Notes to Consolidated Financial Statements
December 31, 2016
Note 1 – Organization and Background
BRT Realty Trust (“BRT” or the “Trust”) is a business trust organized in Massachusetts. BRT owns, operates and develops multi‑family properties and owns and operates other assets, including real estate and a real estate loan. BRT 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 venture partners in transactions in which the Trust contributes
80%
of the equity. At
December 31, 2016
, the Trust owns: (a)
30
multi-family properties with
8,624
units located in
11
states (including
271
units at a property in the lease up stage) with a net book value of
$735,596,000
; and (b) interests in
two
unconsolidated joint ventures with a net book value of
$14,373,000
.
The Trust also owns and operates various other real estate assets. At
December 31, 2016
, the net book value of the real property included in these other real estate assets was
$16,487,000
, including a real estate loan of
$5,900,000
.
Note 2 – Basis of Preparation
The accompanying interim unaudited consolidated financial statements as of
December 31, 2016
, and for the
three
months ended
December 31,
2016
and
2015
, 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
December 31,
2016
and
2015
, are not necessarily indicative of the results for the full year. The consolidated balance sheet as of
September 30, 2016
, has been derived from the audited 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") for complete financial statements.
The consolidated financial statements include the accounts and operations of BRT Realty Trust, its wholly owned subsidiaries, and its majority owned or controlled real estate entities and its interests in variable interest entities ("VIE's") in which the Trust is determined to be the primary beneficiary. Material inter-company balances and transactions have been eliminated.
The Trust’s consolidated joint ventures that own multi‑family properties, were determined to be VIE’s because the voting rights of some equity investors are not proportional to their obligations to absorb the expected losses of the entity and their right to receive the expected residual returns. In addition, substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately fewer voting rights. It was determined that the Trust 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 venture that owns a property in Dallas, TX was determined not to be a VIE but is consolidated because the Trust has substantive participating rights in the entity owning the property.
With respect to its unconsolidated joint ventures, as (i) the Trust is primarily the managing member but does not exercise substantial operating control over these entities or the Trust is not the managing member and (ii) such entities are not VIEs, the Trust 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.
For the
three
months ended
December 31,
2015
, the Trust reclassified approximately
$921,000
of tenant utility reimbursements from real estate operating expenses to rental and other revenues from real estate properties to
conform with the current period presentation. This reclassification increased total revenues and expenses by
$921,000
, and had no effect on the Trust's financial position, results of operations or cash flows.
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.
Note 3 ‑ Equity
Common Share Dividend Distribution
During the three months ended
December 31, 2016
, the Trust did not declare a dividend on its shares.
Stock Based Compensation
The Trust's Amended and Restated 2016 Incentive Plan (the "Plan") permits the Trust to grant: (i) stock options, restricted stock, restricted stock units, performance shares awards and any one or more of the foregoing, up to a maximum of
600,000
shares; and (ii) cash settled dividend equivalent rights in tandem with the grant of restricted stock units and certain performance based awards.
Pursuant to the Plan, in June 2016, the Trust issued restricted stock units (the "Units") to acquire up to
450,000
common shares (the "Pay for Performance Program") . Recipients of the Units are entitled to receive (i) the underlying shares if certain performance metrics are satisfied at the vesting date and (ii) cash dividends paid with respect to the common shares underlying the Units if, when, and to the extent, the related Units vest. Because the Units are not participating securities, for accounting purposes, the shares underlying the Units are excluded in the outstanding shares reflected on the balance sheet and from the calculation of basic earnings per share. The shares are contingently issuable shares but have not been included in the diluted earnings per share as the performance and market criteria have not been met.
Expense is recognized, over a
five
year vesting period on the Units which the Trust expects to vest. The Trust recorded
$110,000
of compensation expense related to the amortization of unearned compensation with respect to the Units in the
three
months ended
December 31, 2016
. At December 31, 2016 and September 30, 2016,
$1,862,000
and
$1,972,000
, respectively, has been deferred and will be charged to expense over the vesting period.
In January
2017
, the Trust granted
147,050
shares of restricted stock pursuant to the Plan.
As of
December 31, 2016
, an aggregate of
666,775
shares of unvested restricted stock are outstanding pursuant to the 2012 Incentive Plan and the 2009 Incentive Plan (collectively the "Prior Plans").
