| DEBT |
5. DEBT A summary of our consolidated debt is as follows: | | | | | | | | | | | | | | | Weighted-Average | | | | | | | | | | | Effective Interest Rate as of | | | | Balance as of | | | June 30, | | December 31, | | | | June 30, | | December 31, | ($ in thousands) | | 2024 | | 2023 | | Current Maturity Date | | 2024 | | 2023 | Line of credit (1) | | 5.86 | % | 5.35 | % | November 2025 | | $ | 540,125 | | $ | 367,000 | Term loan (2) | | 3.36 | | 3.31 | | November 2026 | | | 400,000 | | | 400,000 | Term loan (3) | | 4.31 | | 4.26 | | January 2027 | | | 400,000 | | | 400,000 | Fixed-rate mortgage notes | | 4.46 | | 4.46 | | January 2027 - May 2031 | | | 595,096 | | | 596,191 | Floating-rate mortgage notes (4) | | 5.25 | | 5.25 | | October 2024 - October 2026 | | | 207,600 | | | 207,600 | Total principal amount / weighted-average (5) | | 4.66 | % | 4.43 | % | | | $ | 2,142,821 | | $ | 1,970,791 | Less: unamortized debt issuance costs | | | | | | | | $ | (14,457) | | $ | (17,038) | Add: unamortized mark-to-market adjustment on assumed debt | | | | | | | | | 6,848 | | | 7,367 | Total debt, net | | | | | | | | $ | 2,135,212 | | $ | 1,961,120 | Gross book value of properties encumbered by debt | | | | | | | | $ | 1,397,784 | | $ | 1,391,173 |
| (1) | The effective interest rate for our borrowings in U.S. dollars, which was $506.0 million as of June 30, 2024, is calculated based on the Term Secured Overnight Financing Rate (“Term SOFR”) plus an 11.448 basis point adjustment (“Adjusted Term SOFR”), plus a margin ranging from 1.25% to 2.00% depending on our consolidated leverage ratio. The effective interest rate for our borrowings in pound sterling, which was $34.1 million as of June 30, 2024 when converted to U.S. dollars, is calculated based on the Sterling Overnight Index Average Reference Rate (“SONIA”) plus a 3.26 basis point adjustment, plus a margin ranging from 1.25% to 2.00% depending on our consolidated leverage ratio. As of June 30, 2024, the unused and available portions under the line of credit were approximately $359.9 million and $326.4 million, respectively. The weighted-average interest rate is the all-in interest rate, including the effects of interest rate cap agreements relating to $150.0 million in borrowings under this line of credit. The line of credit is available for general business purposes including, but not limited to, refinancing of existing indebtedness and financing the acquisition of permitted investments, including commercial properties. |
| (2) | The effective interest rate is calculated based on Adjusted Term SOFR, plus a margin ranging from 1.20% to 1.90% depending on our consolidated leverage ratio. Total commitments for this term loan are $400.0 million. The weighted-average interest rate is the all-in interest rate, including the effects of interest rate swap agreements relating to $200.0 million in borrowings under this term loan and interest rate cap agreements relating to $200.0 million in borrowings under this term loan. |
| (3) | The effective interest rate is calculated based on Adjusted Term SOFR, plus a margin ranging from 1.20% to 1.90% depending on our consolidated leverage ratio. Total commitments for this term loan are $400.0 million. The weighted-average interest rate is the all-in interest rate, including the effects of interest rate swap agreements relating to $350.0 million in borrowings under this term loan and an interest rate cap agreement relating to $50.0 million in borrowings under this term loan. |
| (4) | The effective interest rate is calculated based on Adjusted Term SOFR plus a margin ranging from 1.55% to 2.50%. The weighted-average interest rate is the all-in interest rate, including the effects of interest rate cap agreements which capped the effective interest rates of our two floating-rate mortgage notes at 5.61% and 4.66%, respectively, as of June 30, 2024. |
| (5) | The weighted-average remaining term of our consolidated borrowings was 2.6 years as of June 30, 2024, excluding the impact of certain extension options. |
For the three months ended June 30, 2024 and 2023, the amount of interest incurred related to our consolidated indebtedness, excluding amortization of debt issuance costs, was $27.9 million and $20.6 million, respectively, including $3.7 million and $1.1 million, respectively, related to the amortization of our interest rate cap premiums. For the six months ended June 30, 2024 and 2023, the amount of interest incurred related to our consolidated indebtedness, excluding amortization of debt issuance costs, was $54.1 million and $40.2 million, respectively, including $7.1 million and $1.5 million, respectively, related to the amortization of our interest rate cap premiums. See “Note 6” for the amount of interest incurred related to the DST Program (as defined below). As of June 30, 2024, the principal payments due on our consolidated debt during each of the next five years and thereafter were as follows: | | | | | | | | | | | | | (in thousands) | | Line of Credit (1) | | Term Loans | | Mortgage Notes (2) | | Total | Remainder of 2024 | | $ | — | | $ | — | | $ | 128,144 | | $ | 128,144 | 2025 | | | 540,125 | | | — | | | 2,646 | | | 542,771 | 2026 | | | — | | | 400,000 | | | 85,396 | | | 485,396 | 2027 | | | — | | | 400,000 | | | 177,034 | | | 577,034 | 2028 | | | — | | | — | | | 90,477 | | | 90,477 | Thereafter | | | — | | | — | | | 318,999 | | | 318,999 | Total principal payments | | $ | 540,125 | | $ | 800,000 | | $ | 802,696 | | $ | 2,142,821 |
| (1) | The term of the line of credit may be extended pursuant to two six-month extension options, subject to certain conditions. |
| (2) | A $127.0 million mortgage note matures in October 2024 and the term may be extended pursuant to a one-year extension option, subject to certain conditions. A $115.0 million mortgage note matures in January 2027 and may be extended pursuant to two one-year extension options, subject to certain conditions. |
Debt Covenants Our line of credit, term loans and mortgage note agreements contain various property-level covenants, including customary affirmative and negative covenants. In addition, the line of credit and term loan agreements contain certain corporate-level financial covenants, including leverage ratio, fixed charge coverage ratio and tangible net worth thresholds. We were in compliance with our debt covenants as of June 30, 2024. Derivative Instruments To manage interest rate risk for certain of our variable-rate debt, we use interest rate derivative instruments as part of our risk management strategy. These derivatives are designed to mitigate the risk of future interest rate increases by either providing a fixed interest rate or capping the variable interest rate for a limited, pre-determined period of time. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the life of the interest rate swap agreements without exchange of the underlying notional amount. Interest rate caps involve the receipt of variable amounts from a counterparty at the end of each period in which the interest rate exceeds the agreed fixed price. For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss is recorded as a component of accumulated other comprehensive income (loss) (“AOCI”) on the condensed consolidated balance sheets and is reclassified into earnings as interest expense for the same period that the hedged transaction affects earnings, which is when the interest expense is recognized on the related debt. During the next 12 months, we estimate that $11.0 million will be reclassified as a decrease to interest expense related to active effective hedges of existing floating-rate debt. For derivatives that are not designated and do not qualify as hedges, changes in fair value are recognized through income. As a result, in periods with high interest rate volatility, we may experience significant fluctuations in our net income (loss). The following table summarizes the location and fair value of our consolidated derivative instruments on our condensed consolidated balance sheets: | | | | | | | | | | | | | | Number of | | | | | Fair Value | ($ in thousands) | | Contracts | | Notional Amount (1) | | | Other Assets | | Other Liabilities | As of June 30, 2024 | | | | | | | | | | | | Interest rate swaps designated as cash flow hedges | | 9 | | $ | 550,000 | | $ | 9,832 | | $ | — | Interest rate caps designated as cash flow hedges | | 8 | | | 607,600 | | | 18,734 | | | | Total derivative instruments | | 17 | | $ | 1,157,600 | | $ | 28,566 | | $ | — | As of December 31, 2023 | | | | | | | | | | | | Interest rate swaps designated as cash flow hedges | | 12 | | $ | 650,000 | | $ | 10,510 | | $ | — | Interest rate caps designated as cash flow hedges | | 8 | | | 507,600 | | | 21,746 | | | — | Total derivative instruments | | 20 | | $ | 1,157,600 | | $ | 32,256 | | $ | — |
| (1) | As of December 31, 2023, notional amount excludes an aggregate $100.0 million of notional amount for three interest rate cap agreements entered into in November 2023 with effective dates in February 2024. These interest rate cap agreements replaced separate interest rate swap agreements with an aggregate $100.0 million of notional amount that expired at the end of January 2024. |
The following table presents the effect of our consolidated derivative instruments on our condensed consolidated financial statements: | | | | | | | | | | | | | | | | For the Three Months Ended | | For the Six Months Ended | | | | June 30, | | June 30, | | (in thousands) | | 2024 | | 2023 | | 2024 | | 2023 | | Derivative instruments designated as cash flow hedges: | | | | | | | | | | | | | | Gain recognized in AOCI | | $ | 3,171 | | $ | 14,146 | | $ | 12,830 | | $ | 10,146 | | Amount reclassified from AOCI as a decrease into interest expense | | | (4,575) | | | (4,038) | | | (9,465) | | | (7,094) | | Total interest expense presented in the condensed consolidated statements of operations in which the effects of cash flow hedges are recorded | | | 45,885 | | | 37,882 | | | 90,119 | | | 75,427 | | Derivative instruments not designated as cash flow hedges: | | | | | | | | | | | | | | Unrealized loss on derivative instruments recognized in other income (expenses) (1) | | $ | — | | $ | (1,101) | | $ | — | | $ | (2,325) | | Realized gain on derivative instruments recognized in other income (expenses) (2) | | | — | | | 1,293 | | | — | | | 2,414 | |
| (1) | Unrealized loss on changes in fair value of derivative instruments relates to mark-to-market changes on our derivatives not designated as cash flow hedges. |
| (2) | Realized gain on derivative instruments relates to interim settlements for our derivatives not designated as cash flow hedges. |
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