Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 3. Quantitative and Qualitative Disclosures About Market Risk (dollar amounts in thousands, except per share data)
We are exposed to risks associated with market changes in interest rates. We manage our exposure to this market risk by monitoring available financing alternatives. Our strategy to manage exposure to changes in interest rates has not materially changed since December 31, 2023. Other than as described below, we do not currently foresee any significant changes in our exposure to fluctuations in interest rates or in how we manage this exposure in the near future.
Fixed Rate Debt
As of June 30, 2024, our outstanding fixed rate debt consisted of the following:
Debt Principal Balance (1)
Annual Interest Rate (1)
Annual Interest Expense Maturity Interest Payments Due
Senior unsecured notes $ 499,154 4.500% $ 22,462 2025 Semi-annually
Senior unsecured notes 140,488 2.650% 3,723 2026 Semi-annually
Senior unsecured notes 80,784 2.400% 1,939 2027 Semi-annually
Mortgage note (one property) 26,340 8.139% 2,144 2028 Monthly
Mortgage note (one property) 42,700 8.272% 3,532 2028 Monthly
Mortgage note (two properties) 54,300 7.671% 4,165 2028 Monthly
Senior secured notes 300,000 9.000% 27,000 2029 Semi-annually
Senior secured notes 567,429 9.000% 51,069 2029 Semi-annually
Senior unsecured notes 114,355 3.450% 3,945 2031 Semi-annually
Mortgage note (one property) 30,680 7.210% 2,212 2033 Monthly
Mortgage note (one property) 8,400 7.305% 614 2033 Monthly
Mortgage note (one property) 14,900 7.717% 1,150 2033 Monthly
Senior unsecured notes 162,000 6.375% 10,328 2050 Quarterly
Total $ 2,041,530 $ 134,283
(1) The principal balances and annual interest rates are the amounts stated in the applicable contracts. In accordance with GAAP, our carrying values and recorded interest expense may differ from these amounts because of market conditions at the time we issued or assumed these debts. For more information, see Notes 7 and 8 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Our senior notes require semi-annual or quarterly interest payments through maturity. Our mortgage notes require monthly payments of interest only or payments of principal and interest through maturity. Because these debts require interest to be paid at a fixed rate, changes in market interest rates during the term of these debts will not affect our interest obligations. If these debts were refinanced at interest rates which are one percentage point higher or lower than shown above, our annual interest cost would increase or decrease by approximately $20,415.
Changes in market interest rates also would affect the fair value of our fixed rate debt obligations; increases in market interest rates decrease the fair value of our fixed rate debt, while decreases in market interest rates increase the fair value of our fixed rate debt. In response to significant and prolonged increases in inflation, the U.S. Federal Reserve has raised interest rates multiple times since the beginning of 2022. Although the U.S. Federal Reserve has indicated that it may lower interest rates in 2024, we cannot be sure that it will do so, and interest rates may remain at the current high levels or continue to increase. Based on the balances outstanding at June 30, 2024, and discounted cash flow analyses through the respective maturity dates, and assuming no other changes in factors that may affect the fair value of our fixed rate debt obligations, a hypothetical immediate one percentage point increase in interest rates would change the fair value of those obligations by approximately $57,207.
Our fixed rate debt arrangements may allow us to make repayments earlier than the stated maturity date. In some cases, we are not allowed to make early repayment prior to a cutoff date and we are generally allowed to make prepayments only at a premium equal to a make whole amount, as defined, which is generally designed to preserve a stated yield to the note holder. These prepayment rights may afford us opportunities to mitigate the risk of refinancing our debts at maturity at a higher rate by refinancing prior to maturity.
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In addition to the fixed rate debt presented in the table above, at June 30, 2024, we had a noncontrolling ownership interest of 51% in an unconsolidated joint venture that owned two properties that were secured by fixed rate debt consisting of the following mortgage note:
Debt Our JV Ownership Interest Principal Balance (1)(2)
Annual Interest Rate (1)
Annual Interest Expense Maturity Interest Payments Due
Mortgage note (two properties) 51% $ 50,000 4.090% $ 2,045 2029 Monthly
(1) The principal balance and annual interest rate are the amounts stated in the applicable contracts. In accordance with GAAP, the joint venture’s recorded interest expense may differ from these amounts because of market conditions at the time it incurred the debt.
(2) Reflects the entire balance of the debt secured by the properties and is not adjusted to reflect the interest in the joint venture we do not own. None of the debt is recourse to us.
Floating Rate Debt
As of June 30, 2024, our floating rate debt consisted of $178,000 outstanding under our $325,000 secured revolving credit facility and $100,000 outstanding on our secured term loan, both of which are governed by our credit agreement. Our credit agreement matures on January 29, 2027. We can borrow, repay and reborrow funds available under our revolving credit facility, and no principal payments are due under our credit agreement until maturity. Subject to the payment of an extension fee and meeting certain other requirements, we can extend the stated maturity date of our revolving credit facility by one year.
Borrowings under our credit agreement are in U.S. dollars and require interest to be paid at a rate of SOFR plus a margin of 350 basis points. Accordingly, we are vulnerable to changes in U.S. dollar based short term rates, specifically SOFR. Generally, a change in interest rates would not affect the value of our floating rate debt but would affect our operating results.
The following table presents the impact a one percentage point increase in interest rates would have on our annual floating rate interest expense as of June 30, 2024:
Impact of an Increase in Interest Rates
Annual Interest Rate (1)
Outstanding Debt Total Interest Expense Per Year Annual Earnings Per Share Impact (2)
At June 30, 2024 8.9% $ 278,000 $ 24,742 $ 0.51
One percentage point increase 9.9% $ 278,000 $ 27,522 $ 0.57
(1) Based on SOFR plus a margin of 350 basis points per annum as of June 30, 2024.
(2) Based on the weighted average common shares outstanding (diluted) for the six months ended June 30, 2024.
The following table presents the impact a one percentage point increase in interest rates would have on our annual floating rate interest expense as of June 30, 2024 if we were fully drawn on our revolving credit facility and term loan:
Impact of an Increase in Interest Rates
Annual Interest Rate (1)
Outstanding Debt (2)
Total Interest Expense Per Year Annual Earnings Per Share Impact (3)
At June 30, 2024 8.9% $ 425,000 $ 37,825 $ 0.78
One percentage point increase 9.9% $ 425,000 $ 42,075 $ 0.87
(1) Based on SOFR plus a margin of 350 basis points per annum as of June 30, 2024.
(2) Represents the maximum amount available under our revolving credit facility and term loan.
(3) Based on the weighted average common shares outstanding (diluted) for the six months ended June 30, 2024.
The foregoing tables show the impact of an immediate increase in floating interest rates as of June 30, 2024. If interest rates were to increase gradually over time, the impact would be spread over time. Our exposure to fluctuations in floating interest rates will increase or decrease in the future with increases or decreases in the outstanding amount under our revolving credit facility or our term loan, or our other floating rate debt, if any. Although we have no present plans to do so, we may in the future enter into hedge arrangements from time to time to mitigate our exposure to changes in interest rates.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.