Industrial Logistics Properties Trust 10-Q

Item 1. Financial Statements INDUSTRIAL LOGISTICS PROPERTIES TRUST CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) (unaudited) September 30, December 31, 2021 2020 ASSETS Real estate properties: Land $ 718,565 $ 709,099 Buildings and improvements 1,217,458 1,099,971 Total real estate properties, gross 1,936,023 1,809,070 Accumulated depreciation ( 164,843 ) ( 141,406 ) Total real estate properties, net 1,771,180 1,667,664 Investment in unconsolidated joint venture 63,260 60,590 Acquired real estate leases, net 79,475 83,644 Cash and cash equivalents 44,093 22,834 Rents receivable, including straight line rents of $ 68,426 and $ 62,753 , respectively 74,224 69,511 Deferred leasing costs, net 7,037 4,595 Debt issuance costs, net 464 1,477 Due from related persons — 2,665 Other assets, net 8,362 2,765 Total assets $ 2,048,095 $ 1,915,745 LIABILITIES AND SHAREHOLDERS' EQUITY Revolving credit facility $ 354,000 $ 221,000 Mortgage notes payable, net 645,987 645,579 Assumed real estate lease obligations, net 13,037 14,630 Accounts payable and other liabilities 16,942 14,716 Rents collected in advance 11,823 7,811 Security deposits 6,933 6,540 Due to related persons 3,344 2,279 Total liabilities 1,052,066 912,555 Commitments and contingencies Shareholders' Equity: Common shares of beneficial interest, $ .01 par value: 100,000,000 shares authorized; 65,404,879 and 65,301,088 shares issued and outstanding, respectively 654 653 Additional paid in capital 1,011,835 1,010,819 Cumulative net income 280,701 224,226 Cumulative common distributions ( 297,161 ) ( 232,508 ) Total shareholders' equity 996,029 1,003,190 Total liabilities and shareholders' equity $ 2,048,095 $ 1,915,745 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (amounts in thousands, except per share data) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Rental income $ 54,981 $ 65,106 $ 163,378 $ 194,494 Expenses: Real estate taxes 7,617 9,036 22,353 26,779 Other operating expenses 4,417 5,511 13,734 15,733 Depreciation and amortization 12,694 18,488 37,202 55,303 Acquisition and certain other transaction related costs — 178 646 178 General and administrative 4,728 5,180 12,718 14,857 Total expenses 29,456 38,393 86,653 112,850 Gain on sale of real estate 940 — 940 — Interest income — — — 113 Interest expense (including net amortization of debt issuance costs, premiums and discounts of $ 505 , $ 664 , $ 1,516 and $ 1,893 , respectively) ( 9,084 ) ( 12,886 ) ( 26,468 ) ( 40,610 ) Gain on early extinguishment of debt — — — 120 Income before income tax expense and equity in earnings of investees 17,381 13,827 51,197 41,267 Income tax expense ( 72 ) ( 13 ) ( 177 ) ( 202 ) Equity in earnings of investees 998 — 5,455 — Net income 18,307 13,814 56,475 41,065 Net loss attributable to noncontrolling interest — 275 — 691 Net income attributable to common shareholders $ 18,307 $ 14,089 $ 56,475 $ 41,756 Weighted average common shares outstanding - basic 65,178 65,112 65,154 65,092 Weighted average common shares outstanding - diluted 65,230 65,129 65,205 65,101 Per common share data (basic and diluted): Net income attributable to common shareholders $ 0.28 $ 0.22 $ 0.86 $ 0.64 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (dollars in thousands) (unaudited) Number of Additional Cumulative Common Common Paid In Cumulative Common Total Shares Shares Capital Net Income Distributions Equity Balance at December 31, 2020 65,301,088 $ 653 $ 1,010,819 $ 224,226 $ ( 232,508 ) $ 1,003,190 Net income — — — 19,337 — 19,337 Share grants — — 239 — — 239 Distributions to common shareholders — — — — ( 21,550 ) ( 21,550 ) Balance at March 31, 2021 65,301,088 653 1,011,058 243,563 ( 254,058 ) 1,001,216 Net income — — — 18,831 — 18,831 Share grants 21,000 — 780 — — 780 Share repurchases ( 7,733 ) — ( 202 ) — — ( 202 ) Distributions to common shareholders — — — — ( 21,549 ) ( 21,549 ) Balance at June 30, 2021 65,314,355 653 1,011,636 262,394 ( 275,607 ) 999,076 Net income — — — 18,307 — 18,307 Share grants 118,800 1 916 — — 917 Share repurchases ( 27,576 ) — ( 713 ) — — ( 713 ) Share forfeitures ( 700 ) — ( 4 ) — — ( 4 ) Distributions to common shareholders — — — — ( 21,554 ) ( 21,554 ) Balance at September 30, 2021 65,404,879 $ 654 $ 1,011,835 $ 280,701 $ ( 297,161 ) $ 996,029 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (dollars in thousands) (unaudited) Total Equity Total Equity Number of Additional Cumulative Attributable to Attributable to Common Common Paid In Cumulative Common Common Noncontrolling Total Shares Shares Capital Net Income Distributions Shareholders Interest Equity Balance at December 31, 2019 65,180,628 $ 652 $ 999,302 $ 142,155 $ ( 146,419 ) $ 995,690 $ — $ 995,690 Net income (loss) — — — 