Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. 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, between the years ended December 31, 2023 and 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 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 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. We have not elected, and may continue to 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 consolidated statements of operations and comprehensive loss. As of December 31, 2023, our interest rate swaps are recorded in other assets and other liabilities in our accompanying consolidated balance sheet at their aggregate fair value of $1,463,000 and ($2,389,000), respectively. We do not enter into derivative transactions for speculative purposes. As of December 31, 2022, we did not have any derivative financial instruments. See Note 10, Derivative Financial Instruments, and Note 15, Fair Value Measurements, to the Consolidated Financial Statements that are a part of this Annual Report on Form 10-K, for a further discussion on our interest rate swaps.
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As of December 31, 2023, 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, excluding the effect of our interest rate swap (dollars in thousands):
Expected Maturity Date
2024 2025 2026 2027 2028 Thereafter Total Fair Value
Assets
Debt security held-to-maturity $ — $ 93,433 $ — $ — $ — $ — $ 93,433 $ 93,304
Weighted average interest rate on maturing fixed-rate debt security
— % 4.24 % — % — % — % — % 4.24 % —
Liabilities
Fixed-rate debt — principal payments
$ 48,168 $ 136,701 $ 156,379 $ 49,998 $ 16,234 $ 582,845 $ 990,325 $ 846,985
Weighted average interest rate on maturing fixed-rate debt
3.56 % 4.30 % 3.00 % 3.43 % 3.25 % 3.59 % 3.58 % —
Variable-rate debt — principal payments
$ 263,277 $ 339,975 $ 379,953 $ 550,177 $ 187 $ 27,142 $ 1,560,711 $ 1,564,165
Weighted average interest rate on maturing variable-rate debt (based on rates in effect as of December 31, 2023)
8.11 % 8.16 % 7.15 % 7.05 % 7.61 % 7.60 % 7.50 % —
Debt Security Investment, Net
As of December 31, 2023, the net carrying value of our debt security investment was $86,935,000. As we expect to hold our debt security investment to maturity and the amounts due under such debt security investment are 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 15, 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, 2023.
Mortgage Loans Payable, Net and Lines of Credit and Term Loan
Mortgage loans payable were $1,326,313,000 ($1,302,396,000, net of discount/premium and deferred financing costs) as of December 31, 2023. As of December 31, 2023, we had 76 fixed-rate mortgage loans payable and 13 variable-rate mortgage loans payable with effective interest rates ranging from 2.21% to 8.46% per annum and a weighted average effective interest rate of 4.72%. In addition, as of December 31, 2023, we had $1,224,723,000 ($1,223,967,000, net of deferred financing fees) outstanding under our lines of credit and term loan, at a weighted-average interest rate of 7.36% per annum.
As of December 31, 2023, the weighted average effective interest rate on our outstanding debt, factoring in our fixed-rate interest rate swaps, was 5.72% per annum. An increase in the variable interest rate on our variable-rate mortgage loans payable and lines of credit and term loan constitutes a market risk. As of December 31, 2023, 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 by $5,124,000, or 3.48% of total annualized interest expense on our mortgage loans payable and lines of credit and term loan. See Note 8, Mortgage Loans Payable, Net, and Note 9, Lines of Credit and Term Loan, 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 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 and residents, which may affect our ability to refinance our debt if necessary.
Item 8. Financial Statements and Supplementary Data.
See Part IV, Item 15, Exhibits, Financial Statement Schedules.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
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