NOTE 7 – DERIVATIVES AND HEDGING ACTIVITIES

As part of our interest rate risk management strategy, we have used derivative instruments to manage our exposure to interest rate movements and add stability to interest expense. Interest rate swaps designated as cash flow hedges involve the receipt of variable rate amounts from a counterparty in exchange for the Trust making fixed rate payments over the life of the agreement without exchange of the underlying notional amount.

As of March 31, 2020, the Trust used four interest rate swaps to hedge the variable cash flows associated with variable rate debt. Changes in fair value of the derivatives that are designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive loss and are reclassified into interest expense as interest payments are made on the Trust’s variable rate debt. Over the next nine months, the Trust estimates that an additional $30 will be reclassified as a $30 increase to interest expense.

The following table summarizes the Trust’s interest rate swaps as of March 31, 2020, which effectively convert on month floating rate LIBOR to a fixed rate:


			Fixed
Effective Date		Notional	Interest Rate	Maturity Date
April 15, 2005	$	801	7.25%	April 15, 2020
November 1, 2019	$	7,121	3.15%	November 1, 2029
November 1, 2019	$	4,946	3.28%	November 1, 2029
January 10, 2020	$	3,211	3.39%	January 10, 2030

The following table summarizes the Trust’s interest rate swaps that were designated as cash flow hedges of interest rate risk:


	Number of Instruments			Notional
Interest Rate Derivatives	March 31, 2020	December 31, 2019		March 31, 2020		December 31, 2019
Interest rate swaps	4	3	$	16,079	$	12,960

The table below presents the estimated fair value of the Trust’s derivative financial instruments as well as their classification in the accompanying consolidated balance sheets. The valuation techniques are described in Note 8 to the consolidated financial statements.


	Derivatives
Derivatives designated as	March 31, 2020			December 31, 2019
cash flow hedges:	Balance Sheet Location		Fair Value	Balance Sheet Location		Fair Value
Interest rate swaps	Other assets, net	$	—	Other assets, net	$	58
Interest rate swaps	Accrued expenses and other liabilities	$	1,449	Accrued expenses and other liabilities	$	21

The carrying amount of the swaps have been adjusted to their fair value at the end of the quarter, which because of changes in forecasted levels of LIBOR, resulted in reporting a liability for the fair value of the future net payments forecasted under the swap. The interest rate swap is accounted for as an effective hedge in accordance with ASC 815-20 whereby it is recorded at fair value and changes in fair value are recorded to comprehensive income. The following table presents the effect of the Company’s derivative financial instruments on the accompanying consolidated statements of operations and other comprehensive loss (income) for the quarters ended March 31, 2020 and 2019:


			Location of Gain
		Amount of (Gain)/Loss	Reclassified from
Derivatives in		Recognized in Other	Accumulated other		Amount of (Gain)/Loss
Cash Flow Hedging		Comprehensive Income	Comprehensive Income		Reclassified from
Relationships		on Derivatives	(AOCI) into Income		AOCI into income
		2020			2020
Interest rate swaps	$	1,486	Interest expense	$	10
		2019			2019
Interest rate swaps	$	(4)	Interest expense	$	7

Credit-risk-related Contingent Features

The Trust has agreements with each of its derivative counterparties that contain a provision whereby if the Trust defaults on the related indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Trust could also be declared in default on its corresponding derivative obligation.

The Trust’s agreements with each of its derivative counterparties also contain a provision whereby if the Trust consolidates with, merges with or into, or transfers all or substantially all of its assets to another entity and the creditworthiness of the resulting, surviving or transferee entity, is materially weaker than the Trust’s, the counterparty has the right to terminate the derivative obligations. As of March 31, 2020, the termination value of derivatives in a liability position, which includes accrued interest but excludes any adjustment for non-performance risk, which the Trust has deemed not significant, was $1,449. As of March 31, 2020, the Trust has pledged the properties related to the loans which are hedged as collateral. If the Trust had breached any of these provisions as of March 31, 2020, it could have been required to settle its obligations under the agreements at their termination value of $1,449.