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, 2023 (in thousands):
2023 2024 2025 2026 2027 Thereafter Total Fair Value
Unsecured fixed rate debt
Principal $ — $ — $ 125,000 (1)
$ — — $ 400,000 $ 525,000 $ 471,463
Interest payments $ 11,954 $ 23,908 $ 17,995 $ 17,995 $ 17,995 $ 44,216 $ 134,063
Interest rate on debt maturities — % — % 2.9 % — % — % 4.5 % 4.2 %
Unsecured variable rate debt
Principal $ — $ — $ 24,000 $ — $ — $ — $ 24,000 $ 24,000
Variable interest rate on debt maturities 6.0 % 6.0 %
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(1) Represents a $125.0 million term loan with a floating interest rate. A $100.0 million portion of the term loan is effectively fixed by an interest rate swap that expires on July 21, 2023. The full amount of the term loan will be effectively fixed by two interest rate swaps that become effective on July 21, 2023 and expire on the loan’s maturity date of January 10, 2025.
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, 2023 and December 31, 2022 and their respective fair values (in thousands):
Notional Amount Floating Index Rate Fair Value as of:
Fixed Rate Effective Date Expiration Date June 30, 2023 December 31, 2022
$ 100,000 1.205% USD-SOFR 3/31/2017 7/21/2023 $ 219 $ 1,998
75,000 3.670% USD-SOFR 7/21/2023 1/10/2025 1,383 —
50,000 3.670% USD-SOFR 7/21/2023 1/10/2025 922 —
$ 2,524 $ 1,998
We enter into debt obligations primarily to support general corporate purposes including acquisition of real estate properties, capital improvements and working capital needs.
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, 2022 filed with the SEC on February 17, 2023. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Debt Financing.”
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