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, 2021. 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. 34 Table of Contents Fixed Rate Debt At March 31, 2022, 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 notes (186 properties in Hawaii) $ 650,000 4.310 % $ 28,015 2029 Monthly Mortgage notes (17 U.S. Mainland Properties ) 700,000 4.417 % 30,919 2032 Monthly Mortgage note (2) 13,644 3.670 % 501 2031 Monthly Mortgage note (2) 27,446 3.100 % 851 2035 Monthly Mortgage note (2) 15,585 3.560 % 555 2030 Monthly Mortgage note (2) 45,534 4.130 % 1,881 2033 Monthly Mortgage note (2) 15,032 4.140 % 622 2032 Monthly Mortgage note (2) 32,634 4.020 % 1,312 2033 Monthly Mortgage note (2) 5,290 3.770 % 199 2030 Monthly Mortgage note (2) 5,594 3.850 % 215 2030 Monthly Mortgage note (2) 44,042 2.950 % 1,299 2036 Monthly Mortgage note (2) 47,742 4.270 % 2,039 2037 Monthly Mortgage note (2) 54,012 3.250 % 1,755 2038 Monthly Mortgage note (2) 15,095 3.760 % 568 2028 Monthly $ 1,671,650 $ 70,731 (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) Our consolidated joint venture, in which we have a 61% interest, assumed MNR’s existing mortgages secured by 11 properties in aggregate. Our $650,000 and $700,000 mortgage notes require interest only payments until maturity. The remaining fixed rate mortgage notes require amortizing payment of principal and interest 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 an interest rate which is one percentage point higher or lower than shown above, our annual interest cost would increase or decrease by approximately $16,717. 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 balance outstanding at March 31, 2022 and discounted cash flow analyses through the maturity date, and assuming no other changes in factors that may affect the fair value of our fixed rate debt obligation, a hypothetical immediate one percentage point change in the interest rates would change the fair value of this obligation by approximately $55,883. 35 Table of Contents Floating Rate Debt At March 31, 2022, our outstanding floating rate debt consisted of the following: Annual Annual Interest Principal Interest Interest Payments Debt Balance (1) Rate (1) Expense (1) Maturity Due Bridge Loan - mortgage $ 1,125,982 2.040 % $ 22,970 2023 Monthly Bridge Loan - mezzanine 259,176 8.290 % 21,486 2023 Monthly Floating Rate Loan 1,400,000 3.060 % 42,840 2024 (2) Monthly 2,785,158 $ 87,296 (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 Floating Rate Loan matures in March 2024, subject to three, one year extension options. At March 31, 2022, our aggregate floating rate debt was $2,785,158, consisting of the $1,400,000 outstanding principal amount of the Floating Rate Loan secured by 82 properties owned by our consolidated joint venture and the $1,385,158 outstanding principal amount of the Bridge Loan. The Bridge Loan matures on February 24, 2023 and requires that interest be paid at an annual rate of SOFR plus a premium of 1.75% under the loan agreement and a premium of 8.00% under the mezzanine loan agreement. The Floating Rate Loan matures on March 9, 2024, subject to three, one year extension options, and requires that interest be paid at an annual rate of SOFR plus a premium of 2.765% . In conjunction with these borrowings, to hedge our exposure to risks related to changes in SOFR rates, we purchased interest rate caps with a strike rate of 2.70% for the Bridge Loan and 3.40% for the Floating Rate Loan. However, we are vulnerable to changes in the U.S. dollar based short term rates, specifically SOFR. In addition, upon renewal or refinancing of these obligations, 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 March 31, 2022: 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 March 31, 2022 3.13 % $ 2,785,158 $ 87,296 $ 1.34 One percentage point increase 4.13 % $ 2,785,158 $ 115,148 $ 1.77 (1) Based on the diluted weighted average common shares outstanding for the three months ended March 31, 2022. 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 any floating rate debt we may incur.