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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2022-03-25 compared with 2021-03-26 · 46 added, 30 removed, 21 unchanged (78% of the section changed)

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.

Market risk includes risks that arise from changes in interest rates, foreign currency exchange 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 between the years ended December 31, 2020, 2019 and 2018.

There were no material changes in our market risk exposures, or in the methods we use to manage market risk, between the years ended December 31, 2021 and 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.

We are exposed to the effects of interest rate changes primarily as a result of long-term debt used to acquire and develop 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.

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 consolidated statements of operations.

As of December 31, 2020, our interest rate swap liabilities are recorded in our accompanying consolidated balance sheets at their aggregate fair value of $5,255,000.

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.

Our interest rate risk management objectives are to limit the impact of interest rate increases 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 or lend at fixed or variable rates.

We have entered into, and may continue to enter into, derivative financial instruments such as interest rate swaps and interest rate caps in order to mitigate our interest rate risk on a related financial instrument, and for which we have not and may not elect hedge accounting treatment.

We have not elected to apply hedge accounting treatment to these derivatives;

As of December 31, 2021, our interest rate swaps are recorded in security deposits, prepaid rent and other liabilities in our accompanying consolidated balance sheets at their fair value of $500,000, and such swaps matured in January 2022.

We do not enter into derivative transactions for speculative purposes.

In July 2017, the Financial Conduct Authority, or FCA, that regulates 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, 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 derivative financial instruments 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.

The FCA ceased publishing one-week and two-month LIBOR after December 31, 2021 and intends to cease publishing all remaining LIBOR after June 30, 2023.

On January 19, 2022, we entered into the 2022 Credit Agreement that bears interest at varying rates based upon our option, as follows:

(i) the Daily Simple Secured Overnight Financing Rate, or Daily SOFR, as defined in the 2022 Credit Agreement, plus the Applicable Rate for Daily SOFR Rate Loans or (ii) the Term Secured Overnight Financing Rate, or the Term SOFR, as defined in the 2022 Credit Agreement, plus the Applicable Rate for Term SOFR Rate Loans.

Please see Note 22, Subsequent Events — 2022 Credit Facility, for a further discussion.

We have variable rate debt outstanding and maturing on various dates from 2022 to 2031 and interest rate swaps maturing in January 2022, as discussed above, that are indexed to LIBOR.

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.

The value of loans or derivative instruments tied to LIBOR could also be impacted if LIBOR is 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.

If LIBOR is discontinued, interest rates on our current or future indebtedness may be adversely affected.

Currently we cannot estimate the overall impact of the phase-out of LIBOR on our current debt agreements, although it is possible that an alternative variable rate could raise our borrowing costs.

It is not possible to predict whether LIBOR will continue to be viewed as an acceptable market “benchmark” prior to June 30, 2023, and 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.

3 unchanged sentences

2022 2023 2024 2025 2026 Thereafter Total Fair Value

Debt security held-to-maturity $ — $ — $ — $ — $ 93,433,000 $ — $ 93,433,000 $ 93,920,000

Weighted average interest rate on maturing fixed-rate debt security

— % — % — % — % 4.24 % — % 4.24 % —

Fixed-rate debt — principal payments

$ 65,147,000 $ 34,227,000 $ 71,352,000 $ 28,277,000 $ 154,125,000 $ 492,376,000 $ 845,504,000 $ 803,202,000

Weighted average interest rate on maturing fixed-rate debt

3.99 % 3.75 % 3.51 % 2.62 % 2.97 % 2.98 % 3.17 % —

Variable-rate debt — principal payments

$ 982,439,000 $ 389,863,000 $ 93,190,000 $ 12,276,000 $ 475,000 $ 19,103,000 $ 1,497,346,000 $ 1,499,163,000

Weighted average interest rate on maturing variable-rate debt (based on rates in effect as of December 31, 2021)

Mortgage Loans Payable, Net and Line of Credit and Term Loans

Mortgage loans payable was $18,766,000 ($17,827,000, net of discount/premium and deferred financing costs) as of December 31, 2020.

As of December 31, 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 December 31, 2020, we had $476,900,000 outstanding under our line of credit and term loans at a weighted-average interest rate of 2.12% per annum.

2.44 % 2.89 % 3.76 % 2.59 % 2.33 % 2.33 % 2.65 % —

Debt Security Investment, Net

As of December 31, 2021, the net carrying value of our debt security investment was $79,315,000.

As we expect to hold our debt security investment to maturity and the amounts due under such debt security investment would be limited to the outstanding principal balance and any accrued and unpaid interest, we do not expect that fluctuations in interest rates, and the resulting change in fair value of our debt security investment, would have a significant impact on our operations.

See Note 16, Fair Value Measurements, to the Consolidated Financial Statements that are a part of this Annual Report on Form 10-K, for a discussion of the fair value of our investment in a held-to-maturity debt security.

The effective interest rate on our debt security investment was 4.24% per annum as of December 31, 2021.

Mortgage Loans Payable, Net and Lines of Credit and Term Loan s

Mortgage loans payable were $1,116,216,000 ($1,095,594,000, net of discount/premium and deferred financing costs) as of December 31, 2021.

As of December 31, 2021, we had 66 fixed-rate mortgage loans payable and 12 variable-rate mortgage loans payable with effective interest rates ranging from 2.21% to 5.25% per annum and a weighted average effective interest rate of 3.21%.

In addition, as of December 31, 2021, we had $1,226,634,000 outstanding under our lines of credit and term loans, at a weighted-average interest rate of 2.55% per annum.

On October 1, 2021, as a result of the Merger, we recognized the fair value of GAHR IV's three fixed-rate mortgage loans of $18,602,000, which consist of an aggregate principal balance of $18,291,000 and premium of $311,000.

These mortgage loans carry interest rates ranging from 3.67% to 5.25% per annum with maturity dates ranging from April 1, 2025 to February 1, 2051 and a weighted average effective interest rate of 3.91%.

As of December 31, 2021, the weighted average effective interest rate on our outstanding debt, factoring in our fixed-rate interest rate swaps, was 3.18% 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 December 31, 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 $922,000, or 5.13% 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 the Consolidated Financial Statements that are a part of this Annual Report on Form 10-K, for a further discussion.

An increase in the variable interest rate on our variable-rate mortgage loans payable and lines of credit and term loans constitutes a market risk.

As of December 31, 2021, we have three fixed-rate interest rate swaps on our term loan;

an increase in the variable interest rate thereon would have no effect on our overall annual interest expense.

As of December 31, 2021, a 0.50% increase in the market rates of interest would have increased our overall annualized interest expense on all of our other variable-rate mortgage loans payable and lines of credit and term loans by $3,477,000, or 4.32% of total annualized interest expense on our mortgage loans payable and lines of credit and term loans.

Note 8, Mortgage Loans Payable, Net, and Note 9, Lines of Credit and Term Loans, to the Consolidated Financial Statements that are a part of this Annual Report on Form 10-K, for a further discussion.

Other Market Risk

In addition to changes in interest rates, the value of our 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.

In addition to changes in interest rates and foreign currency exchange 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.

Financial Statements and Supplementary Data.

See the index at Part IV, Item 15, Exhibits, Financial Statement Schedules.

See Part IV, Item 15, Exhibits, Financial Statement Schedules.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk