Derivative Instruments and Hedging Activities

12 Months Ended

Dec. 31, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

The Company uses interest rate swaps, interest rate caps, and total return swap contracts to manage certain interest rate risks. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair values of interest rate swaps and total return swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate

curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.

In September 2022, the Company entered into one forward starting interest rate swap, with settlement payments commencing in May 2023, related to the $300.0 million unsecured term loan entered into in October 2022. In April 2023, the Company drew down the $300.0 million term loan priced at Adjusted SOFR plus 0.85%, which has been swapped to an all-in fixed rate of 4.2%. The term loan matures in October 2024 with three 12-month extension options, each exercisable at the Company's option and the swap has a termination date of October 2026. This derivative qualifies for hedge accounting. As of December 31, 2023 and 2022, the Company had an outstanding balance on the unsecured term loan of $300.0 million and zero, respectively.

As of December 31, 2023 and 2022, the Company had no interest rate caps.

As of December 31, 2023 and 2022, the aggregate carrying value of the interest rate swap contracts were an asset of $4.3 million and $5.6 million, respectively. As of December 31, 2023 and 2022, the swap contracts were presented in the consolidated balance sheets as an asset of $4.3 million and $5.6 million, respectively, and were included in prepaid expenses and other assets on the consolidated balance sheets.

Hedge ineffectiveness related to cash flow hedges, which is included in interest expense on the consolidated statements of income, was zero for the years ended December 31, 2023, 2022, and 2021 respectively.

The Company has four total return swap contracts, with an aggregate notional amount of $222.7 million, that effectively convert $222.7 million of mortgage notes payable to a floating interest rate based on the Securities Industry and Financial Markets Association Municipal Swap Index ("SIFMA") plus a spread. The Company can currently settle all four of the total return swaps with $222.7 million of the outstanding debt at par. These derivatives do not qualify for hedge accounting and had a carrying and fair value of zero at both December 31, 2023 and 2022, respectively. These total return swaps are scheduled to mature between December 2024 and November 2033. The realized gains of $3.1 million, $7.9 million, and $10.8 million for the years ended December 31, 2023, 2022, and 2021, respectively, were reported on the consolidated statements of income as total return swap income.