12,846 — 12,846 ( 152 ) 12,694 Share grants 6,000 — 326 — — 326 — 326 Share repurchases ( 951 ) — ( 18 ) — — ( 18 ) — ( 18 ) Distributions to common shareholders — — — — ( 21,510 ) ( 21,510 ) — ( 21,510 ) Contributions from noncontrolling interest — — 6,972 — — 6,972 100,668 107,640 Balance at March 31, 2020 65,185,677 652 1,006,582 155,001 ( 167,929 ) 994,306 100,516 1,094,822 Net income (loss) — — — 14,821 — 14,821 ( 264 ) 14,557 Share grants 24,500 — 654 — — 654 — 654 Share repurchases ( 613 ) — ( 13 ) — — ( 13 ) — ( 13 ) Distributions to common shareholders — — — — ( 21,511 ) ( 21,511 ) — ( 21,511 ) Distributions to noncontrolling interest — — — — — — ( 1,898 ) ( 1,898 ) Balance at June 30, 2020 65,209,564 652 1,007,223 169,822 ( 189,440 ) 988,257 98,354 1,086,611 Net income (loss) — — — 14,089 — 14,089 ( 275 ) 13,814 Share grants 108,600 1 675 — — 676 — 676 Share repurchases ( 16,496 ) — ( 351 ) — — ( 351 ) — ( 351 ) Share forfeitures ( 580 ) — ( 3 ) — — ( 3 ) — ( 3 ) Distributions to common shareholders — — — — ( 21,519 ) ( 21,519 ) — ( 21,519 ) Contributions from noncontrolling interest — — 2,595 — — 2,595 ( 2,293 ) 302 Distributions to noncontrolling interest — — — — — — ( 2,107 ) ( 2,107 ) Balance at September 30, 2020 65,301,088 $ 653 $ 1,010,139 $ 183,911 $ ( 210,959 ) $ 983,744 $ 93,679 $ 1,077,423 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited) Nine Months Ended September 30, 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 56,475 $ 41,065 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 23,500 34,307 Net amortization of debt issuance costs, premiums and discounts 1,516 1,893 Amortization of acquired real estate leases and assumed real estate lease obligations 12,567 19,458 Amortization of deferred leasing costs 620 952 Straight line rental income ( 5,673 ) ( 6,183 ) Gain on sale of real estate ( 940 ) — Gain on early extinguishment of debt — ( 120 ) Other non-cash expenses 1,932 1,652 Unconsolidated joint venture distributions 1,980 — Equity in earnings of investees ( 5,455 ) — Change in assets and liabilities: Rents receivable 960 ( 1,984 ) Deferred leasing costs ( 2,758 ) ( 514 ) Due from related persons 2,665 1,504 Other assets ( 5,596 ) ( 2,413 ) Accounts payable and other liabilities 1,657 3,865 Rents collected in advance 4,012 ( 1,210 ) Security deposits 393 71 Due to related persons 1,065 589 Net cash provided by operating activities 88,920 92,932 CASH FLOWS FROM INVESTING ACTIVITIES: Real estate acquisitions and deposits ( 134,730 ) ( 71,628 ) Real estate improvements ( 2,373 ) ( 4,495 ) Proceeds from sale of real estate 1,206 — Proceeds from sale of joint venture 804 — Distributions in excess of earnings from Affiliates Insurance Company — 287 Net cash used in investing activities ( 135,093 ) ( 75,836 ) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under revolving credit facility 246,000 180,000 Repayments of revolving credit facility ( 113,000 ) ( 170,000 ) Repayment of mortgage note payable — ( 48,750 ) Distributions to common shareholders ( 64,653 ) ( 64,540 ) Proceeds from noncontrolling interest, net — 107,942 Distributions to noncontrolling interest — ( 4,005 ) Repurchase of common shares ( 915 ) ( 382 ) Net cash provided by financing activities 67,432 265 Increase in cash, cash equivalents and restricted cash 21,259 17,361 Cash, cash equivalents and restricted cash at beginning of period 22,834 34,550 Cash, cash equivalents and restricted cash at end of period $ 44,093 $ 51,911 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (dollars in thousands) (unaudited) Nine Months Ended September 30, 2021 2020 SUPPLEMENTAL DISCLOSURES: Interest paid $ 24,708 $ 39,125 Income taxes paid $ 386 $ 199 NON-CASH INVESTING ACTIVITIES: Real estate improvements accrued, not paid $ 799 $ 741 SUPPLEMENTAL DISCLOSURE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH: The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows: As of September 30, 2021 2020 Cash and cash equivalents $ 44,093 $ 39,105 Restricted cash — 12,806 Total cash, cash equivalents and restricted cash shown in the statements of cash flows $ 44,093 $ 51,911 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 8 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) Note 1. Basis of Presentation The accompanying condensed consolidated financial statements of Industrial Logistics Properties Trust and its consolidated subsidiaries, or the Company, ILPT, we, us or our, are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2020, or our 2020 Annual Report. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the condensed consolidated financial statements include purchase price allocations, useful lives of fixed assets, impairments of real estate and related intangibles. Note 2. Real Estate Investments As of September 30, 2021, our portfolio was comprised of 294 wholly owned properties containing approximately 36,488,000 rentable square feet, including 226 buildings, leasable land parcels and easements containing approximately 16,729,000 rentable square feet of primarily industrial lands located on the island of Oahu, Hawaii, or our Hawaii Properties, and 68 properties containing approximately 19,759,000 rentable square feet of industrial properties located in 32 other states, or our Mainland Properties. As of September 30, 2021, we also owned a 22 % equity interest in an unconsolidated joint venture which owns 12 properties located in nine states totaling approximately 9,227,000 rentable square feet. We operate in one business segment: ownership and leasing of properties that include industrial and logistics buildings and leased industrial lands. For the three months ended September 30, 2021 and 2020, approximately 50.5 % and 40.7 %, respectively, of our rental income was from our Hawaii Properties. For the nine months ended September 30, 2021 and 2020, approximately 50.7 % and 41.0 %, respectively, of our rental income was from our Hawaii Properties. In addition, subsidiaries of Amazon.com, Inc., which are tenants at certain of our Mainland Properties, accounted for $ 5,231 , or 9.5 %, and $ 10,288 , or 15.8 %, of our rental income for the three months ended September 30, 2021 and 2020, respectively, and $ 16,117 , or 9.9 %, and $ 30,349 , or 15.6 %, of our rental income for the nine months ended September 30, 2021 and 2020, respectively. During the nine months ended September 30, 2021, we acquired four industrial properties and one parcel of developable land containing 1,644,508 rentable square feet for an aggregate purchase price of $ 134,730 , including acquisition related costs of $ 1,030 . These acquisitions were accounted for as asset acquisitions. We allocated the purchase prices for these acquisitions based on the estimated fair value of the acquired assets as follows: Number Rentable Buildings Acquired Acquired of Square Purchase and Real Estate Real Estate Date Market Area Properties Feet Price Land Improvements Leases Lease Obligations May 2021 Dallas, TX 1 — $ 2,319 $ 2,319 $ — $ — $ — June 2021 Columbus, OH 1 357,504 31,762 1,491 27,407 2,864 — August 2021 Memphis, TN 3 1,287,004 100,649 5,922 87,600 7,192 ( 65 ) 5 1,644,508 $ 134,730 $ 9,732 $ 115,007 $ 10,056 $ ( 65 ) As a result of eminent domain taking in September 2021, we sold a portion of a land parcel located in Rock Hill, South Carolina for $ 1,400 , excluding closing costs, resulting in a net gain on sale of real estate of $ 940 . 9 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) In October 2021, we entered into an agreement to acquire a recently built property located in the Detroit, Michigan market area containing approximately 1,009,000 rentable square feet and net leased to a single e-commerce tenant for a purchase price of $ 120,000 , excluding acquisition related costs. This acquisition is expected to close during the fourth quarter of 2021. However, this acquisition is subject to conditions; accordingly, we cannot be sure that we will complete this acquisition, that this will not be delayed or that the terms will not change. During the nine months ended September 30, 2021, we committed $ 7,074 for expenditures related to leasing related costs for leases executed during the period for approximately 2,002,000 square feet. Committed but unspent tenant related obligations based on existing leases as of September 30, 2021 were $ 2,315 . Certain of our industrial lands in Hawaii may require environmental remediation, especially if the use of those lands is changed; however, we do not have plans to change the use of those lands. As of both September 30, 2021 and December 31, 2020, accrued environmental remediation costs of $ 6,940 were included in accounts payable and other liabilities in our condensed consolidated balance sheets. These accrued environmental remediation costs relate to maintenance of our properties for current uses, and, because of the indeterminable timing of the remediation, these amounts have not been discounted to present value. In general, we do not have any insurance designated to limit any losses that we may incur as a result of known or unknown environmental conditions which are not caused by an insured event, such as fire or flood, although some of our tenants may maintain such insurance that may benefit us. Although we do not believe that there are environmental conditions at any of our properties that will have a material adverse effect on us, we cannot be sure that such conditions are not present at our properties or that costs we incur to remediate contamination will not