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FAIR VALUE MEASUREMENTS
 9 Months Ended
Sep. 30, 2021
FAIR VALUE MEASUREMENTS  
FAIR VALUE MEASUREMENTS

NOTE 12 – FAIR VALUE MEASUREMENTS

The Company measures the fair value of financial instruments based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. In accordance with the fair value hierarchy, Level 1 assets/liabilities are valued based on quoted prices for identical instruments in active markets, Level 2 assets/liabilities are valued based on quoted prices in active markets for similar instruments, on quoted prices in less active or inactive markets, or on other “observable” market inputs and Level 3 assets/liabilities are valued based significantly on “unobservable” market inputs.

The carrying amounts of cash and cash equivalents, 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 September 30, 2021, the $427,567,000 estimated fair value of the Company’s mortgages payable is greater than their $406,929,000 carrying value (before unamortized deferred financing costs) by approximately $20,638,000 assuming a blended market interest rate of 3.20% based on the 6.6 year weighted average remaining term to maturity of the mortgages.

At December 31, 2020, the $461,965,000 estimated fair value of the Company’s mortgages payable is greater than their $433,549,000 carrying value (before unamortized deferred financing costs) by approximately $28,416,000, assuming a blended market interest rate of 3.0% based on the 7.1 year weighted average remaining term to maturity of the mortgages.

At September 30, 2021 and December 31, 2020, the carrying amount of the Company’s line of credit (before unamortized deferred financing costs) of $3,200,000 and $12,950,000, 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.

NOTE 12 – FAIR VALUE MEASUREMENTS (CONTINUED)

Fair Value on a Recurring Basis

As of September 30, 2021, the Company had in effect 20 interest rate derivatives, all of which were interest rate swaps, related to 20 outstanding mortgage loans with an aggregate $61,360,000 notional amount maturing between 2022 and 2026 (weighted average remaining term to maturity of 2.6 years). The Company’s objective in using interest rate swaps is to add stability to interest expense. These 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 5.16% and a weighted average interest rate of 4.09% at September 30, 2021). The Company does not use derivatives for trading or speculative purposes.

The fair value of the Company’s derivative financial instruments, all of which were financial liabilities, was determined to be the following (amounts in thousands):

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Carrying and

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Balance Sheet

Financial liabilities:

    

As of

    

Fair Value

    

Classification

Interest rate swaps

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September 30, 2021

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$

2,352

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Other liabilities

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December 31, 2020

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5,012

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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 September 30, 2021, 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. 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 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):

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Three Months Ended

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Nine Months Ended

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September 30, 

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September 30, 

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2021

    

2020

    

2021

    

2020

Amount of (loss) gain recognized on derivatives in other comprehensive loss

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$

(31)

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$

(31)

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$

722

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$

(5,672)

Amount of reclassification from Accumulated other comprehensive loss into Interest expense

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(348)

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(425)

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(1,937)

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(1,677)

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During the nine months ended September 30, 2021 and 2020, in connection with the sale of three properties and the early payoff of the related mortgages, the Company discontinued hedge accounting on the related interest rate swaps as the hedged forecasted transactions were no longer probable to occur. As such, the Company accelerated the reclassification of amounts from accumulated other comprehensive loss to interest expense which is recorded as Prepayment costs on debt in the consolidated statements of income. Such reclassifications amounted to $24,000 and $808,000 during the three and nine months ended September 30, 2021, respectively, and $58,000 and $1,123,000 for the three and nine months ended September 30, 2020, respectively.

No gain or loss was recognized with respect to amounts excluded from effectiveness testing on the Company’s cash flow hedges for the three and nine months ended September 30, 2021 and 2020. During the twelve months ending September 30, 2022, the Company estimates an additional $1,206,000 will be reclassified from Accumulated other comprehensive loss as an increase to Interest expense.

NOTE 12 – FAIR VALUE MEASUREMENTS (CONTINUED)

The derivative agreements in effect at September 30, 2021 provide that if the wholly-owned subsidiary of the Company which is a party to such 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, the Company could be held liable for such swap breakage losses.

As of September 30, 2021 and December 31, 2020, the fair value of the derivatives in a liability position, including accrued interest of $85,000 and $120,000, respectively, but excluding any adjustments for non-performance risk, was approximately $2,495,000 and $5,314,000, respectively. In the event the Company had breached the contractual provisions of the derivative contracts, it would be required to settle its obligations thereunder at their termination liability value of $2,495,000 and $5,314,000 as of September 30, 2021 and December 31, 2020, respectively. This termination liability value, net of adjustments for non-performance risk of $58,000 and $182,000, is included in Accrued expenses and other liabilities on the consolidated balance sheets at September 30, 2021 and December 31, 2020, respectively.