Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are subject to market risk associated with changes in interest rates both in terms of variable-rate debt and the price of new fixed-rate debt upon maturity of existing debt and for acquisitions.
Interest Rate Risk
Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. As of December 31, 2022, our debt included outstanding variable-rate term loans of $400.0 million, of which $300.0 million has been swapped to a fixed rate. If market rates of interest on all variable-rate debt as of December 31, 2022, permanently increased or decreased by 1%, the annual increase or decrease in interest expense on the variable-rate debt and decrease or increase in future earnings and cash flows would be approximately $1.0 million.
With regard to our variable-rate financing, we assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. We maintain risk management control systems to monitor interest rate cash flow risk attributable to both outstanding or forecasted debt obligations as well as our potential offsetting hedge positions. The risk management control systems involve the use of analytical techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates on our future cash flows. We continue to assess retaining cash flows that may assist us in maintaining a flexible low debt balance sheet and managing the impact of upcoming debt maturities.
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We monitor interest rate risk using a variety of techniques, including periodically evaluating fixed interest rate quotes on all variable rate debt and the costs associated with converting the debt to fixed rate debt. In addition, existing fixed and variable rate loans that are scheduled to mature within the next two years are evaluated for possible early refinancing and/or extension due to consideration given to current interest rates. Refer to our Borrowings table in Item 7 of this Annual Report for debt principal amounts and expected maturities by year to evaluate the expected cash flows and sensitivity to interest rate changes.
We may use financial instruments to hedge exposures to changes in interest rates on loans. To the extent we do, we are exposed to credit risk and market risk. Credit risk is the risk of 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 pose credit risk. We seek to minimize the credit risk in derivative instruments by entering into transactions with what we believe are high-quality counterparties. Market risk is the adverse effect on the value of a financial instrument resulting from a change in interest rates.
The Company is party to four effective interest rate swap agreements and four interest rate forward swap agreements, which address the periods between the maturity dates of the effective swaps and the maturity dates of the Amended Term Loan Agreement. In tandem, the interest rate swaps achieve fixed interest rates for a constant notional amount through the maturity dates of the Amended Term Loan Agreement.
On December 15, 2022, the Company and IAGM transitioned all interest rate swaps from 1-Month LIBOR to 1-Month Term SOFR. The Company's and IAGM's hedging instruments continue to qualify for cash flow hedge accounting through application of expedients provided by ASU 2020-04, Reference Rate Reform .
The following table summarizes the Company's four effective and four forward interest rate swaps as of December 31, 2022:
Interest Rate Swap Effective Date Termination
Date InvenTrust Receives
Variable Rate of InvenTrust Pays
Fixed Rate of Fixed Rate Achieved Notional
Amount Fair Value as of
December 31, 2022
5 year, fixed portion Dec 2, 2019 Dec 21, 2023 1-Month SOFR
1.41% 2.71% $ 100,000 $ 3,222
5 year, fixed portion Dec 2, 2019 Dec 21, 2023 1-Month SOFR
1.42% 2.72% 100,000 3,238
5.5 year, fixed portion Dec 2, 2019 Jun 21, 2024 1-Month SOFR
1.47% 2.77% 50,000 2,275
5.5 year, fixed portion Dec 2, 2019 Jun 21, 2024 1-Month SOFR
1.46% 2.76% 50,000 2,281
$ 300,000 $ 11,016
5 year, fixed portion Dec 21, 2023 Sep 22, 2026 1-Month SOFR
1.51% 2.81% $ 100,000 $ 4,924
5 year, fixed portion Dec 21, 2023 Sep 22, 2026 1-Month SOFR
1.51% 2.81% 100,000 4,949
5.5 year, fixed portion Jun 21, 2024 Mar 22, 2027 1-Month SOFR
1.48% 2.78% 50,000 2,196
5.5 year, fixed portion Jun 21, 2024 Mar 22, 2027 1-Month SOFR
1.54% 2.84% 50,000 2,116
$ 300,000 $ 14,185
The following table summarizes the Company's four effective and four forward interest rate swaps as of December 31, 2021:
Interest Rate Swap Effective Date Termination
Date InvenTrust Receives
Variable Rate of InvenTrust Pays
Fixed Rate of Fixed Rate Achieved Notional
Amount Fair Value as of December 31, 2021
5 year, fixed portion Dec 2, 2019 Dec 21, 2023 1-Month LIBOR 1.48% 2.68% $ 100,000 $ (1,304)
5 year, fixed portion Dec 2, 2019 Dec 21, 2023 1-Month LIBOR 1.48% 2.68% 100,000 (1,304)
5.5 year, fixed portion Dec 2, 2019 Jun 21, 2024 1-Month LIBOR 1.49% 2.69% 50,000 (674)
5.5 year, fixed portion Dec 2, 2019 Jun 21, 2024 1-Month LIBOR 1.50% 2.70% 50,000 (684)
$ 300,000 $ (3,966)
5 year, fixed portion Dec 21, 2023 Sep 22, 2026 1-Month SOFR
1.58% 2.78% $ 100,000 $ (230)
5 year, fixed portion Dec 21, 2023 Sep 22, 2026 1-Month SOFR
1.57% 2.77% 100,000 (212)
5.5 year, fixed portion Jun 21, 2024 Mar 22, 2027 1-Month SOFR
1.58% 2.78% 50,000 (87)
5.5 year, fixed portion Jun 21, 2024 Mar 22, 2027 1-Month SOFR
1.60% 2.80% 50,000 (118)
$ 300,000 $ (647)
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The following table summarizes IAGM's effective interest rate swaps as of December 31, 2022:
Interest Rate Swap Effective Date Termination Date IAGM Receives
Variable Rate of IAGM Pays
Fixed Rate of Fixed Rate Achieved Notional
Amount Fair Value as of December 31, 2022
Secured term loan Apr 1, 2020 Nov 2, 2023 1-Month SOFR
0.35% 2.00% $ 45,000 $ 1,655
Secured term loan Apr 1, 2020 Nov 2, 2023 1-Month SOFR
0.32% 1.97% 30,000 $ 1,109
$ 75,000 $ 2,764
The following table summarizes IAGM's effective interest rate swaps as of December 31, 2021:
Interest Rate Swap Effective Date Termination Date IAGM Receives
Variable Rate of IAGM Pays
Fixed Rate of Fixed Rate Achieved Notional
Amount Fair Value as of December 31, 2021
Secured term loan Apr 1, 2020 Nov 2, 2023 1-Month LIBOR 0.43% 1.98% $ 45,000 $ 310
Secured term loan Apr 1, 2020 Nov 2, 2023 1-Month LIBOR 0.41% 1.96% 30,000 $ 220
$ 75,000 $ 530
The gains or losses resulting from marking-to-market our derivatives each reporting period are recognized as an increase or decrease in other comprehensive income (loss) on our consolidated statements of operations and comprehensive income (loss).
Item 8. Consolidated Financial Statements and Supplementary Data
See the Index to Consolidated Financial Statements and financial statements commencing on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.