have a material adverse effect on our business or financial condition. Charges for environmental remediation costs, if any, are included in other operating expenses in our condensed consolidated statements of comprehensive income. Joint Venture Activities As of September 30, 2021, we have an equity investment in a joint venture that consists of the following: ILPT Carrying Value ILPT of Investment at Number of Square Joint Venture Ownership September 30, 2021 Properties Location Feet 12 properties 22 % $ 63,260 12 Nine states 9,226,729 The following table provides a summary of the mortgage debts of our joint venture: Principal Balance at September 30, Joint Venture Coupon Rate (1) Maturity Date 2021 (2) Mortgage note payable (secured by one property in Florida) 3.60 % 10/1/2023 $ 56,980 Mortgage note payable (secured by 11 other properties in eight states) 3.33 % 11/7/2029 350,000 Weighted average/total 3.37 % $ 406,980 (1) Includes the effect of mark to market purchase accounting. (2) Amounts are not adjusted for our minority interest; none of the debt is recourse to us. During the nine months ended September 30, 2020, we entered into agreements related to this joint venture for 12 of our properties in the mainland United States, or our joint venture, with an Asian institutional investor and contributed those 12 properties to our joint venture. We received an aggregate of $ 108,676 from that investor for a 39 % equity interest in our joint venture and we retained the remaining 61 % equity interest in our joint venture. We recognized a 39 % noncontrolling interest in our condensed consolidated financial statements for the three and nine months ended September 30, 2020. The portion of our joint venture's net loss not attributable to us, or $ 275 and $ 691 for the three and nine months ended September 30, 2020, respectively, is reported as noncontrolling interest in our condensed consolidated statements of comprehensive income. During the three and nine months ended September 30, 2020, our joint venture made aggregate cash distributions of $ 2,107 and $ 4,005 , respectively, to the first joint venture investor, which were reflected as a decrease in total equity attributable to noncontrolling interest in our condensed consolidated balance sheets. 10 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) In November 2020, we sold an additional 39 % equity interest from our then remaining 61 % equity interest to a second unrelated third party institutional investor and retained a 22 % equity interest in our joint venture. Effective as of the date of the sale, we deconsolidated our joint venture and, since that time, we account for our joint venture using the equity method of accounting under the fair value option. During the three and nine months ended September 30, 2021, we recorded an increase in the fair value of our investment in our joint venture of $ 998 and $ 5,455 , respectively, as equity in earnings of investees in our condensed consolidated statements of comprehensive income. In addition, during the three and nine months ended September 30, 2021, our joint venture made aggregate cash distributions of $ 660 and $ 1,980 , respectively, to us. See Note 5 for more information regarding our joint venture. Note 3. Leases We are a lessor of industrial and logistics properties. Our leases provide our tenants with the contractual right to use and economically benefit from all the physical space specified in the leases; therefore, we have determined to evaluate our leases as lease arrangements. Our leases provide for base rent payments and in addition may include variable payments. Rental income from operating leases, including any payments derived by index or market-based indices, is recognized on a straight line basis over the lease term when we have determined that the collectability of substantially all of the lease payments is probable. Some of our leases have options to extend or terminate the lease exercisable at the option of our tenants, which are considered when determining the lease term. We do not include in our measurement of our lease receivables certain variable payments, including payments determined by changes in the index or market-based indices after the inception of the lease, certain tenant reimbursements and other income until the specific events that trigger the variable payments have occurred. Such payments totaled $ 9,478 and $ 11,943 for the three months ended September 30, 2021 and 2020, respectively, of which tenant reimbursements totaled $ 9,233 and $ 11,698 , respectively, and $ 28,733 and $ 35,103 for the nine months ended September 30, 2021 and 2020, respectively, of which tenant reimbursements totaled $ 27,998 and $ 34,368 , respectively. We increased rental income to record