No
additional awards may be granted under the Prior Plans. All restricted shares vest
five
years from the date of grant and under specified circumstances, including a change in control, may vest earlier. For accounting purposes, the restricted shares are 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
December 31, 2016
and
2015
, the Trust recorded $
214,000
and
$230,000
, respectively, of compensation expense related to the amortization of unearned compensation with respect to the restricted share awards. At
December 31, 2016
and September 30, 2016, $
1,875,000
and
$2,089,000
has been deferred as unearned compensation and will be charged to expense over the remaining vesting periods of these restricted share awards. The weighted average vesting period of these restricted shares is
2.6
years.
Share Buyback
On March 11, 2016, the Board of Trustees approved a share repurchase program authorizing the Trust to repurchase up to
$5,000,000
of shares of beneficial interest through September 30, 2017. During the quarter ended December 31, 2016, the Trust purchased
1,200
shares of beneficial interest at an average market price of
$8.21
for a purchase price, including commissions, of
$9,000
.
Per Share Data
Basic earnings (loss) per share is determined by dividing net income (loss) applicable to common shareholders for the applicable period by the weighted average number of shares of beneficial interest 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 shares of beneficial interest were exercised or converted into shares of beneficial interest or resulted in the issuance of shares of beneficial interest that share in the earnings of the Trust. Diluted earnings (loss) per share is determined by dividing net income (loss) applicable to common shareholders for the applicable period by the weighted average number of shares of beneficial interest outstanding during such period. For the three months ended December 31, 2016, none of the Units are included in the diluted weighted average as they did not meet the applicable performance metrics during such periods.
Basic and diluted shares outstanding for the three months ended
December 31,
2016
and
2015
, were
13,898,626
and
14,101,056
, respectively.
Note 4 ‑ Real Estate Properties
Real estate properties (including properties held for sale) consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2016
|
Land
|
|
$
|
126,242
|
|
|
$
|
128,409
|
|
Building
|
|
638,348
|
|
|
684,133
|
|
Building improvements
|
|
26,964
|
|
|
25,717
|
|
Real estate properties
|
|
791,554
|
|
|
838,259
|
|
Accumulated depreciation
|
|
(45,371
|
)
|
|
(44,687
|
)
|
Total real estate properties, net
|
|
$
|
746,183
|
|
|
$
|
793,572
|
|
A summary of real estate properties owned (including properties held for sale) follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
Balance
|
|
Additions
|
|
Capitalized Costs and Improvements
|
|
Depreciation
|
|
Sales
|
|
December 31, 2016
Balance
|
Multi-family
|
$
|
783,085
|
|
|
$
|
47,974
|
|
|
$
|
2,845
|
|
|
$
|
(6,270
|
)
|
|
$
|
(92,037
|
)
|
|
$
|
735,597
|
|
Land - Daytona, FL
|
8,021
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,021
|
|
Shopping centers/Retail - Yonkers, NY
|
2,466
|
|
|
—
|
|
|
126
|
|
|
(27
|
)
|
|
—
|
|
|
2,565
|
|
Total real estate properties
|
$
|
793,572
|
|
|
$
|
47,974
|
|
|
$
|
2,971
|
|
|
$
|
(6,297
|
)
|
|
$
|
(92,037
|
)
|
|
$
|
746,183
|
|
The table below summarizes the preliminary allocations of the purchase prices of assets acquired during the three months ended
December 31, 2016
(dollars in thousands):
|
|
|
|
|
|
|
|
Preliminary Purchase Price Allocation
|
Land
|
|
$
|
8,957
|
|
Buildings and Improvements
|
|
29,601
|
|
Acquisition-related intangible assets
|
|
575
|
|
Total Consideration
|
|
$
|
39,133
|
|
Note 5 ‑ Acquisitions and Dispositions
Property Acquisitions
The table below provides information for the
three
months ended
December 31,
2016
regarding the Trust's purchases of multi-family properties (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Purchase Date
|
|
No. of Units
|
|
Contract Purchase Price
|
|
Acquisition Mortgage Debt
|
|
Initial BRT Equity
|
|
Ownership Percentage
|
|
Capitalized Acquisition Costs
(a)
|
Fredricksburg, VA
|
|
11/4/2016
|
|
220
|
|
|
$
|
38,490
|
|
|
$
|
29,940
|
|
|
$
|
8,720
|
|
|
80
|
%
|
|
$
|
643
|
|
_______________________________
(a) See Note 15.
