In the normal course of business, our operations are exposed to market risks, including the effect of changes in interest rates. We may enter into derivative financial instruments to offset this underlying market risk. There have been no significant changes in our policy and strategy from what was disclosed in our 2025 Annual Report.

Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements but either do not meet the strict requirements to apply hedge accounting in accordance with FASB ASC 815, Derivatives and Hedging, or the Company has elected not to designate such derivatives as hedges. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in net income (loss) as interest expense.

As of September 30, 2026, the Company had the following interest rate caps outstanding that were not designated as cash flow hedges of interest rate risk (dollars in thousands):


Properties	Type	Maturity Date	Notional		Strike Rate
Avant at Pembroke Pines	Floating	10/1/2027	$	248,185	8.16%
Brandywine I & II	Floating	10/1/2027		59,526	8.16%
Sabal Palm at Lake Buena Vista	Floating	10/1/2027		56,220	8.41%
Cornerstone	Floating	10/1/2027		45,815	8.66%
Arbors of Brentwood	Floating	10/1/2027		39,977	8.16%
Bella Vista	Floating	10/1/2027		37,400	8.91%
Estates on Maryland	Floating	10/1/2027		37,345	8.91%
The Venue on Camelback	Floating	10/1/2027		36,465	8.16%
The Enclave	Floating	10/1/2027		33,440	8.66%
Residences at Glenview Reserve	Floating	10/1/2027		33,271	8.16%
The Adair	Floating	10/1/2027		33,229	8.16%
High House at Cary	Floating	10/1/2027		32,478	8.16%
Six Forks Station	Floating	10/1/2027		30,430	8.16%
The Verandas at Lake Norman	Floating	10/1/2027		30,113	8.16%
The Heritage	Floating	10/1/2027		29,810	8.91%
Versailles II	Floating	10/1/2027		15,706	8.16%
Summers Landing	Floating	10/1/2027		14,135	8.66%
Rockledge Apartments	Floating	12/1/2027		78,444	7.66%
The Preserve at Terrell Mill	Floating	12/1/2027		74,341	7.66%
Bloom	Floating	12/1/2027		60,848	7.66%
Fairways at San Marcos	Floating	12/1/2027		55,056	7.66%
Torreyana Apartments	Floating	12/1/2027		43,153	7.66%
Atera Apartments	Floating	12/1/2027		38,555	7.66%
Bella Solara	Floating	12/1/2027		37,772	7.66%
Seasons 704 Apartments	Floating	12/1/2027		33,960	7.66%
Courtney Cove	Floating	12/1/2027		31,596	7.66%
Parc500	Floating	12/1/2027		30,012	7.66%
Madera Point	Floating	12/1/2027		29,676	7.66%
Creekside at Matthews	Floating	12/1/2027		28,703	7.66%
The Summit at Sabal Park	Floating	12/1/2027		26,735	7.66%
Versailles	Floating	12/1/2027		26,108	7.66%
Venue at 8651	Floating	12/1/2027		24,620	7.66%
Cutter's Point	Floating	12/1/2027		18,994	7.66%
Arbors on Forest Ridge	Floating	12/1/2027		17,307	7.66%
Sedona at Lone Mountain	Floating	2/1/2029		40,287	7.17%
			$	1,509,712	8.01%

The table below presents the fair value of the Company’s derivative financial instruments, which use level 2 inputs, as well as their classification on the consolidated balance sheets as of September 30, 2026 and December 31, 2025 (in thousands):


		Asset Derivatives				Liability Derivatives
	Balance Sheet Location	September 30, 2026		December 31, 2025		September 30, 2026		December 31, 2025
Derivatives designated as hedging instruments:
Interest rate swaps	Fair market value of interest rate swaps	$	4,346	$	13,434	$	—	$	475

Derivatives not designated as hedging instruments:
Interest rate caps	Prepaid and other assets		251		16		—		—
Total		$	4,597	$	13,450	$	—	$	475

The tables below present the effect of the Company’s derivative financial instruments on the consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2026 and 2025 (in thousands):


	Amount of gain (loss) recognized in OCI					Location of gain (loss) reclassified from accumulated	Amount of gain (loss) reclassified from OCI into income
	2026		2025			OCI into income	2026		2025
Derivatives designated as hedging instruments:
For the three months ended September 30,
Interest rate swaps	$	2,533	$	883		Interest expense	$	3,418	$	7,223
Interest rate caps	$	—	$	1		Interest expense	$	—	$	—
For the nine months ended September 30,
Interest rate swaps	$	5,590	$	(261	)	Interest expense	$	14,203	$	22,769
Interest rate caps	$	—	$	247		Interest expense	$	—	$	170


	Location of gain (loss)	Amount of gain (loss) recognized in income
	recognized in income	2026		2025
Derivatives not designated as hedging instruments:
For the three months ended September 30,
Interest rate caps	Interest expense	$	78	$	(157	)
For the nine months ended September 30,
Interest rate caps	Interest expense	$	205	$	(935	)

Redeemable noncontrolling interests in the OP have a redemption feature and are marked to their redemption value if such value exceeds the carrying value of the redeemable noncontrolling interests in the OP (see Note 8). The redemption value is based on the fair value of the Company’s common stock at the redemption date and, therefore, is calculated based on the fair value of the Company’s common stock at the balance sheet date. Since the valuation is based on observable inputs such as quoted prices for similar instruments in active markets, redeemable noncontrolling interests in the OP are classified as Level 2 if they are adjusted to their redemption value.

As of September 30, 2026 and December 31, 2025, the fair values of cash and cash equivalents, restricted cash, accounts receivable, prepaid and other assets, excluding interest rate caps, accounts payable and other accrued liabilities, accrued real estate taxes payable, accrued interest payable, security deposits and prepaid rent approximated their carrying values because of the short-term nature of these instruments. The estimated fair values of other financial instruments were determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company would realize on the disposition of the financial instruments. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value amounts.

The Company's note receivable, included in prepaid and other assets, is carried at amortized cost. Given the recency of the purchase of the Waterford Loan (as defined below) in June 2026, and the absence of significant changes in credit or market conditions since that date, the Company believes its carrying value approximates fair value as of September 30, 2026. The Company will reassess this conclusion in future periods as additional information becomes available, and the estimated fair value would utilize Level 3 inputs (see Note 9).

Long-term indebtedness is carried at amounts that reasonably approximate their fair value. In calculating the fair value of its long-term indebtedness, the Company used interest rate and spread assumptions that reflect current credit worthiness and market conditions available for the issuance of long-term debt with similar terms and remaining maturities. These financial instruments utilize Level 2 inputs.