ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2019
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number 001-07172
BRT APARTMENTS CORP.
(Exact name of Registrant as specified in its charter)
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
60 Cutter Mill Road, Great Neck, NY
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer” “accelerated filer”, “smaller reporting company”and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer ý
Non-accelerated filer o
Smaller reporting company ý
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
Indicate the number of shares outstanding of each of the issuer’s classes of stock, as of the latest practicable date.
15,900,395 Shares of Common Stock,
par value $0.01 per share, outstanding on May 6, 2019
Real estate properties, net of accumulated depreciation and amortization of $101,332 and $91,715
Real estate loan
Cash and cash equivalents
Deposits and escrows
Investments in unconsolidated joint ventures
Total Assets (a)
LIABILITIES AND EQUITY
Mortgages payable, net of deferred costs of $6,100 and $6,289
Junior subordinated notes, net of deferred costs of $352 and $357
Accounts payable and accrued liabilities
Total Liabilities (a)
Commitments and contingencies
BRT Apartments Corp. stockholders' equity:
Preferred shares $.01 par value 2,000 shares authorized, none outstanding
Common stock, $.01 par value, 300,000 shares authorized;
15,175 and 15,038 shares outstanding
Additional paid-in capital
Accumulated other comprehensive income
Total BRT Apartments Corp. stockholders’ equity
Total Liabilities and Equity
(a) The Company's consolidated balance sheets include the assets and liabilities of consolidated variable interest entities (VIEs). See note 6. The consolidated balance sheets include the following amounts related to the Company's VIEs as of March 31, 2019 and December 31, 2018, respectively: $635,457 and $584,074 of real estate properties, $6,859 and $5,207 of cash and cash equivalents, $7,419 and $11,705 of deposits and escrows, $5,649 and $6,302 of other assets, $484,232 and $446,779 of mortgages payable, net of deferred costs and $9,482 and $11,816 of accounts payable and accrued liabilities.
See accompanying notes to consolidated financial statements.
BRT Apartments Corp. (the "Company"), a Maryland corporation, owns, operates and develops multi-family properties. The Company conducts its operations to qualify as a real estate investment trust, or REIT, for federal income tax purposes.
Generally, the multi-family properties are acquired with joint venture partners in transactions in which the Company contributes a significant portion of the equity. At March 31, 2019, the Company owns: (a) 36 multi-family properties with 10,008 units (including 402 units at a property that commenced leasing activities in the current quarter), located in 12 states with a carrying value of $1,066,988,000; and (b) interests in three unconsolidated multi-family joint ventures with 1,026 units (including 339 units in lease-up) located in two states with a carrying value of $19,125,000.
Note 2 – Basis of Preparation
The accompanying interim unaudited consolidated financial statements as of March 31, 2019, and for the threemonths ended March 31, 2019 and 2018, reflect all normal recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the results for such interim periods. The results of operations for the three months ended March 31, 2019 and 2018, are not necessarily indicative of the results for the full year. The consolidated unaudited balance sheet as of December 31, 2018, has been derived from the unaudited financial statements at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States ("GAAP"). Accordingly, these unaudited statements should be read in conjunction with the Company's audited financial statements included in its Annual Report on Form 10-K for the year ended September 30, 2018, filed with the Securities and Exchange Commission ("SEC") on December 10, 2018, for complete financial statements.
The consolidated financial statements include the accounts and operations of the Company, its wholly owned subsidiaries, and its majority owned or controlled real estate entities and its interests in variable interest entities ("VIEs") in which the Company is determined to be the primary beneficiary. Material intercompany balances and transactions have been eliminated.
The Company’s consolidated joint ventures that own multi-family properties were determined to be VIEs because the voting rights of some equity investors in the applicable joint venture entity are not proportional to their obligations to absorb the expected losses of the entity and their right to receive the expected residual returns. It was determined that the Company is the primary beneficiary of these joint ventures because it has a controlling interest in that it has the power to direct the activities of the VIE that most significantly impact the entity's economic performance and it has the obligation to absorb losses of the entity and the right to receive benefits that could potentially be significant to the VIE.
The joint ventures that own properties in Ocoee, FL, Lawrenceville, GA, Dallas, TX, Farmers Branch, TX and Grand Prairie, TX were determined not to be a VIEs but are consolidated because the Company has controlling rights in such entities.
With respect to its unconsolidated joint ventures, as (i) the Company is generally the managing member but does not exercise substantial operating control over these entities or the Company is not the managing member and (ii) such entities are not VIEs, the Company has determined that such joint ventures should be accounted for under the equity method of accounting for financial statement purposes.
