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FAIR VALUE MEASUREMENTS

12 Months Ended

Dec. 31, 2023

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

NOTE 9—FAIR VALUE MEASUREMENTS

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, are not measured at fair value on a recurring basis but are considered to be recorded at amounts that approximate fair value.

The fair value and carrying amounts of the Company’s mortgages payable are as follows (dollars in thousands):


		December 31,
		2023				2022
Fair value of mortgages payable (a)		$	397,031			$	378,943
Carrying value of mortgages payable, gross		$	422,565			$	409,175
Fair value less than the carrying value		$	(25,534)			$	(30,232)
Blended market interest rate (a)			5.93	%			5.87	%
Weighted average interest rate			4.31	%			4.10	%
Weighted average remaining term to maturity (years)			5.9				6.5

(a)	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.

At December 31, 2023 and 2022, the carrying amount of the Company’s line of credit (before unamortized deferred financing costs) of $0 and $21,800,000, respectively, approximates its fair value.

Considerable judgment is necessary to interpret market data and develop the 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

As of December 31, 2023, the Company had in effect 13 interest rate derivatives, all of which were interest rate swaps, related to 13 outstanding mortgage loans with an aggregate $29,650,000 notional amount maturing between 2024 and 2026 (weighted average remaining term to maturity of 1.2 years). These interest rate swaps, all of which were designated as cash flow hedges, converted SOFR based variable rate mortgages to fixed annual rate mortgages. The interest rates range from 3.22% to 4.55% with a weighted average interest rate of 3.88% at December 31, 2023.

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 associated credit valuation adjustments 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, 2023, 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.

NOTE 9 — FAIR VALUE MEASUREMENTS (CONTINUED)

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


		As of		Carrying and			Balance Sheet
		December 31,		Fair Value			Classification
Financial assets: Interest rate swaps		2023		$	824		Other assets
		2022			1,811		Other assets

As of December 31, 2023 and 2022, there were no derivatives in a liability position.

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



		Year Ended December 31,
		2023		2022			2021
Amount of gain (loss) recognized on derivatives in other comprehensive income (loss)	$	328		$	3,028		$	1,179
Amount of reclassification from Accumulated other comprehensive income (loss) into Interest expense		1,295			(297)			(2,318)

During 2021, in connection with the sale of two 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 $867,000 from Accumulated other comprehensive loss to interest expense which is included as part of Prepayment costs on debt in the consolidated statement of income for the year ended December 31, 2021.

During the twelve months ending December 31, 2024, the Company estimates an additional $714,000 will be reclassified from Accumulated other comprehensive income as a decrease to Interest expense.

The derivative agreements in effect at December 31, 2023 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.

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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