximately $554,000 and $1,638,000, respectively. In the event the Company had breaches any of the contractual provisions of the derivative contracts, it would be required to settle its obligations thereunder at their termination liability value of $554,000 and $1,638,000 as of December 31, 2018 and 2017, respectively. This termination liability value, net of adjustments for non-performance risk of $41,000 and $93,000, is included in Accrued expenses and other liabilities on the consolidated balance sheets at December 31, 2018 and 2017, respectively.