revenue on a straight line basis by $ 1,678 and $ 2,120 for the three months ended September 30, 2021 and 2020, respectively, and $ 5,673 and $ 6,183 for the nine months ended September 30, 2021 and 2020, respectively. Rents receivable included $ 68,426 and $ 62,753 of straight line rents at September 30, 2021 and December 31, 2020, respectively. During the year ended December 31, 2020, certain of our tenants requested, and we granted, relief from their obligations to pay rent due to us in response to the economic conditions resulting from the COVID-19 pandemic. In most cases, the tenants granted deferrals were obligated to pay the deferred rents in 12 equal monthly installments beginning in September 2020. As of September 30, 2021 and December 31, 2020, deferred payments totaling $ 1,168 and $ 2,630 , respectively, are included in rents receivable in our condensed consolidated balance sheets. These deferred amounts did not impact our operating results for the three or nine months ended September 30, 2021 or 2020. 11 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) Note 4. Indebtedness As of September 30, 2021, our outstanding indebtedness consisted of the following: Net Book Value Principal Balance as of of Collateral September 30, December 31, Interest At September 30, 2021 (1) 2020 (1) Rate Maturity 2021 Unsecured revolving credit facility (2) $ 354,000 $ 221,000 1.39 % Dec 2021 $ — Mortgage notes payable (secured by 186 properties in Hawaii) 650,000 650,000 4.31 % Feb 2029 491,119 1,004,000 871,000 $ 491,119 Unamortized debt issuance costs ( 4,013 ) ( 4,421 ) $ 999,987 $ 866,579 (1) The principal balances are the amounts stated in contracts. In accordance with GAAP, our carrying values and recorded interest expense may be different because of market conditions at the time we assumed certain of these debts. (2) The maturity date of our revolving credit facility is December 29, 2021 and we have the option to extend the maturity date for two , six month periods through December 29, 2022. We have a $ 750,000 unsecured revolving credit facility, or our revolving credit facility, that is available for our general business purposes, including acquisitions. The maturity date of our revolving credit facility is December 29, 2021. We have the option to extend the maturity date of our revolving credit facility for two , six month periods, subject to payment of extension fees and satisfaction of other conditions. We may borrow, repay and reborrow funds under our revolving credit facility until maturity, and no principal repayment is due until maturity. Interest on borrowings under our revolving credit facility is calculated at floating rates based on LIBOR plus a premium that varies based on our leverage ratio. We are also required to pay a commitment fee on the unused portion of our revolving credit facility. The agreement governing our revolving credit facility, or our credit agreement, also includes a feature under which the maximum borrowing availability under our revolving credit facility may be increased to up to $ 1,500,000 in certain circumstances. As of September 30, 2021, interest payable on the amount outstanding under our revolving credit facility was LIBOR plus 130 basis points and our commitment fee was 25 basis points. As of September 30, 2021 and December 31, 2020, the interest rate payable on borrowings under our revolving credit facility was 1.39 % and 1.70 %, respectively. The weighted average interest rate for borrowings under our revolving credit facility was 1.42 % and 1.57 % for the three months ended September 30, 2021 and 2020, respectively, and 1.46 % and 2.51 % for the nine months ended September 30, 2021 and September 30, 2020, respectively. As of September 30, 2021 and October 25, 2021, we had $ 354,000 and $ 327,000 , respectively, outstanding under our revolving credit facility, and $ 396,000 and $ 423,000 , respectively, available to borrow under our revolving credit facility. Our credit agreement provides for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, such as a change of control of us, which includes The RMR Group LLC, or RMR LLC, ceasing to act as our business manager and property manager. Our credit agreement also contains a number of covenants, including covenants that restrict our ability to incur debts or to make distributions in certain circumstances, and generally requires us to maintain certain financial ratios. We believe we were in compliance with the terms and conditions of the covenants under our credit agreement at September 30, 2021. In May 2020, we prepaid at par plus accrued interest a mortgage note secured by one of our properties with an outstanding principal balance of approximately $ 48,750 , an annual interest rate of 3.48 % and a maturity date in November 2020. As a result of the prepayment of this mortgage note, we recorded a gain on early extinguishment of debt of $ 120 for the nine months ended September 30, 2020 to write off unamortized debt premiums. 