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) March 31, December 31, 2023 2022 ASSETS Real estate properties: Land $ 1,116,561 $ 1,117,779 Buildings and improvements 4,061,589 4,058,329 Total real estate properties, gross 5,178,150 5,176,108 Accumulated depreciation ( 304,581 ) ( 273,467 ) Total real estate properties, net 4,873,569 4,902,641 Investment in unconsolidated joint venture 127,329 124,358 Acquired real estate leases, net 282,947 297,445 Cash and cash equivalents 61,250 48,261 Restricted cash 83,909 92,519 Rents receivable, including straight line rents of $ 84,472 and $ 80,710 , respectively 111,014 107,011 Other assets, net 94,958 103,931 Total assets $ 5,634,976 $ 5,676,166 LIABILITIES AND EQUITY Mortgages and notes payable, net $ 4,245,651 $ 4,244,501 Accounts payable and other liabilities 75,937 73,547 Assumed real estate lease obligations, net 21,439 22,523 Due to related persons 5,774 4,824 Total liabilities 4,348,801 4,345,395 Commitments and contingencies: Equity: Equity attributable to common shareholders: Common shares of beneficial interest, $ .01 par value: 100,000,000 shares authorized; 65,565,969 and 65,568,145 shares issued and outstanding, respectively 656 656 Additional paid in capital 1,014,585 1,014,201 Cumulative net income 92,376 117,185 Cumulative other comprehensive income 14,885 21,903 Cumulative common distributions ( 363,877 ) ( 363,221 ) Total equity attributable to common shareholders 758,625 790,724 Total equity attributable to noncontrolling interest 527,550 540,047 Total equity 1,286,175 1,330,771 Total liabilities and equity $ 5,634,976 $ 5,676,166 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 (LOSS) (amounts in thousands, except per share data) (unaudited) Three Months Ended March 31, 2023 2022 Rental income $ 110,258 $ 71,375 Expenses: Real estate taxes 16,467 9,436 Other operating expenses 9,318 6,772 Depreciation and amortization 45,457 22,878 General and administrative 7,907 6,077 Total expenses 79,149 45,163 Interest and other income 1,146 478 Interest expense (including net amortization of debt issuance costs, premiums and discounts of $ 6,713 and $ 20,321 , respectively) ( 70,771 ) ( 40,999 ) Loss on sale of real estate ( 974 ) — Realized gain on equity securities — 1,232 Unrealized gain on equity securities — 2,460 Loss on early extinguishment of debt — ( 828 ) Loss before income tax expense and equity in earnings of unconsolidated joint venture ( 39,490 ) ( 11,445 ) Income tax expense ( 17 ) ( 69 ) Equity in earnings of unconsolidated joint venture 3,961 1,727 Net loss ( 35,546 ) ( 9,787 ) Net loss attributable to noncontrolling interest 10,737 3,273 Net loss attributable to common shareholders $ ( 24,809 ) $ ( 6,514 ) Other comprehensive income: Unrealized (loss) gain on derivatives ( 8,778 ) 5,632 Less: unrealized gain (loss) on derivatives attributable to noncontrolling interest 1,760 ( 1,724 ) Other comprehensive (loss) income attributable to common shareholders ( 7,018 ) 3,908 Comprehensive loss attributable to common shareholders $ ( 31,827 ) $ ( 2,606 ) Weighted average common shares outstanding - basic and diluted 65,309 65,212 Per common share data (basic and diluted): Net loss attributable to common shareholders $ ( 0.38 ) $ ( 0.10 ) 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) Cumulative Total Equity Total Equity Number of Additional Other Cumulative Attributable to Attributable to Common Common Paid In Cumulative Comprehensive Common Common Noncontrolling Total Shares Shares Capital Net Income Income Distributions Shareholders Interest Equity Balance at December 31, 2022 65,568,145 $ 656 $ 1,014,201 $ 117,185 $ 21,903 $ ( 363,221 ) $ 790,724 $ 540,047 $ 1,330,771 Net loss — — — ( 24,809 ) — — ( 24,809 ) ( 10,737 ) ( 35,546 ) Share grants — — 388 — — — 388 — 388 Share repurchases ( 976 ) — ( 3 ) — — — ( 3 ) — ( 3 ) Share forfeitures ( 1,200 ) — ( 1 ) — — — ( 1 ) — ( 1 ) Distributions to common shareholders — — — — — ( 656 ) ( 656 ) — ( 656 ) Net current period other comprehensive loss — — — — ( 7,018 ) — ( 7,018 ) ( 1,760 ) ( 8,778 ) Balance at March 31, 2023 65,565,969 $ 656 $ 1,014,585 $ 92,376 $ 14,885 $ ( 363,877 ) $ 758,625 $ 527,550 $ 1,286,175 Balance at December 31, 2021 65,404,592 $ 654 $ 1,012,224 $ 343,908 $ — $ ( 318,744 ) $ 1,038,042 $ — $ 1,038,042 Net loss — — — ( 6,514 ) — — ( 6,514 ) ( 3,273 ) ( 9,787 ) Share grants — — 407 — — — 407 — 407 Share repurchases ( 333 ) — ( 7 ) — — — ( 7 ) — ( 7 ) Share forfeitures ( 400 ) — ( 1 ) — — — ( 1 ) — ( 1 ) Distributions to common shareholders — — — — — ( 21,584 ) ( 21,584 ) — ( 21,584 ) Net current period other comprehensive income — — — — 3,908 — 3,908 1,724 5,632 