Property Dispositions
The following table is a summary of the real estate properties disposed of by the Trust in the
three
months ended
December 31,
2016 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
Sale
Date
|
|
No. of
Units
|
|
Sales Price
|
|
Gain on Sale
|
|
Non-controlling partner portion of gain
|
Greenville, NC
|
10/19/2016
|
|
350
|
|
|
$
|
68,000
|
|
|
$
|
18,483
|
|
|
$
|
9,329
|
|
Panama City, FL
|
10/26/2016
|
|
160
|
|
|
14,720
|
|
|
7,393
|
|
|
3,478
|
|
Atlanta, GA
|
11/21/2016
|
|
350
|
|
|
36,750
|
|
|
8,905
|
|
|
4,166
|
|
Hixson, TN
|
11/30/2016
|
|
156
|
|
|
10,775
|
|
|
608
|
|
|
152
|
|
New York, NY
|
12/21/2016
|
|
1
|
|
|
465
|
|
|
449
|
|
|
—
|
|
|
|
|
1,017
|
|
|
$
|
130,710
|
|
|
$
|
35,838
|
|
|
$
|
17,125
|
|
Note 6 –Real Estate Loan
As a result of the sale of our interest in the Newark Joint Venture in February 2016, the mortgage loan owed to the Trust by the venture (the "NJV Loan Receivable"), which was, prior to the sale, eliminated in consolidation, is reflected as a real estate loan on the consolidated balance sheets. At December 31, 2016 and September 30, 2016, the NJV Loan Receivable was in the principal amount of
$5,900,000
and
$19,500,000
, respectively.
During the quarter ended December 31, 2016, the Trust received (i) a
$13,600,000
principal paydown of the NJV Loan Receivable and (ii)
$2,606,000
, representing all the interest (
i.e.
, current and deferred) due through the repayment date. In connection with this transaction, the Trust released certain properties from the mortgages securing the NJV Loan Receivable. The remaining
$5,900,000
of principal balance of this receivable matures in June 2017, bears interest, payable monthly, at a rate of
11%
per year, and is secured by several properties in Newark, New Jersey.
Note 7 - Real Estate Property Held For Sale
At September 30, 2016, the Sandtown Vista property in Atlanta, GA and the Spring Valley property in Panama City, FL were held for sale. The Sandtown Vista property, which had a book value of
$27,102,000
, was sold on November 21, 2016. The Spring Valley property, which had a book value
$6,920,000
, was sold on October 26, 2016.
Note 8 - Restricted Cash
Restricted cash represents funds that are being held for specific purposes and are therefore not generally available for general corporate purposes. As reflected on the consolidated balance sheets, Restricted cash represents funds that are held by or on behalf of the Trust specifically for capital improvements at certain multi-family properties.
Note 9 – Investment in Unconsolidated Ventures
In the quarter ended December 31, 2016, the Trust purchased interests in
two
unconsolidated joint ventures in Columbia, SC: (i) a
$5,670,000
investment for a
32%
interest in a venture which owns a
374
unit multi-family property and (ii) an
$8,665,000
investment for a
46%
interest in a venture in which the Trust contemplates the construction of
339
multi-family units. Construction financing for this development project has been secured.
Note 10 – Debt Obligations
Debt obligations consist of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2016
|
Mortgages payable
(a)
|
|
$
|
578,768
|
|
|
$
|
621,382
|
|
Junior subordinated notes
|
|
37,400
|
|
|
37,400
|
|
Deferred mortgage costs
|
|
(5,588
|
)
|
|
(6,275
|
)
|
Total debt obligations
|
|
$
|
610,580
|
|
|
$
|
652,507
|
|
_____________________________________
(a) Excludes mortgages payable held for sale of
$27,052,000
at September 30, 2016.