The distributions to each joint venture partner are determined pursuant to the applicable operating agreement and may not be pro-rata to the percentage equity interest each partner has in the applicable venture.
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Actual results could differ from those estimates. Substantially all of the Company's assets are comprised of multi- family real estate assets generally leased to tenants on a one-year basis. Therefore, the Company aggregates real estate assets for reporting purposes and operates in one reportable segment.
In February 2019, the Board of Directors of the Company authorized a change in the Company’s fiscal year end from September 30 to December 31. The change is intended to better align the Company’s fiscal year with the fiscal year of other multi-family REITs. As a result of the change in fiscal year, (i) the Company’s 2019 fiscal year began on January 1, 2019 and
ends on December 31, 2019 and (ii) the Company filed a Transition Report on Form 10-Q (a "Transition Report") covering the transition period from October 1, 2018 to December 31, 2018.
Note 3 - Equity
Equity Distribution Agreements
In January 2018, the Company entered into equity distribution agreements, which were amended in May 2018, with three sales agents to sell up to an aggregate of $30,000,000 of its common stock from time-to-time in an at-the-market offering. During the quarter ended March 31, 2019, the Company did not sell any shares. Since the commencement of the at-the-market offering program through March 31, 2019, the Company sold 1,590,935 shares for an aggregate sales price of $20,913,000.
Common Stock Dividend Distribution
The Company declared a quarterly cash distribution of $0.20per share, payable on April 5, 2019 to stockholders of record on March 26, 2019.
Stock Based Compensation
The Company's 2018 Incentive Plan (the "2018 Plan") permits the Company to grant: (i) stock options, restricted stock, restricted stock units, performance share awards and any one or more of the foregoing, up to a maximum of 600,000shares; and (ii) cash settled dividend equivalent rights in tandem with the grant of restricted stock units and certain performance based awards.
Restricted Stock Units
In June 2016, the Company issued restricted stock units (the "Units") to acquire up to 450,000shares of common stock pursuant to the 2016 Amended and Restated Incentive Plan (the "2016 Incentive Plan"). The Units entitle the recipients, subject to continued service through the March 31, 2021 vesting date, to receive (i) the underlying shares if and to the extent certain performance and/or market conditions are satisfied at the vesting date, and (ii) an amount equal to the cash dividends paid from the grant date through the vesting date with respect to the shares of common stock underlying the Units if, when, and to the extent, the related Units vest. For financial statement purposes, because the Units are not participating securities, the shares underlying the Units are excluded in the outstanding shares reflected on the consolidated balance sheet and from the calculation of basic earnings per share. The shares underlying the Units are contingently issuable shares.
Expense is recognized over the five-year vesting period on the Units which the Company expects to vest. For the three months ended March 31, 2019 and 2018, the Company recorded $35,000and $73,000, of compensation expense related to the amortization of unearned compensation with respect to the Units. At March 31, 2019, and December 31, 2018, $284,000 and $319,000 of compensation expense, respectively, had been deferred and will be charged to expense over the remaining vesting period.
In January 2019, the Company granted 156,399 shares of restricted stock pursuant to the 2018 Incentive Plan. As of March 31, 2019, an aggregate of 725,296 shares of unvested restricted stock are outstanding pursuant to the 2018 Incentive Plan, 2016 Incentive Plan and 2012 Incentive Plan. No additional awards may be granted under the 2016 Incentive Plan and the 2012 Incentive Plan. The shares of restricted stock vest five years from the date of grant and under specified circumstances, including a change in control, may vest earlier. For financial statement purposes, the restricted stock is not included in the outstanding shares shown on the consolidated balance sheets until they vest, but are included in the earnings per share computation.
For the three months ended March 31, 2019 and 2018, the Company recorded $330,000 and $224,000, respectively, of compensation expense related to the amortization of unearned compensation with respect to the restricted stock awards. At March 31, 2019 and December 31, 2018, $4,348,000 and $2,735,000 has been deferred as unearned compensation and will be charged to expense over the remaining vesting periods of these restricted stock awards. The weighted average remaining vesting period of these shares of restricted stock is 2.9 years.
On September 5, 2017, the Board of Directors approved a repurchase plan authorizing the Company, effective as of October 1, 2017, to repurchase up to $5,000,000 of shares of common stock through September 30, 2019. During the quarters ended March 31, 2019 and March 31, 2018, there were no repurchases of common stock.