Contributions from noncontrolling interest — — — — — — — 591,268 591,268 Balance at March 31, 2022 65,403,859 $ 654 $ 1,012,622 $ 337,394 $ 3,908 $ ( 340,328 ) $ 1,014,250 $ 589,719 $ 1,603,969 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 CASH FLOWS (dollars in thousands) (unaudited) Three Months Ended March 31, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 35,546 ) $ ( 9,787 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 31,224 14,992 Net amortization of debt issuance costs, premiums and discounts 6,713 20,320 Amortization of acquired real estate leases and assumed real estate lease obligations 13,414 7,223 Amortization of deferred leasing costs 559 361 Unrealized gain on equity securities — ( 2,460 ) Realized gain on sale of equity securities — ( 1,232 ) Straight line rental income ( 3,762 ) ( 1,156 ) Loss on early extinguishment of debt — 828 Loss on sale of real estate 974 — Proceeds from settlement of derivatives ( 12,976 ) — Other non-cash expenses 6,532 696 Distributions of earnings from unconsolidated joint venture 990 1,320 Equity in earnings of unconsolidated joint venture ( 3,961 ) ( 1,727 ) Change in assets and liabilities: Rents receivable ( 242 ) ( 1,309 ) Deferred leasing costs ( 2,401 ) ( 3,226 ) Other assets ( 5,048 ) ( 15,018 ) Accounts payable and other liabilities 366 22,502 Rents collected in advance 3,357 19,646 Security deposits 24 729 Due to related persons 950 3,937 Net cash provided by operating activities 1,167 56,639 CASH FLOWS FROM INVESTING ACTIVITIES: Real estate acquisitions — ( 3,557,602 ) Real estate improvements ( 3,784 ) ( 618 ) Proceeds from sale of marketable securities — 115,735 Proceeds from settlement of derivatives 12,976 — Proceeds from sale of real estate 243 — Net cash provided by (used in) investing activities 9,435 ( 3,442,485 ) 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 (CONTINUED) (dollars in thousands) (unaudited) Three Months Ended March 31, 2023 2022 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of mortgage notes payable — 2,100,000 Repayment of mortgage notes payable ( 5,530 ) ( 1,782 ) Proceeds from secured bridge loan facility — 1,385,158 Borrowings under revolving credit facility — 3,000 Repayments of revolving credit facility — ( 185,000 ) Payment of debt issuance costs ( 34 ) ( 89,354 ) Distributions to common shareholders ( 656 ) ( 21,584 ) Proceeds from sale of noncontrolling interest, net — 587,440 Repurchase of common shares ( 3 ) — Net cash (used in) provided by financing activities ( 6,223 ) 3,777,878 Increase in cash, cash equivalents and restricted cash 4,379 392,032 Cash, cash equivalents and restricted cash at beginning of period 140,780 29,397 Cash, cash equivalents and restricted cash at end of period $ 145,159 $ 421,429 SUPPLEMENTAL DISCLOSURES: Interest paid $ 68,600 $ 13,021 Income taxes paid $ — $ 57 Interest capitalized $ 142 $ 3 NON-CASH INVESTING ACTIVITIES: Real estate acquired by assumption of mortgage notes payable $ — $ 323,432 Real estate improvements accrued not paid $ 2,092 $ 821 NON-CASH FINANCING ACTIVITIES: Assumption of mortgage notes payable $ — $ ( 323,432 ) Increase in deferred financing fees $ — $ 14,537 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: Three Months Ended March 31, 2023 2022 Cash and cash equivalents $ 61,250 $ 275,075 Restricted cash (1) 83,909 146,354 Total cash, cash equivalents and restricted cash shown in the statements of cash flows $ 145,159 $ 421,429 (1) Restricted cash consists of amounts escrowed for capital expenditures at certain of our mortgaged properties and cash held for the operations of our consolidated joint venture arrangement in which we own a 61 % equity interest. The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 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, 2022, or our 2022 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, and assessment of impairment of real estate and related intangibles. Note 2. Real Estate Investments As of March 31, 2023, our portfolio was comprised of 413 consolidated properties containing approximately 59,983,000 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 187 industrial properties containing approximately 43,254,000 rentable square feet located in 38 other states, or our Mainland Properties, which included 94 properties owned by a consolidated joint venture in which we own a 61 % equity interest. As of March 31, 2023, we also owned a 22 % equity interest in an unconsolidated joint venture which owns 18 industrial properties located in 12 states totaling approximately 11,726,000 rentable square feet. We operate in one business segment: ownership and leasing of properties that include