Mortgages Payable
During the
three
months ended
December 31,
2016, the Trust incurred the following fixed rate mortgage debt in connection with the following acquisition (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Closing Date
|
|
Acquisition Mortgage Debt
|
|
Interest Rate
|
|
Interest only period
|
|
Maturity Date
|
Fredricksburg, VA
|
|
11/4/16
|
|
$
|
27,638
|
|
|
3.68
|
%
|
|
N/A
|
|
February 2027
|
|
|
|
|
|
|
|
|
|
|
|
|
During the
three
months ended
December 31, 2016
, the Trust obtained supplemental fixed rate mortgage financing as set forth in the table below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Closing Date
|
|
Supplemental Mortgage Debt
|
|
Interest Rate
|
|
Maturity Date
|
Fredricksburg, VA
|
|
11/4/16
|
|
$
|
2,261
|
|
|
4.84
|
%
|
|
February 2027
|
|
|
|
|
|
|
|
|
|
|
During the
three
months ended
December 31,
2016,
$7,107,000
was advanced on the construction loan that financed the N. Charleston, SC (Factory at Garco) development. There is
$9,614,000
remaining to be drawn on the facility.
Junior Subordinated Notes
At
December 31, 2016
and
September 30, 2016
, the Trust's junior subordinated notes had an outstanding principal balance of
$37,400,000
, before deferred costs of
$397,000
. At December 31, 2016, the interest rate on the outstanding balance is
three
month LIBOR +
2.00%
or
2.89%
.
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 December 31, 2016
and
2015
, which includes amortization of deferred costs, was
$274,000
and
$463,000
, respectively.
Note 11 – Related Party Transactions
Majestic Property Management Corp., a related party, provides management services to the Trust for certain properties owned by the Trust and joint ventures in which the Trust participates. These fees amounted to
$8,000
and
$11,000
for the three months ended December 31, 2016 and 2015, respectively.
The allocation of expenses for the shared facilities, personnel and other resources used by the Trust is determined in accordance with a shared services agreement by and among the Trust and related parties. Amounts paid pursuant to the agreement are included in general and administrative expenses on the consolidated statement of operations. The Trust reimbursed Gould Investors L.P., a related party,
$79,000
and
$51,000
, in the three months ended
December 31,
2016 and 2015, respectively, for services provided under the agreement.
Management of many of the Trust's multi-family properties is performed by the Trust's joint venture partners or their affiliates (none of these joint venture partners is Gould Investors L.P. or its affiliates). In addition, the Trust may pay an acquisition fee to a joint venture partner in connection with a property purchased by such joint venture. Management and acquisition fees to these related parties for the three months ended
December 31,
2016
and
2015
was
$924,000
and
$422,000
, respectively.
During the quarter ended December 31, 2015, the Trust paid REIT Management, a related party, advisory fees pursuant to an advisory agreement of
$693,000
. The advisory agreement terminated effective December 31, 2015.
In the quarter ended December 31, 2015, the Trust borrowed
$8,000,000
from Gould Investors L.P., a related party. Interest for the quarter ended December 31, 2015 was
$24,000
.
Note 12 - Segment Reporting
Management determined that the Trust operates in
two
reportable segments: a multi-family property segment which includes the ownership, operation and development of multi-family properties; and an other assets segment which includes the ownership and operation of the Trust's other real estate assets and a real estate loan.
The following tables summarize our segment reporting for the periods indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2016
|
|
|
Multi-Family
Real Estate
|
|
Other
Assets
|
|
Total
|
Revenues:
|
|
|
|
|
|
|
Rental and other revenues from real estate properties
|
|
$
|
24,643
|
|
|
$
|
386
|
|
|
$
|
25,029
|
|
Other income
|
|
—
|
|
|
611
|
|
|
611
|
|
Total revenues
|
|
24,643
|
|
|
997
|
|
|
25,640
|
|
Expenses:
|
|
|
|
|
|
|
Real estate operating expenses
|
|
12,349
|
|
|
97
|
|
|
12,446
|
|
Interest expense
|
|
6,092
|
|
|
595
|
|
|
6,687
|
|
General and administrative
|
|
2,544
|
|
|
53
|
|
|
2,597