Per Share Data
Basic earnings (loss) per share is determined by dividing net income (loss) applicable to common stockholders for the applicable period by the weighted average number of shares of common stock outstanding during such period. The Units are excluded from the basic earnings per share calculation, as they are not participating securities. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into shares of common stock or resulted in the issuance of shares of common stock that share in the earnings of the Company. Diluted earnings per share is determined by dividing net income applicable to common stockholders for the applicable period by the weighted average number of shares of common stock deemed to be outstanding during such period. In calculating diluted earnings per share, the Company, for the three months ended (i) March 31, 2019, did not include any shares underlying the Units as their effect would have been anti-dilutive and (ii) March 31, 2018, included 200,000shares of common stock underlying the Units as only the market criteria with respect to the Units had been met at March 31, 2018.
The following table sets forth the computation of basic and diluted earnings per share (dollars in thousands, except per share amounts):
Three Months Ended March 31,
Numerator for basic and diluted earnings (loss) per share attributable to common stockholders:
Net (loss) income attributable to common stockholders
Denominator for basic earnings per share—weighted average number of shares
Effect of diluted securities
Denominator for diluted earnings per share—adjusted weighted average number of shares and assumed conversions
Basic (loss) earnings per share
Diluted (loss) earnings per share
Note 4 ‑ Real Estate Properties
Real estate properties consist of the following (dollars in thousands):
A summary of real estate properties owned follows (dollars in thousands):
December 31, 2018 Balance
Capitalized Costs and Improvements
March 31, 2019 Balance
Multi-family lease up - West Nashville, TN
Land - Daytona, FL
Shopping centers/Retail - Yonkers, NY
Total real estate properties
The following table summarizes the allocation of the purchase price with respect to aproperty purchased during the threemonths ended March 31, 2019(dollars in thousands):
Allocation of Purchase Price
Building and improvements
Acquisition-related intangible assets
The purchase price of the property acquired, inclusive of acquisition costs, was allocated to the acquired assets based on their estimated relative fair values on the acquisition date.
Note 5 ‑ Acquisitions and Dispositions
The table below provides information regarding the Company's purchase of a multi-family property during the threemonths ended March 31, 2019 (dollars in thousands):
No. of Units
Acquisition Mortgage Debt
Initial BRT Equity
Capitalized Acquisition Costs
Kannapolis, North Carolina
The table below provides information regarding the Company's purchases of multi-family properties during the three months ended March 31, 2018 (dollars in thousands):
No. of Units
Acquisition Mortgage Debt
Initial BRT Equity
Capitalized Acquisition Costs
On May 7, 2019, the Company acquired, through a joint venture in which it has an 80% equity interest, a 328-unit multi-family property located in Trussville, AL, for $43,000,000, including $32,250,000 of mortgage debt assumed in connection with the purchase. The mortgage debt matures in June 2029, bears interest at a fixed rate of 4.19%, is interest only for six years, and thereafter amortizes based on a 30 year schedule. The Company contributed $11,625,000 for its ownership interest.
The Company did not dispose of any real estate properties during the three months ended March 31, 2019
The following table is a summary of the real estate properties disposed of by the Company during the three months ended March 31, 2018 (dollars in thousands):
No. of Units
Gain on Sale
Non-controlling partner's portion of the gain
Palm Beach Gardens, FL
The Company reviews each real estate asset owned, including those held through investments in unconsolidated joint ventures, for impairment when there is an event or a change in circumstances indicating that the carrying amount may not be recoverable. The Company measures and records impairment losses, and reduces the carrying value of properties, when indicators of impairment are present and the expected undiscounted cash flows related to those properties are less than their carrying amounts. In cases where the Company does not expect to recover its carrying costs on properties held for use, the Company reduces its carrying costs to fair value, and for properties held for sale, the Company reduces its carrying value to the fair value less costs to sell. During the three months ended March 31, 2019 and 2018, no impairment charges were recorded.
Note 6 - Variable Interest Entities
The Company conducts a significant portion of its business with joint venture partners. Many of the Company's consolidated joint ventures that own properties were determined to be VIEs because the voting rights of some equity partners are not proportional to their obligations to absorb the expected loses of the entity and their rights to receive expected residual returns. It was determined that the Company is the primary beneficiary of these joint ventures because it has a controlling financial interest in that it has the power to direct the activities of the VIE that most significantly impacts the entity's economic performance and it has the obligation to absorb losses of the entity and the right to receive benefits from the entity that could potentially be significant to the VIE.
