American Healthcare REIT, Inc. 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk. Market risk includes risks that arise from changes in interest rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, we expect that the primary market risk to which we will be exposed is interest rate risk. There were no material changes in our market risk exposures, or in the methods we use to manage market risk, from those that were provided for in our 2019 Annual Report on Form 10-K, as filed with the SEC on March 19, 2020. Interest Rate Risk We are exposed to the effects of interest rate changes primarily as a result of long-term debt used to acquire properties and other permitted investments. Our interest rate risk is monitored using a variety of techniques. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs while taking into account variable interest rate risk. To achieve our objectives, we may borrow at fixed or variable rates. 55 Table of Contents We have entered into and may continue to enter into derivative financial instruments such as interest rate swaps in order to mitigate our interest rate risk on a related financial instrument. We do not apply hedge accounting treatment to these derivatives; therefore, changes in the fair value of interest rate derivative financial instruments are recorded as a component of interest expense in gain or loss in fair value of derivative financial instruments in our accompanying condensed consolidated statements of operations. As of June 30, 2020 , our interest rate swap liabilities are recorded in our accompanying condensed consolidated balance sheets at their aggregate fair value of $8,137,000 . We will not enter into derivatives or interest rate transactions for speculative purposes. In July 2017, the Financial Conduct Authority, or FCA, that regulates the London Inter-bank Offered Rate, or LIBOR, announced its intention to stop compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, the Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee, or ARRC, which identified the Secured Overnight Financing Rate, or SOFR, as its preferred alternative to United States dollar LIBOR in derivatives and other financial contracts. We are not able to predict when LIBOR will cease to be available or when there will be sufficient liquidity in the SOFR markets. Any changes adopted by the FCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments could change. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form. We have variable rate debt outstanding under our credit facilities and interest rate swap agreements maturing on November 19, 2021 that are indexed to LIBOR. As such, we are monitoring and evaluating the related risks of the discontinuation of LIBOR, which include possible changes to the interest on loans or amounts received and paid on derivative instruments. These risks arise in connection with transitioning contracts to a new alternative rate, including any resulting value transfer that may occur. The value of loans or derivative instruments tied to LIBOR could also be impacted if LIBOR is limited or discontinued. For some instruments, the method of transitioning to an alternative rate may be challenging, as they may require negotiation with the respective counterparty. If a contract is not transitioned to an alternative rate and LIBOR is discontinued, the impact on our contracts is likely to vary. If LIBOR is discontinued or if the methods of calculating LIBOR change from their current form, interest rates on our current or future indebtedness may be adversely affected. While we expect LIBOR to be available in substantially its current form until the end of 2021, it is possible that LIBOR will become unavailable prior to that point. This could result, for example, if a sufficient number of banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and magnified. As of June 30, 2020 , the table below presents the principal amounts and weighted average interest rates by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes. Expected Maturity Date 2020 2021 2022 2023 2024 Thereafter Total Fair Value Fixed-rate debt — principal payments $ 301,000 $ 622,000 $ 651,000 $ 680,000 $ 711,000 $ 16,117,000 $ 19,082,000 $ 21,703,000 Weighted average interest rate on maturing fixed-rate debt 4.48 % 4.48 % 4.49 % 4.49 % 4.50 % 3.84 % 3.94 % — Variable-rate debt — principal payments $ — $ 479,500,000 $ — $ — $ — $ — $ 479,500,000 $ 480,850,000 Weighted average interest rate on maturing variable-rate debt (based on rates in effect as of June 30, 2020) — % 2.14 % — % — % — % — % 2.14 % — 56 Table of Contents Mortgage Loans Payable, Net and Line of Credit and Term Loans Mortgage loans payable was $19,082,000 ( $18,104,000 , net of discount/premium and deferred financing costs) as of June 30, 2020 . As of June 30, 2020 , we had three fixed-rate mortgage loans payable with interest rates ranging from 3.67% to 5.25% per annum. In addition, as of June 30, 2020 , we had $479,500,000 outstanding under our line of credit and term loans at a weighted average interest rate of 2.14% per annum. As of June 30, 2020 , the weighted average effective interest rate on our outstanding debt, factoring in our fixed-rate interest rate swaps, was 3.37% per annum. An increase in the variable interest rate on our variable-rate line of credit and term loans constitutes a market risk. As of June 30, 2020 , a 0.50% increase in the market rates of interest would have increased our overall annualized interest expense on our variable-rate line of credit and term loans by $1,163,000, or 6.26% of total annualized interest expense on our mortgage loans payable and our line of credit and term loans. See Note 6, Mortgage Loans Payable, Net , and Note 7, Line of Credit and Term Loans , to our accompanying condensed consolidated financial statements, for a further discussion. Other Market Risk In addition to changes in interest rates, the value of our future investments is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of tenants, which may affect our ability to refinance our debt if necessary.