|
|
Provision for Federal Tax
|
|
343
|
|
|
7
|
|
|
350
|
|
Depreciation
|
|
6,270
|
|
|
27
|
|
|
6,297
|
|
Total expenses
|
|
27,598
|
|
|
779
|
|
|
28,377
|
|
Total revenue less total expenses
|
|
(2,955
|
)
|
|
218
|
|
|
(2,737
|
)
|
Gain on sale of real estate
|
|
35,389
|
|
|
449
|
|
|
35,838
|
|
Loss on extinguishment of debt
|
|
(799
|
)
|
|
—
|
|
|
(799
|
)
|
Income from continuing operations
|
|
31,635
|
|
|
667
|
|
|
32,302
|
|
Net (income) attributable to non-controlling interests
|
|
(16,497
|
)
|
|
(35
|
)
|
|
(16,532
|
)
|
Net income attributable to common shareholders before reconciling items
|
|
$
|
15,138
|
|
|
$
|
632
|
|
|
$
|
15,770
|
|
Segment Assets at December 31, 2016
|
|
$
|
832,265
|
|
|
$
|
16,809
|
|
|
$
|
849,074
|
|
Note 12- Segment Reporting - continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2015
|
|
|
Multi-Family
Real Estate
|
|
Other Assets
|
|
Total
|
Revenues:
|
|
|
|
|
|
|
Rental and other revenues from real estate properties
|
|
$
|
22,003
|
|
|
$
|
316
|
|
|
$
|
22,319
|
|
Other income
|
|
—
|
|
|
7
|
|
|
7
|
|
Total revenues
|
|
22,003
|
|
|
323
|
|
|
22,326
|
|
Expenses:
|
|
|
|
|
|
|
Real estate operating expenses
|
|
10,944
|
|
|
150
|
|
|
11,094
|
|
Interest expense
|
|
5,459
|
|
|
72
|
|
|
5,531
|
|
Advisor's fee, related party
|
|
594
|
|
|
99
|
|
|
693
|
|
Property acquisition costs
|
|
57
|
|
|
—
|
|
|
57
|
|
General and administrative
|
|
1,661
|
|
|
88
|
|
|
1,749
|
|
Depreciation and amortization
|
|
4,957
|
|
|
27
|
|
|
4,984
|
|
Total expenses
|
|
23,672
|
|
|
436
|
|
|
24,108
|
|
Total revenues less total expenses
|
|
(1,669
|
)
|
|
(113
|
)
|
|
(1,782
|
)
|
Gain on sale of real estate assets
|
|
—
|
|
|
609
|
|
|
609
|
|
Net (loss) income
|
|
(1,669
|
)
|
|
496
|
|
|
(1,173
|
)
|
Net (income) loss attributable to non-controlling interests
|
|
(199
|
)
|
|
(21
|
)
|
|
(220
|
)
|
Net (loss) income attributable to common shareholders before reconciling items
|
|
$
|
(1,868
|
)
|
|
$
|
475
|
|
|
$
|
(1,393
|
)
|
Reconciling adjustment:
|
|
|
|
|
|
|
Discontinued operations, net of
non-controlling interest
|
|
|
|
|
|
(641
|
)
|
Net loss attributable to common shareholders
|
|
|
|
|
|
$
|
(2,034
|
)
|
Segment Assets at December 31, 2015
|
|
$
|
689,231
|
|
|
$
|
191,251
|
|
|
$
|
880,482
|
|
Note 13 – Fair Value of Financial Instruments
Financial Instruments Not Measured at Fair Value
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
December 31, 2016
and
September 30, 2016
the estimated fair value of the notes is lower than their carrying value by approximately
$16,408,000
and
$16,549,000
based on a market interest rate of
6.48%
and
6.37%
, respectively.
Mortgages payable: At
December 31, 2016
, the estimated fair value of the Trust’s mortgages payable is greater than their carrying value by approximately
$13,734,000
assuming market interest rates between
3.81%
and
5.01%
and at
September 30, 2016
, the estimated fair value of the Trust's mortgages payable was greater than their carrying value by approximately
$10,629,000
assuming market interest rates between
3.05%
and
4.25%
. Market interest rates were determined using rates which the Trust believes reflects institutional lender yield requirements.
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 Measured at Fair Value
The Trust’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 Trust does not currently own any financial instruments that are classified as Level 3. Set forth below is information regarding the Trust’s financial liabilities measured at fair value as of
December 31, 2016
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying and Fair Value
|
|
Fair Value Measurements
Using Fair Value Hierarchy
|
|
|
Level 1
|
|
Level 2
|
Financial Assets:
|
|
|
|
|
|
Interest rate swap
|
$
|
1,666
|
|
|
—
|
|
|
$
|
1,666
|
|
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
December 31, 2016
, these derivatives are included in other accounts payable and accrued liabilities on the consolidated balance sheet.
Although the Trust 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
December 31, 2016
, the Trust 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 Trust determined that its derivatives valuation is classified in Level 2 of the fair value hierarchy.