The following is a summary of the carrying amounts with respect to the consolidated VIEs and their classification on the Company's consolidated balance sheets (dollars in thousands):
March 31, 2019 (unaudited)
December 31, 2018 (Unaudited)
Real estate properties, net of accumulated depreciation of $58,945 and $53,637
Cash and cash equivalents
Deposits and escrows
Mortgages payable, net of deferred costs of $3,628 and $3,786
Restricted cash represents funds held for specific purposes and are therefore not generally available for general corporate purposes. The restricted cash reflected on the consolidated balance sheets represents funds that are held by or on behalf of the Company specifically for capital improvements at certain multi-family properties.
Note 8 – Investment in Unconsolidated Ventures
The Company has interests in unconsolidated joint ventures that own multi-family properties. The table below provides information regarding these joint ventures at March 31, 2019(dollars in thousands):
Number of Units
Carrying Value of Investment
Columbia, SC (a)
Forney, TX (b)
(a) Property is currently in lease up. Construction financing for this project of up to $47,426 has been secured. Such financing bears interest at 4.95%and matures in June 2020.
(b) This interest is held through a tenancy-in-common.
The net loss from these ventures was $223,000 and $63,000 for the three months ended March 31, 2019 and 2018, respectively.
Note 9 – Debt Obligations
Debt obligations consist of the following (dollars in thousands):
March 31, 2019
December 31, 2018
Junior subordinated notes
Deferred mortgage costs
Total debt obligations, net of deferred costs
During the three months ended March 31, 2019, the Company obtained the following mortgage debt in connection with the related property (dollars in thousands):
Acquisition Mortgage Debt
The Company has a construction loan financing a development project. Information regarding this loan at March 31, 2019 is set forth below (dollars in thousand):
Maximum Loan Amount
30 day LIBOR + 2.85%
On February 1, 2019, the Company refinanced a $9,200,000 adjustable rate mortgage on its Boerne, TX property with a fixed rate loan in the amount of $8,067,000. The mortgage debt bears interest at a fixed rate of 4.74%, matures in
February 2026, is interest only for three years, amortizes thereafter on a 30 year schedule, with a balloon payment of the unpaid principal and interest due at maturity.
The Company entered into a credit facility dated April 18, 2019, as subsequently amended, with an affiliate of Valley National Bank. The facility allows the Company to borrow, subject to compliance with borrowing base requirements and other conditions, up to $10,000,000 to facilitate the acquisition of multi-family properties, and is secured by the cash available in certain cash accounts maintained by the Company at Valley National Bank. The facility matures April 2021 and bears an adjustable interest rate of 50 basis points over the prime rate, with a floor 5%. The interest rate in effect as of May 2, 2019, is 6%. There is an unused facility fee of 0.25% per annum on the difference between the outstanding loan balance and maximum amount then available under the facility. On May 2, 2019, the Company borrowed $9,000,000 on the facility in connection with the acquisition of the Trussville, AL property.
Junior Subordinated Notes
At March 31, 2019 and December 31, 2018, the Company's junior subordinated notes had an outstanding principal balance of $37,400,000, before deferred financing costs of $352,000 and $357,000, respectively. At March 31, 2019, the interest rate on the outstanding balance is three month LIBOR + 2.00% or 4.75%.
The junior subordinated notes require interest only payments through the maturity date of April 30, 2036, at which time repayment of the outstanding principal and unpaid interest become due. Interest expense for the three months ended March 31, 2019 and 2018, which includes amortization of deferred costs, was $449,000 and $352,000, respectively.
Note 10 – Related Party Transactions
The Company has retained certain of its executive officers and Fredric H. Gould, a director, to provide, among other things, the following services: participating in the Company's multi-family property analysis and approval process (which includes service on the investment committee), providing investment advice, long-term planning and consulting with executives and employees with respect to other business matters, as required. The aggregate fees incurred and paid for these services in the three months ended March 31, 2019 and 2018 were $333,000 and $317,000, respectively.
Management of certain properties owned by the Company and certain joint venture properties is provided by Majestic Property Management Corp. ("Majestic Property"), a company wholly owned by Fredric H. Gould, under renewable year-to-year agreements. Certain of the Company's officers and directors are also officers and directors of Majestic Property. Majestic Property may also provide real estate brokerage and construction supervision services to these properties. These fees amounted to $8,134 and $10,000 for the three months ended March 31, 2019 and 2018, respectively.