12 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) Note 5. Fair Value of Assets and Liabilities Our financial instruments include cash and cash equivalents, restricted cash, rents receivable, our revolving credit facility, mortgage notes payable, accounts payable, rents collected in advance, security deposits and amounts due from or to related persons. At September 30, 2021 and December 31, 2020, the fair value of our financial instruments approximated their carrying values in our condensed consolidated financial statements, due to their short term nature or floating interest rates, except as follows: At September 30, 2021 At December 31, 2020 Carrying Estimated Carrying Estimated Value (1) Fair Value Value (1) Fair Value Mortgage notes payable $ 645,987 $ 713,330 $ 645,579 $ 730,119 (1) Includes unamortized debt issuance costs of $ 4,013 and $ 4,421 as of September 30, 2021 and December 31, 2020, respectively. We estimate the fair value of our mortgage notes payable using discounted cash flow analyses and currently prevailing market rates as of the measurement date (Level 3 inputs). Because Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value. The table below presents certain of our assets measured on a recurring basis at fair value at September 30, 2021 , categorized by the level of inputs as defined in the fair value hierarchy under GAAP, used in the valuation of each asset: Quoted Prices in Significant Other Significant Active Markets for Observable Unobservable Identical Assets Inputs Inputs Total (Level 1) (Level 2) (Level 3) Recurring fair value measurements Investment in unconsolidated joint venture (1) $ 63,260 $ — $ — $ 63,260 (1) We own a 22 % equity interest in a joint venture that owns 12 properties and is included in investment in unconsolidated joint venture in our condensed consolidated balance sheet, and is reported at fair value, which is based on significant unobservable inputs (Level 3 inputs). The significant unobservable inputs used in the fair value are discount rates of between 4.8 % and 7.3 %, exit capitalization rates of between 4.4 % and 6.8 %, holding periods of approximately 10 years and market rents. The assumptions are based on the location, type and nature of each property, and current and anticipated market conditions, which are derived from appraisers, industry publications and our experience. See Note 2 for further information regarding our investment in this joint venture. 13 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) Note 6. Shareholders’ Equity Common Share Awards On June 2, 2021, in accordance with our Trustee compensation arrangements, we awarded to each of our six Trustees 3,500 of our common shares, valued at $ 25.62 per share, the closing price of our common shares on The Nasdaq Stock Market LLC, or Nasdaq, on that day. On September 15, 2021, we awarded under our equity compensation plan an aggregate of 118,800 of our common shares, valued at $ 25.98 per share, the closing price of our common shares on Nasdaq on that day, to our officers and certain other employees of RMR LLC. Common Share Repurchases During the three and nine months ended September 30, 2021, we purchased an aggregate of 27,576 and 35,309 of our common shares valued at a weighted average share price of $ 25.84 and $ 25.98 per share, respectively, from our officers and certain current and former officers and employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares. Distributions During the nine months ended September 30, 2021, we declared and paid regular quarterly distributions to common shareholders as follows: Declaration Date Record Date Payment Date Distribution Per Share Total Distribution January 14, 2021 January 25, 2021 February 18, 2021 $ 0.33 $ 21,550 April 15, 2021 April 26, 2021 May 20, 2021 0.33 21,549 July 15, 2021 July 26, 2021 August 19, 2021 0.33 21,554 $ 0.99 $ 64,653 On October 14, 2021, we declared a regular quarterly distribution to common shareholders of record on October 25, 2021 of $ 0.33 per share, or approximately $ 21,600 in aggregate. We expect to pay this distribution to our shareholders on or about November 18, 2021. 