Item 3. Quantitative and Qualitative Disclosures About Market Risk
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal material financial market risk to which we are exposed is interest rate risk. Our exposure to market risk for changes in interest rates relates primarily to refinancing long-term fixed rate obligations, the opportunity cost of fixed rate obligations in a falling interest rate environment and our variable rate line of credit.
The table below presents principal, interest and related weighted average interest rates by year of maturity, with respect to debt outstanding on June 30, 2021 (in thousands):
2021 2022 2023 2024 2025 Thereafter Total Fair Value
Unsecured fixed rate debt (1)
Principal $ — (2)
$ 300,000 $ 250,000 $ — $ — $ 400,000 $ 950,000 $ 977,200
Interest payments $ 19,177 $ 37,218 $ 22,177 $ 17,995 $ 17,995 $ 87,364 $ 201,926
Interest rate on debt maturities — % 4.0 % 2.6 % — % — % 4.5 % 3.8 %
Unsecured variable rate debt (3)
Principal $ — $ — $ 43,000 $ — $ — $ — $ 43,000 $ 43,000
Variable interest rate on debt maturities 1.1 % 1.1 %
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(1) Includes a $250.0 million term loan with a floating interest rate. The interest rate on the $250.0 million term loan is effectively fixed by interest rate swap arrangements at 2.9%.
(2) Subsequent to the end of the 2021 Quarter, WashREIT provided notice to the holders of its $300.0 million of Senior Notes due in 2022 that it plans to redeem all $300.0 million of Senior Notes due in 2022 in the third quarter of 2021, which it intends to fund using cash available following the sale of the Office Portfolio. The Senior Notes are scheduled to mature in October 2022.
(3) Maturity date on the unsecured credit facility of 2023 assumes the election of two additional six-month options.
We enter into interest rate swap arrangements designated and qualifying as cash flow hedges to reduce our exposure to the variability in future cash flows attributable to changes in interest rates. Derivative instruments expose us to credit risk in the event of non-performance by the counterparty under the terms of the interest rate hedge agreement. We believe that we minimize our credit risk on these transactions by dealing with major, creditworthy financial institutions. As part of our ongoing control procedures, we monitor the credit ratings of counterparties and our exposure to any single entity, thus minimizing our credit risk concentration.
The following table sets forth information pertaining to interest rate swap contracts in place as of June 30, 2021 and December 31, 2020 and their respective fair values (in thousands):
Notional Amount Floating Index Rate Fair Value as of:
Fixed Rate Effective Date Expiration Date June 30, 2021 December 31, 2020
$ 100,000 1.205% One-Month USD-LIBOR 3/31/2017 7/21/2023 $ (1,911) $ (2,671)
50,000 1.208% One-Month USD-LIBOR 3/31/2017 7/21/2023 (958) (1,338)
25,000 2.610% One-Month USD-LIBOR 6/29/2018 7/21/2023 (1,201) (1,562)
25,000 2.610% One-Month USD-LIBOR 6/29/2018 7/21/2023 (1,201) (1,562)
25,000 2.610% One-Month USD-LIBOR 6/29/2018 7/21/2023 (1,200) (1,561)
25,000 2.610% One-Month USD-LIBOR 6/29/2018 7/21/2023 (1,200) (1,561)
$ 250,000 $ (7,671) $ (10,255)
We enter into debt obligations primarily to support general corporate purposes including acquisition of real estate properties, capital improvements and working capital needs.
We currently expect to use a portion of the proceeds from the sale of the Office and potential sale of the Retail Portfolios to prepay a $150.0 million portion of the 2018 Term Loan during the third quarter of 2021. We expect to hold the remaining $100.0 million portion of the 2018 Term Loan until maturity. Due to this intention to prepay a $150.0 million portion of the 2018 Term Loan, we have determined that the hedged transactions for the five interest rate swap arrangements with an aggregate notional value of $150.0 million are probable not to occur and that these interest swap arrangements are no longer effective cash flow hedges as of June 30, 2021. As a result, we recognized a loss of $5.8 million for the 2021 Quarter, which was recorded to Loss on interest rate derivatives on our condensed consolidated statements of operations. The interest rate swap arrangement with a notional value of
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$100.0 million related to the remaining portion of the 2018 Term Loan that we intend to hold to maturity is an effective cash flow hedge as of June 30, 2021.
As the majority of our outstanding debt is long-term, fixed rate debt, our interest rate risk has not changed significantly from what was disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 16, 2021. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Debt Financing.”
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