Note 14 – Derivative Financial Instruments
Cash Flow Hedges of Interest Rate Risk
The Trust’s objective in using interest rate derivatives is to manage its exposure to interest rate movements. To accomplish this objective, the Trust 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 Trust making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives, designated and that qualify as cash flow hedges, is recorded in accumulated other comprehensive (income) loss on our consolidated balance sheets and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.
Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Trust's variable-rate debt.
As of
December 31, 2016
, the Trust had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Derivative
|
|
Notional Amount
|
|
Rate
|
|
Maturity
|
Interest rate swap
|
|
$
|
1,531
|
|
|
5.25
|
%
|
|
April 1, 2022
|
Interest rate swap
|
|
$
|
26,400
|
|
|
3.61
|
%
|
|
May 6, 2023
|
Interest rate swap
|
|
$
|
27,000
|
|
|
4.05
|
%
|
|
September 19, 2026
|
The table below presents the fair value of the Trust’s derivative financial instrument as well as its classification on the consolidated balance sheets as of the dates indicated (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives as of:
|
December 31, 2016
|
|
September 30, 2016
|
Balance Sheet Location
|
|
Fair Value
|
|
Balance Sheet Location
|
|
Fair Value
|
Other Assets
|
|
$
|
1,666
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
1,602
|
|
As of
December 31, 2016
, the Trust did not have any derivative instruments that were considered to be ineffective and does not use derivative instruments for trading or speculative purposes.
The following table presents the effect of the Trust’s interest rate swaps on the consolidated statements of comprehensive loss for the dates indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
|
2016
|
|
2015
|
Amount of gain recognized on derivative in Other Comprehensive Income (loss)
|
|
$
|
3,123
|
|
|
$
|
12
|
|
Amount of gain (loss) reclassified from Accumulated
Other Comprehensive Income (loss) into Interest Expense
|
|
$
|
(145
|
)
|
|
$
|
(8
|
)
|
No
gain or loss was recognized related to hedge ineffectiveness or to amounts excluded from effectiveness testing on the Trust’s cash flow hedges during the
three
months ended
December 31, 2016
and
December 31, 2015
. During the twelve months ending
September 30, 2017
, the Trust estimates an additional
$343,000
will be reclassified from other comprehensive income (loss) as an increase to interest expense.
Credit-risk-related Contingent Features
The agreement between the Trust and its derivatives counterparties provides that if the Trust defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, the Trust could be declared in default on its derivative obligations.
As of
December 31, 2016
, the fair value of the derivatives in a net liability position, which includes accrued interest, but excludes any adjustment for nonperformance risk related to these agreement, was
$24,000
. As of
December 31, 2016
, the Trust has not posted any collateral related to these agreements. If the Trust had been in breach of these agreements at
December 31, 2016
, it could have been required to settle its obligations thereunder at its termination value of
$24,000
.
Note 15 – New Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board ("FASB") issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The ASU clarifies the definition of a business with the objective of adding guidance to assist companies and other reporting organizations with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or business combinations. The ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted. The Trust elected early adoption effective for the quarter ended December 31, 2016. The Trust's net income was favorably impacted as a result of the capitalization of acquisition costs - in prior periods, property acquisition costs were expensed during the period incurred. During the three months ended December 31, 2016, capitalized acquisition costs were
$643,000
, without giving effect to non-controlling interests.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which requires all excess tax benefits or deficiencies to be recognized as income tax expense or benefit in the income statement. In addition, excess tax benefits should be classified along with other income tax cash flows as an operating activity in the statement of cash flows. Application of the standard is required for the annual and interim periods beginning after December 15, 2016. Early adoption is permitted. The Trust is currently evaluating the impact of this new standard on our consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis, which amends the current consolidation guidance, including introducing a separate consolidation analysis specific to limited partnerships and other similar entities. Under this analysis, limited partnerships and other similar entities will be considered a VIE unless the limited partners hold substantive kick-out rights or participating rights. The guidance is effective for annual periods beginning after December 15, 2015, including interim periods within those periods, with early adoption permitted. The Trust adopted this guidance in the quarter December 31, 2016 and its adoption did not have a material effect on its consolidated financial statements.
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. 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 defines a five step process 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 thereafter, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2018.
Note 16 – Subsequent Events
Subsequent events have been evaluated and any significant events, relative to our consolidated financial statements as of
December 31, 2016
that warrant additional disclosure, have been included in the notes to the consolidated financial statements.