14 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) Note 7. Per Common Share Amounts We calculate basic earnings per common share by dividing net income attributable to common shareholders by the weighted average number of our common shares outstanding during the period. We calculate diluted earnings per share using the more dilutive of the two class method or the treasury stock method. Unvested common share awards and other potentially dilutive common shares, and the related impact on earnings, are considered when calculating diluted earnings per share. The calculation of basic and diluted earnings per share is as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Numerators: Net income attributable to common shareholders $ 18,307 $ 14,089 $ 56,475 $ 41,756 Income attributable to unvested participating securities ( 43 ) ( 24 ) ( 140 ) ( 70 ) Net income attributable to common shareholders used in calculating earnings per share $ 18,264 $ 14,065 $ 56,335 $ 41,686 Denominators: Weighted average common shares for basic earnings per share 65,178 65,112 65,154 65,092 Effect of dilutive securities: unvested share awards 52 17 51 9 Weighted average common shares for diluted earnings per share 65,230 65,129 65,205 65,101 Net income attributable to common shareholders per common share - basic $ 0.28 $ 0.22 $ 0.86 $ 0.64 Net income attributable to common shareholders per common share - diluted $ 0.28 $ 0.22 $ 0.86 $ 0.64 Note 8. Business and Property Management Agreements with RMR LLC We have no employees. The personnel and various services we require to operate our business are provided to us by RMR LLC. We have two agreements with RMR LLC to provide management services to us: (1) a business management agreement, which relates to our business generally; and (2) a property management agreement, which relates to our property level operations. Pursuant to our business management agreement with RMR LLC, we recognized net business management fees of $ 2,708 and $ 7,832 for the three and nine months ended September 30, 2021, respectively, and $ 3,410 and $ 9,994 for the three and nine months ended September 30, 2020, respectively. T he net business management fees we recognized for the three and nine months ended September 30, 2020 include $ 347 and $ 823 , respectively, of management fees paid to RMR LLC for those periods by our joint venture we then owned a majority interest in and whose operating results we reported on a consolidated basis. Beginning in November 2020, our ownership in our joint venture was reduced to a minority interest; as a result, we ceased at that time to consolidate our joint venture’s operating results and, since then, we do not include the management fees it pays to RMR LLC in the management fees we pay to RMR LLC. Our joint venture is further described in Notes 2 and 9. Based on our common share total return, as defined in our business management agreement, as of September 30, 2021 and 2020, no incentive fees are included in the net business management fees we recognized for the three or nine months ended September 30, 2021 or 2020. The actual amount of annual incentive fees for 2021, if any, will be based on our common share total return, as defined in our business management agreement, for the three year period ending December 31, 2021, and will be payable in January 2022. We did no t incur any incentive fee payable to RMR LLC for the year ended December 31, 2020. We include business management fees in general and administrative expenses in our condensed consolidated statements of comprehensive income. We and RMR LLC amended our business management agreement effective August 1, 2021 to replace the benchmark index used in the calculation of incentive management fees. Pursuant to the amendment, for periods beginning on and after August 1, 2021, the MSCI U.S. REIT/Industrial REIT Index will replace the discontinued SNL U.S. REIT Industrial Index and be used to calculate benchmark returns per share for purposes of determining any incentive management fee payable by us to RMR LLC. For periods prior to August 1, 2021, the SNL U.S. REIT Industrial Index will continue to be used. Accordingly, the calculation 15 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) of incentive management fees for the next three measurement periods will continue to use the SNL U.S. REIT Industrial Index in calculating the benchmark returns for periods through July 31, 2021. This change of index was due to S&P Global ceasing to publish the SNL U.S. REIT Industrial Index. Pursuant to our property management agreement with RMR LLC, we recognized aggregate property management and construction supervision fees of $ 1,675 and $ 4,860 for the three and nine months ended September 30, 2021, respectively, and $ 1,914 and $ 5,697 for the three and nine months ended September 30, 2020, respectively. Of these amounts, for the three and nine months ended September 30, 2021, $ 1,598 and $ 4,751 , respectively, were expensed to other operating expenses in our condensed consolidated financial statements and $ 77 and $ 109 , respectively, were capitalized as building improvements in our condensed consolidated