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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2023-03-01 compared with 2022-03-01 · 42 added, 36 removed, 1 unchanged (99% of the section changed)

Quantitative and Qualitative Disclosures About Market Risk

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments.

In pursuing our business plan, we believe the primary market risk to which we have exposure is interest rate risk.

We are exposed to the effects of interest rate changes on our variable rate debt.

Interest rate changes on our fixed rate debt will generally not affect our future earnings or cash flows unless such instruments mature or are otherwise terminated.

Our interest rate risk is monitored using a variety of techniques.

In order to mitigate our interest rate risk, we enter into derivative financial instruments such as interest rate swaps and caps.

To the extent we enter into such derivative financial instruments, we are exposed to credit risk and market risk.

Credit risk is the failure of the counterparty to perform under the terms of the derivative contract.

When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us.

When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, it does not possess credit risk.

It is our policy to enter into these transactions with what we believe are high quality counterparties, including those with whom we have a lending relationship.

We believe the likelihood of realized losses from counterparty non-performance is remote.

We manage the market risk associated with interest rate swaps or caps by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

We do not enter into derivative or interest rate transactions for speculative purposes.

The table below presents, as of December 31, 2021, information about HTA's financial instruments that are sensitive to changes in interest rates, including interest rate swaps and debt obligations.

For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates.

For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected (contractual) maturity dates.

Notional amounts are used to calculate the contractual payments to be exchanged under the contract.

Weighted average variable rates are based on implied forward rates in effect as of December 31, 2021 (in thousands, except interest rates):

Expected Maturity Date

2022 2023 2024 2025 2026 Thereafter Total (1)

Fixed rate debt, gross $ — $ — $ — $ — $ 600,000 $ 1,950,000 $ 2,550,000 $ 2,616,630

Weighted average interest rate on fixed rate debt (per annum) — % — % — % — % 3.50 % 2.82 % 2.98 %

Variable rate debt, gross $ — $ — $ 200,000 $ 300,000 $ — $ — $ 500,000 $ 500,972

Weighted average interest rate on variable rate debt (per annum) — % — % 2.25 % 2.52 % — % — % 2.41 %

Interest Rate Swaps:

Variable to Fixed $ — $ 300,000 $ 200,000 $ — $ — $ — $ 500,000 $ 5,069

Average pay rate — % 1.42 % 1.32 % — % — % — % 1.38 %

Average receive rate — % 1.24 % 1.25 % — % — % — % 1.24 %

(1) Total for interest rate swaps represents notional amount of derivative financial instruments designated as cash flow hedges.

As of December 31, 2021, we had $3.1 billion of gross fixed and variable rate debt with interest rates ranging from 0.98% to 3.75% per annum and a weighted average interest rate of 2.67% per annum, excluding the impact of cash flow hedges.

We had $2.6 billion (excluding net premium/discount and deferred financing costs) of fixed rate debt with a weighted average interest rate of 2.98% per annum and $500.0 million (excluding net premium/discount and deferred financing costs) of variable rate debt with a weighted average interest rate of 1.09% per annum as of December 31, 2021, excluding the impact of cash flow hedges.

In addition to changes in interest rates, the value of our future properties is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of tenants, which may affect our ability to refinance our debt if necessary.

Financial Statements and Supplementary Data

See the disclosure listed at Item 15 - Exhibits, Financial Statement Schedules subsections (a)(1) and (a)(2).

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

The Company is exposed to market risk in the form of changing interest rates on its debt.

Management uses regular monitoring of market conditions and analysis techniques to manage this risk.

As of December 31, 2022, $3.5 billion of the Company’s $5.4 billion of outstanding debt bore interest at fixed rates.

The following table provides information regarding the sensitivity of certain of the Company’s financial instruments, as described above, to market conditions and changes resulting from changes in interest rates.

For purposes of this analysis, sensitivity is demonstrated based on hypothetical 10% changes in the underlying market interest rates.

IMPACT ON EARNINGS AND CASH FLOW

Dollars in thousands OUTSTANDING

PRINCIPAL BALANCE

31, 2022 CALCULATED

ANNUAL INTEREST ASSUMING 10%

in market interest rates ASSUMING 10%

in market interest rates

Variable Rate Debt

Unsecured Credit Facility $ 385,000 $ 20,290 $ (2,029) $ 2,029

Unsecured Term Loan due 2025 350,000 18,095 (1,810) 1,810

Unsecured Term Loan due 2026 200,000 10,340 (1,034) 1,034

Unsecured Term Loan due 2026 300,000 15,510 (1,551) 1,551

Unsecured Term Loan due 2026 150,000 7,755 (776) 776

Unsecured Term Loan due 2027 200,000 10,340 (1,034) 1,034

Unsecured Term Loan due 2028 300,000 15,510 (1,551) 1,551

$ 1,885,000 $ 97,840 $ (9,785) $ 9,785

The Company has outstanding interest rate swaps to help mitigate its risk related to variable rate debt.

As of December 31, 2022, the Company had $1.2 billion of interest rate swaps at a weighted average rate of 2.63%.

See Note 11 to the Consolidated Financial Statements for more information regarding the Company's interest rate swaps.

Dollars in thousands CARRYING VALUE

31, 2022 ASSUMING 10%

in market interest rates ASSUMING 10%

in market interest rates DEC.

Fixed Rate Debt

Senior Notes due 2025 $ 249,115 $ 241,413 $ 240,866 $ 241,916 $ 253,110

Senior Notes due 2026 571,587 570,139 568,234 571,940 —

Senior Notes due 2027 479,553 473,450 471,535 475,298 —

Senior Notes due 2028 296,852 271,058 272,142 269,914 311,594

Senior Notes due 2030 565,402 560,723 549,682 556,431 —

Senior Notes due 2030 296,385 236,219 234,692 237,675 288,886

Senior Notes due 2031 295,547 219,321 226,475 220,856 275,696

Senior Notes due 2031 632,693 611,392 606,887 615,727 —

Mortgage Notes Payable 84,247 80,913 80,734 81,041 104,634

Total Fixed Rate Debt $ 3,471,381 $ 3,264,628 $ 3,251,247 $ 3,270,798 $ 1,233,920

1 Fair values as of December 31, 2021 represent fair values of obligations that were outstanding as of that date, and do not reflect the effect of any subsequent changes in principal balances and/or additions or extinguishments of instruments.

2 Balances are presented net of discounts and debt issuance costs and including premiums.

The fair value presented is based on Level 2 inputs defined as model-derived valuations in which significant inputs and significant value drivers are observable in active markets.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk