Elme Communities 10-K

ITEM 7A: 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 interest rate risk 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. We primarily enter into debt obligations to support general corporate purposes, including acquisition of real estate properties, capital improvements and working capital needs. We use interest rate swap arrangements to reduce our exposure to the variability in future cash flows attributable to changes in interest rates. The table below presents principal, interest and related weighted average interest rates by year of maturity, with respect to debt outstanding on December 31, 2021 (dollars in thousands). 2022 2023 2024 2025 2026 Thereafter Total Fair Value Unsecured fixed rate debt (1) Principal $ — $ 100,000 $ — $ — $ — $ 400,000 $ 500,000 $ 515,341 Interest payments $ 20,300 $ 19,340 $ 17,995 $ 17,995 $ 17,995 $ 69,369 $ 162,994 Interest rate on debt maturities — % 2.3 % — % — % — % 4.5 % 4.1 % ______________________________ (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 entered into the 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 December 31, 2021 and 2020 and their respective fair values (dollars in thousands): Notional Amount Floating Index Rate Termination/ Fair Value as of: Fixed Rate Effective Date Expiration Date December 31, 2021 December 31, 2020 $ 100,000 1.205% One-Month USD-LIBOR 3/31/2017 7/21/2023 $ (821) $ (2,671) 50,000 1.208% One-Month USD-LIBOR 3/31/2017 9/27/2021 — (1,338) 25,000 2.610% One-Month USD-LIBOR 6/29/2018 9/27/2021 — (1,562) 25,000 2.610% One-Month USD-LIBOR 6/29/2018 9/27/2021 — (1,562) 25,000 2.610% One-Month USD-LIBOR 6/29/2018 9/27/2021 — (1,561) 25,000 2.610% One-Month USD-LIBOR 6/29/2018 9/27/2021 — (1,561) $ (821) $ (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 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 December 31, 2021. 47 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data appearing on pages 85 to 121 are incorporated herein by reference. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.