balance sheets. For the three and nine months ended September 30, 2020, $ 1,866 and $ 5,539 , respectively, were expensed to other operating expenses in our condensed consolidated financial statements and $ 48 and $ 158 , respectively, were capitalized as building improvements in our condensed consolidated balance sheets. The amounts capitalized are being depreciated over the estimated useful lives of the related capital assets. We are generally responsible for all our operating expenses, including certain expenses incurred or arranged by RMR LLC on our behalf. We are generally not responsible for payment of RMR LLC’s employment, office or administrative expenses incurred to provide management services to us, except for the employment and related expenses of RMR LLC’s employees assigned to work exclusively or partly at our properties, our share of the wages, benefits and other related costs of RMR LLC’s centralized accounting personnel, our share of RMR LLC’s costs for providing our internal audit function, or as otherwise agreed. Our property level operating expenses are generally incorporated into the rents charged to our tenants, including certain payroll and related costs incurred by RMR LLC. We reimbursed RMR LLC $ 1,184 and $ 3,451 for these expenses and costs for the three and nine months ended September 30, 2021, respectively, and $ 1,328 and $ 3,744 for the three and nine months ended September 30, 2020, respectively. These amounts are included in other operating expenses and general and administrative expenses, as applicable, in our condensed consolidated statements of comprehensive income. See Note 9 for further information regarding our relationships, agreements and transactions with RMR LLC. Note 9. Related Person Transactions We have relationships and historical and continuing transactions with RMR LLC, The RMR Group Inc., or RMR Inc., and others related to them, including other companies to which RMR LLC or its subsidiaries provide management services and some of which have trustees, directors or officers who are also our Trustees or officers. RMR LLC is a majority owned subsidiary of RMR Inc. The Chair of our Board of Trustees and one of our Managing Trustees, Adam Portnoy, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., a managing director and the president and chief executive officer of RMR Inc. and an officer and employee of RMR LLC. John Murray, our other Managing Trustee and our President and Chief Executive Officer, also serves as an officer and employee of RMR LLC, and each of our other officers is also an officer and employee of RMR LLC. Some of our Independent Trustees also serve as independent trustees or independent directors of other public companies to which RMR LLC or its subsidiaries provide management services. Adam Portnoy serves as chair of the boards of trustees or boards of directors and as a managing trustee or managing director of those companies. Other officers of RMR LLC, including Mr. Murray and certain of our other officers, serve as managing trustees, managing directors or officers of certain of these companies. See Note 6 for information relating to the awards of our common shares we made in September 2021 to our officers and certain other employees of RMR LLC and common shares we purchased from our officers and certain current and former officers and employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares. We include amounts recognized as expense for awards of our common shares to our officers and RMR LLC employees in general and administrative expenses in our condensed consolidated statements of comprehensive income. Our Manager, RMR LLC . We have two agreements with RMR LLC to provide management services to us. See Note 8 for further information regarding our management agreements with RMR LLC. Our Joint Venture . As of December 31, 2020, our joint venture owed to us $ 2,665 for post-closing adjustments relating to our sale of some of our equity interests in the joint venture to a second third party institutional investor in November 2020. Our joint venture paid these amounts due to us during the nine months ended September 30, 2021. 16 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) TA. In May 2021, we acquired a property located in the Dallas, Texas market from TravelCenters of America Inc., or TA, for a purchase price of $ 2,319 , including acquisition related costs of $ 119 . RMR LLC provides management services to TA and Mr. Portnoy serves as the chair of the board of directors and as a managing director of TA. See Note 2 for further information regarding this acquisition. For further information about these and other such relationships and certain other related person transactions, see our 2020 Annual Report. 17 Table of Contents