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, 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, or in the methods we use to manage market risk, from those that were provided for in our 2021 Annual Report on Form 10-K, as filed with the SEC on March 25, 2022. Interest Rate Risk 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 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 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 did not elect to apply hedge accounting treatment to these derivatives; therefore, changes in the fair value of interest rate derivative financial instruments were 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 and comprehensive loss. As of June 30, 2022, we did not have any derivative financial instruments. 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 SOFR as its preferred alternative to United States dollar LIBOR in derivatives and other financial contracts. 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 SOFR. Please see Note 9, Lines of Credit and Term Loans — 2022 Credit Facility, to our accompanying condensed consolidated financial statements for a further discussion. 60 Table of Contents We have variable rate debt outstanding and maturing on various dates from 2023 to 2031 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 we may enter into in the future. 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 by the discontinuation of LIBOR. 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, upon LIBOR’s discontinuation the impact on our contracts is likely to vary. 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. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and magnified. As of June 30, 2022, 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 2022 2023 2024 2025 2026 Thereafter Total Fair Value Assets Debt security held-to-maturity $ — $ — $ — $ 93,433,000 $ — $ — $ 93,433,000 $ 93,470,000 Weighted average interest rate on maturing fixed-rate debt security — % — % — % 4.24 % — % — % 4.24 % — Liabilities Fixed-rate debt — principal payments $ 25,507,000 $ 34,521,000 $ 71,636,000 $ 29,107,000 $ 154,927,000 $ 510,768,000 $ 826,466,000 $ 690,787,000 Weighted average interest rate on maturing fixed-rate debt 3.92 % 3.78 % 3.53 % 3.35 % 2.98 % 3.01 % 3.12 % — Variable-rate debt — principal payments $ 221,000 $ 452,891,000 $ 158,085,000 $ 356,000 $ 413,270,000 $ 569,345,000 $ 1,594,168,000 $ 1,600,195,000 Weighted average interest rate on maturing variable-rate debt (based on rates in effect as of June 30, 2022) 5.00 % 4.17 % 3.82 % 3.81 % 3.25 % 3.22 % 3.59 % — Debt Security Investment, Net As of June 30, 2022, the net carrying value of our debt security investment was $81,167,000. 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 our accompanying condensed consolidated financial statements, 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 June 30, 2022. Mortgage Loans Payable, Net and Lines of Credit and Term Loans Mortgage loans payable were $1,152,998,000 as of June 30, 2022. As of June 30, 2022, 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 3.35%. In addition, as of June 30, 2022, we had $1,267,634,000 outstanding under our lines of credit and term loans, at a weighted average interest rate of 3.50% per annum. As of June 30, 2022, the weighted average effective interest rate on our outstanding debt was 3.43% per annum. 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 June 30, 2022, 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 $8,082,000, or 11.6% of total annualized interest expense on our mortgage loans payable and lines of credit and term loans. See Note 8, Mortgage Loans Payable, Net and Note 9, Lines of Credit and Term Loans, to our accompanying condensed consolidated financial statements. 61 Table of Contents Other Market Risk 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.