Derivative Instruments and Hedging Activities

12 Months Ended

Dec. 31, 2024

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 October 2024, the Company acquired its joint venture partner’s interest in the BEX II portfolio and assumed $95.0 million of variable rate mortgage notes payable with one interest rate swap that effectively converts $47.5 million to an all-in fixed rate of 2.83%. This variable rate mortgage notes payable matures in April 2026 with one 12-month extension option, exercisable at the Company’s option and the swap has a termination date of March 2026. This derivative qualifies for hedge accounting.

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 2025 with two 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, 2024 and 2023, the Company had an outstanding balance on the unsecured term loan of $300.0 million.

As of December 31, 2024 and 2023, the aggregate carrying value of the interest rate swap contracts was an asset of $5.5 million and $4.3 million, respectively, included in prepaid expenses and other assets in the consolidated balance sheets.

The Company has four total return swap contracts, with an aggregate notional amount of $220.8 million that effectively convert 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 total return swaps with $220.8 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, 2024 and 2023, respectively. The Company’s total return swaps are scheduled to mature between December 2027 and December 2034. Realized gains of $3.1 million, $3.1 million, and $7.9 million for the years ended December 31, 2024, 2023 and 2022, respectively, were reported in the consolidated statements of income as total return swap income.