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 September 30, 2021 (in thousands):
2021 2022 2023 2024 2025 Thereafter Total Fair Value
Unsecured fixed rate debt
Principal $ — $ — $ 100,000 (1)
$ — $ — $ 400,000 $ 500,000 $ 517,185
Interest payments $ 576 $ 20,300 $ 19,340 $ 17,995 $ 17,995 $ 87,364 $ 163,570
Interest rate on debt maturities — % — % 2.3 % — % — % 4.5 % 4.1 %
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(1) Includes a $100.0 million term loan with a floating interest rate. The interest rate on the $100.0 million term loan is effectively fixed by interest rate swap arrangements at 2.31%.
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 September 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 September 30, 2021 December 31, 2020
$ 100,000 1.205% One-Month USD-LIBOR 3/31/2017 7/21/2023 $ (1,689) $ (2,671)
50,000 1.208% One-Month USD-LIBOR 3/31/2017 7/21/2023 — (1,338)
25,000 2.610% One-Month USD-LIBOR 6/29/2018 7/21/2023 — (1,562)
25,000 2.610% One-Month USD-LIBOR 6/29/2018 7/21/2023 — (1,562)
25,000 2.610% One-Month USD-LIBOR 6/29/2018 7/21/2023 — (1,561)
25,000 2.610% One-Month USD-LIBOR 6/29/2018 7/21/2023 — (1,561)
$ 250,000 $ (1,689) $ (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.
In the second quarter of 2021 we determined that the hedged transactions for five interest rate swap arrangements with an aggregate notional value of $150.0 million were probable not to occur and that these interest swap arrangements were no longer effective cash flow hedges as of June 30, 2021 due to our intention to prepay a $150.0 million portion of the 2018 Term Loan. As a result, we recognized a loss of $5.8 million for the second quarter of 2021, which was recorded to Loss on interest rate derivatives on our condensed consolidated statements of operations. On September 27, 2021, we prepaid a $150.0 million portion of the 2018 Term Loan. In connection with the prepayment, we terminated the five interest rate swap arrangements with an aggregate notional value of $150.0 million. We currently expect to hold the remaining $100.0 million portion of the 2018 Term Loan until maturity. The interest rate swap arrangement with a notional value of $100.0 million related to the remaining portion of the 2018 Term Loan is an effective cash flow hedge as of September 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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