Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a number of market risks in the ordinary course of business. Market risk includes risks that arise from changes in interest
rates and other market changes that affect market sensitive investments.
Interest Rate Risk
In pursuing our business and investment objectives, one of the primary risks in which we are exposed is interest rate risk. We are exposed to
interest rate changes primarily as a result of (i) their effect on the market for new homes, and therefore on the likelihood that Purchase Options will be exercised, (ii) our Credit Agreement, and (iii) if we need to obtain other
long-term debt used to maintain liquidity, fund capital expenditures and expand our investment portfolio and operations. Market fluctuations in real estate financing may affect the availability and cost of funds needed to expand our investment
portfolio. In addition, restrictions upon the availability of real estate financing or high interest rates for real estate loans could adversely affect our ability to dispose of real estate in the future. We seek to limit the impact of interest rate
changes on earnings and cash flows and to lower our overall borrowing costs. In the future, we may use derivative financial instruments to hedge exposures to changes in interest rates on loans secured by our assets and on the value of the land we
own.
We expect to be subject to market risk exposure related to changes in interest rates on our indebtedness under our Credit Agreement
and changes in the fair value of our fixed rate debt. Outstanding borrowings under the Credit Agreement bear interest at a per annum rate set forth in a pricing schedule based on the current level of the Companys leverage ratio. At
December 31, 2024, there were no borrowings outstanding under the Credit Agreement, as the Credit Agreement was entered into on February 7, 2025. However, we will be exposed to market risk related to interest rates in the future. We
believe significant interest rate changes would not have a material near-term impact on our future earnings or cash flows.
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We do not currently engage in hedging, but if we acquire derivatives to hedge our exposure,
we will also be exposed to market risk. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. The market risk associated with interest-rate contracts is managed by establishing and
monitoring parameters that limit the types and degree of market risk that may be undertaken. With regard to variable rate financing, the Manager will assess our 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. The Manager will maintain risk management control systems to monitor interest rate cash flow risk attributable to both our
outstanding and forecasted debt obligations as well as our potential offsetting hedge positions. While our hedging strategy will be designed to minimize the impact on our net income and funds from operations from changes in interest rates, they may
reduce the overall returns on our investments. Our Board has not yet established policies and procedures regarding our use of derivative financial instruments for hedging or other purposes.
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