NOTE 7. INTEREST RATE SWAP DERIVATIVES

The primary goal of the Company’s risk management practices related to interest rate risk is to prevent changes in interest rates from adversely impacting the Company’s ability to achieve its investment return objectives. The Company does not enter into derivatives for speculative purposes.

The Company enters into interest rate swaps as a fixed rate payer to mitigate its exposure to rising interest rates on its variable rate mortgage notes payable. The value of interest rate swaps is primarily impacted by interest rates, market expectations about interest rates, and the remaining life of the applicable instrument. In general, increases in interest rates, or anticipated increases in interest rates, will increase the value of the fixed rate payer position and decrease the value of the variable rate payer position. As the remaining life of the interest rate swap decreases, the value of both positions will generally move towards zero.

In June 2017, the Company (or its wholly-owned limited liability company subsidiaries) entered into interest rate swap agreements with amortizing notional amounts relating to two of its mortgage notes payable. The notional amount is an indication of the extent of the Company’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks.

The following table summarizes the notional amount and other information related to the Company’s interest rate swaps as of March 31, 2018:

March 31, 2018

Derivative
Instruments

Number of
Instruments

Notional Amount
(i)

Reference Rate (ii)

Weighted Average
Fixed Pay Rate

Weighted Average
Remaining Term

Interest Rate
Swap Derivatives

10,575,000

One-month LIBOR + applicable spread/Fixed at 4.05%-4.34%

4.16

7.0 years

	(i)	The notional amount of the Company’s swaps decreases each month to correspond to the outstanding principal balance on the related mortgage. The minimum notional amount (outstanding principal balance at the maturity date) as of March 31, 2018 was $9,083,700.
	(ii)	The reference rate was June 30, 2017 for two interest rate swaps.

The following table sets forth the fair value of the Company’s derivative instruments (Level 2 measurement), as well as their classification in the condensed consolidated balance sheet as of March 31, 2018:

Derivative Instrument		Balance Sheet Location		Number of Instruments			Fair Value
Interest Rate Swaps		Asset – Interest rate swap derivatives, at fair value			2		$	230,934

The change in fair value of a derivative instrument that is not designated as a cash flow hedge for financial accounting purposes is recorded as interest expense in the condensed consolidated statements of operations. None of the Company’s derivatives at March 31, 2018 were designated as hedging instruments; therefore, the net realized gain recognized on interest rate swaps of $226,806 was recorded as a reduction in interest expense for the three months ended March 31, 2018.

The following table summarizes the notional amount and other information related to the Company’s interest rate swaps as of December 31, 2017:

December 31, 2017

Derivative
Instruments

Number of
Instruments

Notional Amount
(i)

Reference Rate
as of
June 30, 2016

Weighted Average
Fixed Pay Rate

Weighted Average
Remaining Term

Interest Rate
Swap Derivatives

10,620,000

One-month LIBOR + applicable spread/Fixed at 4.05%-4.34%

4.21

7.2 years

(i)

The notional amount of the Company’s swaps decreases each month to correspond to the outstanding principal balance on the related mortgage. The minimum notional amount (outstanding principal balance at the maturity date) as of December 31, 2017 was $9,083,700.

Derivative Instrument		Balance Sheet Location		Number of Instruments			Fair Value
Interest Rate Swaps		Asset – Interest rate swap derivatives, at fair value			2		$	7,899