industrial and logistics buildings and leased industrial lands. We incurred capital expenditures and leasing costs at certain of our properties of $ 4,931 and $ 3,765 during the three months ended March 31, 2023 and 2022, respectively. During the three months ended March 31, 2023, we committed $ 1,937 for expenditures related to tenant improvements and leasing costs for leases executed during the period for approximately 1,143,000 square feet. Committed, but unspent, tenant related obligations based on existing leases as of March 31, 2023 were $ 25,054 , of which $ 8,365 is expected to be spent during the next 12 months. In March 2023, we received gross proceeds of $ 270 and recorded a $ 974 net loss on sale of real estate as a result of a partial eminent domain taking at a property in Everett, Washington. Joint Venture Activities As of March 31, 2023, we had equity investments in our joint ventures that consisted of the following: ILPT Carrying Value ILPT of Investment Number of Square Joint Venture Presentation Ownership at March 31, 2023 Properties Location Feet Mountain Industrial REIT LLC Consolidated 61 % N/A 94 Various 20,980,661 The Industrial Fund REIT LLC Unconsolidated 22 % $ 127,329 18 Various 11,726,137 8 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) Consolidated Joint Venture - Mountain Industrial REIT LLC: We own a 61 % equity interest in Mountain Industrial REIT LLC, or our consolidated joint venture. We control our consolidated joint venture and therefore account for the properties owned by this joint venture on a consolidated basis in our condensed consolidated financial statements. We recognized a 39 % noncontrolling interest in our condensed consolidated financial statements for the three months ended March 31, 2023 and for the period from this joint venture’s formation date, February 25, 2022, to March 31, 2022. The portion of this joint venture's net loss not attributable to us, or $ 10,728 and $ 3,261 , for the three months ended March 31, 2023 and for the period from February 25, 2022 to March 31, 2022, respectively, is reported as net loss attributable to noncontrolling interest in our condensed consolidated statements of comprehensive income (loss). This joint venture made no distributions for the three months ended March 31, 2023 or for the period from February 25, 2022 to March 31, 2022. As of March 31, 2023, this joint venture had total assets of $ 3,064,043 and total liabilities of $ 1,721,021 . Unconsolidated Joint Venture - The Industrial Fund REIT LLC: We own a 22 % equity interest in The Industrial Fund REIT LLC, or the unconsolidated joint venture. We account for the unconsolidated joint venture under the equity method of accounting under the fair value option. We recorded a change in the fair value of our investment in the unconsolidated joint venture of $ 3,961 and $ 1,727 for the three months ended March 31, 2023 and 2022, respectively, as equity in earnings of unconsolidated joint venture in our condensed consolidated statements of comprehensive income (loss). In addition, the unconsolidated joint venture made aggregate cash distributions to us of $ 990 and $ 1,320 during the three months ended March 31, 2023 and 2022, respectively. Consolidated Tenancy in Common: An unrelated third party owns an approximate 33 % tenancy in common interest in one property located in Somerset, New Jersey, and we own the remaining 67 % tenancy in common interest in this property. The portion of this property’s net loss not attributable to us, or $ 9 and $ 12 , for the three months ended March 31, 2023 and for the period from February 25, 2022 to March 31, 2022, respectively, is reported as net loss attributable to noncontrolling interest in our condensed consolidated statements of comprehensive income (loss). See Notes 4, 5, 8, 9 and 10 for more information regarding these joint ventures. 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 their respective leases; therefore, we have determined to evaluate our leases as lease arrangements. We recognize rental income from operating leases 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. We increased rental income by $ 3,762 and $ 1,156 to record revenue on a straight line basis during the three months ended March 31, 2023 and 2022, respectively. 