The Company shares facilities, personnel and other resources with One Liberty Properties, Inc., Majestic Property, and Gould Investors L.P. Certain of the Company's executive officers and/or directors also serve in management positions, and have ownership interests, in One Liberty, Majestic Property and/or Georgetown Partners Inc., the managing general partner of Gould Investors L.P. The allocation of expenses for the facilities, personnel and other resources shared by the Company, One Liberty, Majestic Property and Gould Investors is computed in accordance with a shared services agreement by and among the Company and these entities and is included in general and administrative expense on the consolidated statements of operations. For the three months ended March 31, 2019 and 2018, net allocated general and administrative expenses reimbursed by the Company to Gould Investors L.P. pursuant to the shared services agreement aggregated $142,000 and $147,000, respectively.
Management of many of the Company's multi-family properties (including three multi-family properties owned by two unconsolidated joint ventures) is performed by the Company's joint venture partners or their affiliates. None of these joint venture partners is Gould Investors L.P., Majestic Property or their affiliates. Management fees to these joint venture partners or their affiliates for the three months ended March 31, 2019 and 2018 were $1,023,000 and $908,000, respectively. In addition, the Company may pay an acquisition fee to a joint venture partner in connection with a property purchased by such joint venture. Capitalized acquisition fees paid to these related parties for the three months ended March 31, 2019 and 2018 were $421,000 and $1,300,000, respectively.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments that are not recorded at fair value on the consolidated balance sheets:
Cash and cash equivalents, restricted cash, accounts receivable (included in other assets), accounts payable and accrued liabilities: The carrying amounts reported in the balance sheets for these instruments approximate their fair value due to the short term nature of these accounts.
Junior subordinated notes: At March 31, 2019 and December 31, 2018, the estimated fair value of the notes is lower than their carrying value by approximately $11,978,000 and $11,974,000, respectively, based on a market interest rate of 7.61% and 7.79%, respectively.
Mortgages payable: At March 31, 2019, the estimated fair value of the Company’s mortgages payable is lower than their carrying value by approximately $8,096,000, assuming market interest rates between 3.56% and 5.33% and at December 31, 2018, the estimated fair value of the Company's mortgages payable was lower than their carrying value by approximately $19,334,000 assuming market interest rates between 3.94% and 5.61%. Market interest rates were determined using rates which the Company believes reflects institutional lender yield requirements at the balance sheet dates.
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 assumptions.
Financial Instruments Carried at Fair Value
The Company’s fair value measurements are 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, there is a fair value hierarchy that 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. 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 Company does not currently own any financial instruments that are classified as Level 3. Set forth below is information regarding the Company’s financial assets and liabilities measured at fair value as of March 31, 2019 (dollars in thousands):
Carrying and Fair Value
Fair Value MeasurementsUsing Fair Value Hierarchy
Interest rate swaps
Interest rate caps
Total Financial Assets
Derivative financial instruments: 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, foreign exchange rates, and implied volatilities. At March 31, 2019, these derivatives are included in other assets on the consolidated balance sheet.
Although the Company has determined that 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 them utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. As of March 31, 2019, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative position and determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivatives valuation is classified in Level 2 of the fair value hierarchy.
The Company's objective in using interest rate derivatives are to add stability to interest expense and to to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.
As of March 31, 2019, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (dollars in thousands):
Interest Rate Derivative
Current Notional Amount
Interest rate cap on LIBOR
July 10, 2019
Interest rate swap
April 1, 2022
Interest rate swap
May 6, 2023
Interest rate swap
September 19, 2026
Derivatives not designated as hedges are not speculative and are used to manage the Company's exposure to interest rate movements and other identified risks but do not meet the hedge accounting requirements. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. As a result of a mortgage refinancing of an adjustable rate loan to a fixed rate loan, at March 31, 2019, the Company had an interest rate cap with a notional value of $9,200,000 that was not designated as a hedge in a qualifying hedge relationship. At March 31, 2019, this derivative had no value.
The table below presents the fair value of the Company’s derivative financial instruments as well as its classification on the consolidated balance sheets as of the dates indicated (dollars in thousands):
Derivatives as of:
March 31, 2019
December 31, 2018
Balance Sheet Location
Balance Sheet Location
The following table presents the effect of the Company’s interest rate swaps on the consolidated statements of comprehensive (loss) income for the dates indicated (dollars in thousands):
Three Months Ended March 31,
Amount of gain (loss) recognized on derivative in Other Comprehensive Income
Amount of gain (loss) reclassified from Accumulated Other Comprehensive Income into Interest expense
Total amount of Interest expense presented in the Consoldiated Statement of Operations
The Company estimates an additional $491,000will be reclassified from other comprehensive loss as a decrease to interest expense over the next twelve months.
