DIVERSIFIED HEALTHCARE TRUST 10-Q

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, 2021. 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. 44 Table of Contents Fixed Rate Debt At September 30, 2022, 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 $ 250,000 4.750 % $ 11,875 2024 Semi-Annually Senior unsecured notes 500,000 9.750 % 48,750 2025 Semi-Annually Senior unsecured notes 500,000 4.750 % 23,750 2028 Semi-Annually Senior unsecured notes 500,000 4.375 % 21,875 2031 Semi-Annually Senior unsecured notes 350,000 5.625 % 19,688 2042 Quarterly Senior unsecured notes 250,000 6.250 % 15,625 2046 Quarterly Mortgage note (2) 10,287 4.850 % 499 2022 Monthly Mortgage note 14,853 6.640 % 986 2023 Monthly Mortgage note 10,060 4.444 % 447 2043 Monthly $ 2,385,200 $ 143,495 (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) We repaid this mortgage in October 2022. 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 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 $23.9 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. The U.S. Federal Reserve recently raised interest rates in an effort to combat high inflation and may continue to do so. Based on the balances outstanding at September 30, 2022, 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 $66.0 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 debt 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 September 30, 2022, our floating rate debt obligations consisted of $700.0 million outstanding under our revolving credit facility. Our revolving credit facility matures in January 2024. 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. Borrowings under our revolving credit facility are in U.S. dollars and interest is required to be paid at the rate of LIBOR plus a premium that is 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, we are vulnerable to increases in interest rate premiums due to 45 Table of Contents 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 September 30, 2022 (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 September 30, 2022 5.62 % $ 700,000 $ 39,340 $ 0.17 One percentage point increase 6.62 % $ 700,000 $ 46,340 $ 0.19 (1) Interest rate under our revolving credit facility as of September 30, 2022. (2) Based on weighted average number of shares outstanding (diluted) for the nine months ended September 30, 2022. The foregoing table shows 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 We are required to pay interest on borrowings under our revolving credit facility at floating rates based on LIBOR. LIBOR has been phased out for new contracts and is expected to be phased out for pre-existing contracts by June 30, 2023. The determination of interest under our revolving credit facility will be revised as provided under our credit agreement or amended as necessary to provide for an alternative interest rate based on SOFR upon the cessation of LIBOR. This may result in our paying increased interest amounts.