Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to risks associated with market changes in interest rates. We manage our exposure to this market risk by monitoring available financing alternatives. Our strategy to manage exposure to changes in interest rates has not materially changed since December 31, 2019 . Other than as described below, we do not currently foresee any significant changes in our exposure to fluctuations in interest rates or in how we manage this exposure in the near future.
Although we have no present plans to do so, we may in the future enter into hedge arrangements or derivative contracts from time to time to mitigate our exposure to changes in interest rates.
Fixed Rate Debt
At June 30, 2020 , our outstanding fixed rate debt included the following (dollars in thousands):
Annual
Annual
Principal
Interest
Interest
Interest
Debt
Balance (1)
Rate (1)
Expense
Maturity
Payments Due
Senior unsecured notes
$
300,000
6.75
%
$
20,250
2021
Semi-Annually
Senior unsecured notes
250,000
4.75
%
11,875
2024
Semi-Annually
Senior unsecured notes
1,000,000
9.75
%
97,500
2025
Semi-Annually
Senior unsecured notes
500,000
4.75
%
23,750
2028
Semi-Annually
Senior unsecured notes
350,000
5.63
%
19,705
2042
Quarterly
Senior unsecured notes
250,000
6.25
%
15,625
2046
Quarterly
Mortgage note
12,181
6.28
%
765
2022
Monthly
Mortgage note
10,843
4.85
%
526
2022
Monthly
Mortgage note
15,970
5.75
%
918
2022
Monthly
Mortgage note
15,854
6.64
%
1,053
2023
Monthly
Mortgage notes (2)
620,000
3.53
%
21,886
2026
Monthly
Mortgage note
10,580
4.44
%
470
2043
Monthly
$
3,335,428
$
214,323
(1)
The principal balances and interest rates are the amounts stated in the applicable contracts. In accordance with GAAP, our carrying values and recorded interest expense may differ from these amounts because of market conditions at the time we assumed certain of these debts. This table does not include obligations under finance leases.
(2)
The life science property encumbered by these mortgages is owned in a joint venture arrangement in which we own a 55% equity interest. The principal amounts listed in the table for these debts have not been adjusted to reflect the equity interest in the joint venture that we do not own.
No principal repayments are due under our unsecured notes until maturity. Our mortgage notes generally require principal and interest payments through maturity pursuant to amortization schedules. Because these debts require interest to be paid at a
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fixed rate, changes in market interest rates during the term of these debts will not affect our interest obligations. If these debts were refinanced at interest rates which are one percentage point higher or lower than shown above, our annual interest cost would increase or decrease by approximately $33.4 million .
Changes in market interest rates also would affect the fair value of our fixed rate debt obligations; increases in market interest rates decrease the fair value of our fixed rate debt, while decreases in market interest rates increase the fair value of our fixed rate debt. Based on the balances outstanding at June 30, 2020 , and discounted cash flows analyses through the respective maturity dates, and assuming no other changes in factors that may affect the fair value of our fixed rate debt obligations, a hypothetical immediate one percentage point increase in interest rates would change the fair value of those obligations by approximately $35.9 million .
Our senior unsecured notes and certain of our mortgages contain provisions that allow us to make repayments earlier than the stated maturity date. In some cases, we are not allowed to make early repayment prior to a cutoff date and we are generally allowed to make prepayments only at a premium equal to a make whole amount, as defined, which is generally designed to preserve a stated yield to the noteholder. In the past, we have repurchased and retired some of our outstanding debts and we may do so again in the future. These prepayment rights and our ability to repurchase and retire outstanding debt may afford us opportunities to mitigate the risk of refinancing our debts at maturity at higher rates by refinancing prior to maturity.
Floating Rate Debt
At June 30, 2020 , our floating rate debt obligations consisted of our $1.0 billion revolving credit facility, under which we had no outstanding borrowings, and our $200.0 million term loan. Our revolving credit facility matures in January 2022, and, subject to our payment of an extension fee and our meeting other conditions, we have the option to extend the stated maturity date by one year to January 2023. Generally, no principal repayments are required under our revolving credit facility prior to maturity, and we can borrow, repay and re-borrow funds available, subject to conditions, at any time without penalty. Our $200.0 million term loan matures in September 2022 and is prepayable without penalty at any time.
Borrowings under our revolving credit facility and term loan are in U.S. dollars and interest is required to be paid at the rate of LIBOR plus premiums that are subject to adjustment based upon changes to our credit ratings. Accordingly, we are exposed to interest rate risk for changes in U.S. dollar based short term rates, specifically LIBOR, and to changes in our credit ratings. In addition, upon renewal or refinancing of our revolving credit facility or our term loan, we are vulnerable to increases in interest rate premiums due to market conditions or our perceived credit characteristics. Generally, a change in interest rates would not affect the value of our floating rate debt but would affect our operating results.
The following table presents the impact a one percentage point increase in interest rates would have on our annual floating rate interest expense as of June 30, 2020 (dollars in thousands except per share amounts):
Impact of Changes in Interest Rates
Outstanding
Total Interest
Annual Earnings
Interest Rate (1)
Floating Rate Debt
Expense Per Year
Per Share Impact (2)
At June 30, 2020
2.43
%
$
200,000
$
4,860
$
0.02
One percentage point increase
3.43
%
$
200,000
$
6,860
$
0.03
(1)
Weighted based on the respective interest rates and outstanding borrowings under our credit facility and term loan as of June 30, 2020 .
(2)
Based on weighted average number of shares outstanding (basic and diluted) for the six months ended June 30, 2020 .
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The following table presents the impact a one percentage point increase in interest rates would have on our annual floating rate interest expense as of June 30, 2020 if we were fully drawn on our revolving credit facility and our term loan remained outstanding (dollars in thousands except per share amounts):
Impact of Changes in Interest Rates
Outstanding
Total Interest
Annual Earnings
Interest Rate (1)
Floating Rate Debt
Expense Per Year
Per Share Impact (2)
At June 30, 2020
2.53
%
$
1,200,000
$
30,360
$
0.13
One percentage point increase
3.53
%
$
1,200,000
$
42,360
$
0.18
(1)
Weighted based on the respective interest rates and outstanding borrowings under our credit facility (assuming fully drawn) and term loan as of June 30, 2020 .
(2)
Based on weighted average number of shares outstanding (basic and diluted) for the six months ended June 30, 2020 .
The foregoing tables show the impact of an immediate increase in floating interest rates. If interest rates were to increase gradually over time, the impact would be spread over time. Our exposure to fluctuations in floating interest rates will increase or decrease in the future with increases or decreases in the amount of our borrowings outstanding under our revolving credit facility or other floating rate debt.
LIBOR Phase Out
LIBOR is currently expected to be phased out in 2021. We are required to pay interest on borrowings under our revolving credit facility and term loan at floating rates based on LIBOR. Future debt that we may incur may also require that we pay interest based upon LIBOR. We currently expect that the determination of interest under our credit facility and term loan agreements would be revised as provided under the agreement or amended as necessary to provide for an interest rate that approximates the existing interest rate as calculated in accordance with LIBOR. Despite our current expectations, we cannot be sure that, if LIBOR is phased out or transitioned, the changes to the determination of interest under our agreements would approximate the current calculation in accordance with LIBOR. We do not know what standard, if any, will replace LIBOR if it is phased out or transitioned.