The agreement between the Company and its derivative counterparties provides that if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, the Company could be declared in default on its derivative obligations.
Note 13 – New Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which prescribes a single, common revenue standard that supersedes nearly all existing revenue recognition guidance under U.S. GAAP, including most industry-specific requirements. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 outlines a five step model to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein. The Company's revenues are primarily derived from rental income, which is scoped out from this standard and is currently accounted for in accordance with ASC Topic 840, Leases. The Company adopted this standard effective October 1, 2018, using the modified retrospective approach, applying the provisions to open contracts as of the date of adoption. Certain revenues, such as tenant reimbursements, tenant fees, and other property income, are subject to the new guidance. The adoption of the new revenue recognition standard did not have a material impact on the consolidated financial statements and no cumulative effect adjustment was recorded upon adoption as there was no change in the amount or timing of revenue recognized.
In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 supersedes the current accounting for leases and while retaining two distinct types of leases, finance and operating, and requires lessees to recognize most leases on their balance sheets and makes targeted changes to lessor accounting. Further, in July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. This amendment provides a new practical expedient that allows lessors, by class of underlying asset, to avoid separating lease and associated non-lease components within a contract if the following criteria are met: (i) the timing and pattern of transfer for the non-lease component and the associated lease component are the same, and (ii) the stand-alone lease component would be classified as an operating lease if accounted for separately. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and early adoption is permitted. The Company adopted this standard effective January 1, 2019, and its adoption did not have a material effect on the consolidated financial statements. As a lessor, the adoption of ASU 2016-02 (as amended by subsequent ASUs) did not change the timing of revenue recognition of the Company’s rental revenues. As a lessee, the Company is party to a ground lease, and an operating lease with future payment obligations for which the Company recorded right-of-use assets and lease liabilities at the present value of the remaining minimum rental payments upon adoption of this standard.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides specific guidance on eight cash flow classification issues and how to reduce diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The effective date of the standard will be fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company adopted this standard effective October 1, 2018, using the “cumulative earnings approach” whereby distributions received from equity method investments are classified as cash flows from operations to the extent of equity earnings and then as cash flows from investing activities thereafter. The adoption of this guidance did not have a material effect on the consolidated financial statements.
In November 2016, the FASB issued ASU Update No. 2016-018, Statement of Cash Flows (Topic 230): Restricted
Cash. The new standard requires that the statement of cash flows explain the change during the period in the combined total of
cash, cash equivalents, and amounts generally described as restricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose relevant information about the nature of the restrictions on the basis of their individual facts and circumstances. The Company adopted this standard effective October 1, 2018 using the retrospective approach. The adoption of this update did not have a material effect on the consolidated financial statements.
In February 2017, the FASB issued ASU 2017-05, Other Income—Gains and Losses from the Derecognition of
Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which amends the guidance on nonfinancial assets in ASC 610-20. The amendments clarify that (i) a financial asset is within the scope of ASC 610-20 if it meets the definition of an in substance nonfinancial asset and may include nonfinancial assets transferred within a legal entity to a counter-party, (ii) an entity should identify each distinct
nonfinancial asset or in substance nonfinancial asset promised to a counter-party and de-recognize each asset when a counter-party obtains control of it, and (iii) an entity should allocate consideration to each distinct asset by applying the guidance in ASC 606 on allocating the transaction price to performance obligations. Further, ASU 2017-05 provides guidance on accounting for partial sales of nonfinancial assets. The amendments are effective at the same time as the amendments in ASU 2014-09. The Company adopted this standard effective October 1, 2018. The adoption of this guidance did not have a material effect on the consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The update better aligns a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The Company adopted this standard effective January 1, 2019, The adoption of this guidance did not have a material effect on the consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to
Nonemployee Share-Based Payment Accounting. This update provides specific guidance for transactions for acquiring goods
and services from nonemployees and specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (i) financing to the issuer or (ii) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC Topic 606, Revenue from Contracts with Customers. This guidance is effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. Early adoption is permitted but not earlier than the adoption of ASC Topic 606. The Company does not believe that this guidance will have a material effect on its consolidated financial statements as it has not historically issued share-based payments in exchange for goods or services to be consumed within its operations.
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement, which removes, modifies, and adds certain disclosure requirements related to fair value measurements in ASC Topic 820. This guidance is effective for public companies in fiscal years beginning after Dec