Industrial Logistics Properties Trust 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk ( dollars 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 is materially unchanged since December 31, 2019. Other than as described below, we do not currently expect 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 At June 30, 2020 , our outstanding fixed rate debt consisted of the following mortgage notes: Annual Annual Interest Principal Interest Interest Payments Debt Balance (1) Rate (1) Expense (1) Maturity Due Mortgage note (one property in Florida) (2) $ 56,980 3.60 % $ 2,051 2023 Monthly Mortgage notes (186 properties in Hawaii) 650,000 4.31 % 28,015 2029 Monthly Mortgage notes (11 U.S. Mainland Properties) (2) 350,000 3.33 % 11,655 2029 Monthly $ 1,056,980 $ 41,721 (1) The principal balance, annual interest rate and annual interest expense are the amounts stated in the applicable contract. In accordance with GAAP, our carrying values and recorded interest expense may differ from these amounts because of market conditions at the time we assumed or issued this debt. (2) The properties encumbered by these mortgages are owned by a joint venture in which we own a 61% equity interest. These mortgage notes require interest only payments until maturity. Because our mortgage notes require interest to be paid at a fixed rate, changes in market interest rates during the terms of these mortgage notes will not affect our interest obligations. If these mortgage notes are 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 $10,570 . 33 Table of Contents Changes in market interest rates 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. Based on the balances outstanding at June 30, 2020 and discounted cash flow analyses through the 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 change in the interest rates would change the fair value of these obligations by approximately $78,147. Floating Rate Debt At June 30, 2020 , our floating rate debt consisted of $ 320,000 outstanding under our revolving credit facility. Our revolving credit facility matures on December 29, 2021 and, subject to the payment of extension fees and satisfaction of other conditions, we have the option to extend the maturity date for two, six month periods. No principal repayments are required under our revolving credit facility prior to maturity, and prepayments may be made at any time without penalty. Borrowings under our revolving credit facility are in U.S. dollars and require interest to be paid at LIBOR plus a premium that varies based on our leverage ratio. Accordingly, we are vulnerable to changes in the U.S. dollar based short term rates, specifically LIBOR. In addition, upon renewal or refinancing of this obligation, we are vulnerable to increases in interest rate premiums due to market conditions or our perceived credit risk. 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 approximate impact a one percentage point increase in interest rates would have on our annual floating rate interest expense at June 30, 2020 : Impact of an Increase in Interest Rates Total Interest Annual Interest Rate Outstanding Expense Earnings Per Per Year Debt Per Year Share Impact (1) At June 30, 2020 1.59 % $ 320,000 $ 5,088 $ (0.08 ) One percentage point increase 2.59 % $ 320,000 $ 8,288 $ (0.13 ) (1) Based on the diluted weighted average common shares outstanding for the six months ended June 30, 2020 . The following table presents the approximate impact a one percentage point increase in interest rates would have on our annual floating rate interest expense at June 30, 2020 if we were fully drawn on our revolving credit facility: Impact of an Increase in Interest Rates Total Interest Annual Interest Rate Outstanding Expense Earnings Per Per Year Debt Per Year Share Impact (1) At June 30, 2020 1.59 % $ 750,000 $ 11,925 $ (0.18 ) One percentage point increase 2.59 % $ 750,000 $ 19,425 $ (0.30 ) (1) Based on the diluted weighted average common shares outstanding for the six months ended June 30, 2020 . The foregoing tables show the impact of an immediate one percentage point change in floating interest rates. If interest rates were to change 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 amounts of our revolving credit facility and any other floating rate debt. LIBOR Phase Out LIBOR is currently expected to be phased out in 2021. We are required to pay interest on borrowings under our revolving credit facility at floating rates based on LIBOR. Future debt that we may incur may also require that we pay interest based upon LIBOR. We currently expect that the determination of interest under our revolving credit facility would be revised as provided under our credit agreement or amended as necessary to provide for an interest rate that approximates the existing interest rate as calculated in accordance with LIBOR. Despite our current expectations, we cannot be sure that, if LIBOR is phased out or transitioned, the changes to the determination of interest under our agreements would approximate the current calculation in accordance with LIBOR. We do not know what standard, if any, will replace LIBOR if it is phased out or transitioned. 34 Table of Contents