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 $ 21,099 and $ 12,380 for the three months ended March 31, 2023 and 2022, respectively. Right of use assets and lease liabilities. Three of our properties are subject to ground leases and we are also the lessee under a lease for one office property, which we assumed as part of our acquisition of Monmouth Real Estate Investment Corporation, or MNR, in February 2022. For these leases under which we are the lessee, we are required to record a right of use asset and lease liability for all leases with a term greater than 12 months. The values of our right of use assets and related liabilities representing our future obligations under the lease arrangements under which we are the lessee were $ 4,976 and $ 5,046 , respectively, as of March 31, 2023, and $ 5,084 and $ 5,149 , respectively, as of December 31, 2022. Our right of use assets and related lease liabilities are included in other assets, net and accounts payable and other liabilities, respectively, in our 9 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) condensed consolidated balance sheets. We have a sublease for a portion of the MNR lease that expires on December 30, 2029. Rent expense incurred under the MNR lease, net of sublease revenue, if any, was $ 101 for three months ended March 31, 2023 and $ 87 for the period from February 25, 2022 to March 31, 2022. Rent expense is included in general and administrative expense in our condensed consolidated statements of comprehensive income (loss). Generally, payments of ground lease obligations are made by our tenants. However, if a tenant does not perform obligations under a ground lease or does not renew any ground lease, we may have to perform obligations under, or renew, the ground lease in order to protect our investment in the affected property. Tenant Concentration Subsidiaries of FedEx Corporation, or FedEx, accounted for $ 34,787 , or 31.6 % and $ 13,468 , or 18.9 % of our rental income for the three months ended March 31, 2023 and 2022, respectively. In addition, subsidiaries of Amazon.com, Inc., or Amazon, accounted for $ 7,515 , or 6.8 % and $ 5,615 , or 7.9 % of our rental income for the three months ended March 31, 2023 and 2022, respectively. Geographic Concentration For the three months ended March 31, 2023 and 2022, approximately 27.4 % and 37.4 %, respectively, of our rental income was from our Hawaii Properties. 10 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 March 31, 2023, our outstanding indebtedness consisted of the following: Net Book Value Principal Balance as of of Collateral March 31, December 31, Interest At March 31, Entity Type Secured By: 2023 (1) 2022 (1) Rate Maturity 2023 ILPT Floating Rate - Interest only 104 Properties $ 1,235,000 $ 1,235,000 6.18 % 10/09/24 $ 1,064,535 ILPT Fixed Rate - Interest only 186 Properties 650,000 650,000 4.31 % 02/07/29 490,194 ILPT Fixed Rate - Interest only 17 Properties 700,000 700,000 4.42 % 03/09/32 515,084 Mountain JV (2) Floating Rate - Interest only 82 Properties 1,400,000 1,400,000 6.17 % 03/09/24 1,895,603 Mountain JV (2) Fixed Rate - Amortizing One Property 13,034 13,556 3.76 % 10/01/28 62,799 Mountain JV (2) Fixed Rate - Amortizing One Property 4,720 4,865 3.77 % 04/01/30 39,447 Mountain JV (2) Fixed Rate - Amortizing One Property 4,992 5,145 3.85 % 04/01/30 39,447 Mountain JV (2) Fixed Rate - Amortizing One Property 13,987 14,392 3.56 % 09/01/30 50,554 Mountain JV (2) Fixed Rate - Amortizing One Property 12,368 12,691 3.67 % 05/01/31 29,419 Mountain JV (2) Fixed Rate - Amortizing One Property 13,842 14,144 4.14 % 07/01/32 44,460 Mountain JV (2) Fixed Rate - Amortizing One Property 30,376 30,949 4.02 % 10/01/33 86,555 Mountain JV (2) Fixed Rate - Amortizing One Property 42,432 43,219 4.13 % 11/01/33 131,092 Mountain JV (2) Fixed Rate - Amortizing One Property 25,744 26,175 3.10 % 06/01/35 47,387 Mountain JV (2) Fixed Rate - Amortizing One Property 41,425 42,087 2.95 % 01/01/36 101,199 Mountain JV (2) Fixed Rate - Amortizing One Property 45,553 46,109 4.27 % 11/01/37 112,286 Mountain JV (2) Fixed Rate - Amortizing One Property 51,360 52,031 3.25 % 01/01/38 115,824 Total indebtedness $ 4,284,833 $ 4,290,363 $ 4,825,885 Unamortized debt issuance costs ( 39,182 ) ( 45,862 ) Total indebtedness, net $ 4,245,651 $ 4,244,501 (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) Mountain JV is our consolidated joint venture in which we own a 61 % equity interest . See Notes 2, 5, 8, 9 and 10 for more information regarding this joint venture. Our $ 1,235,000 interest only floating rate loan, secured by 104 of our properties, or the ILPT Floating Rate Loan, matures in October 2024, subject to three , one year extension options, and requires that interest be paid at an annual rate of secured overnight financing rate, or SOFR, which is capped at an annual rate of 2.25 % for the initial term of the ILPT Floating Rate Loan, plus a weighted average premium of 3.93 %. The interest rate payable on the ILPT Floating Rate Loan as of March 31, 2023 and the weighted average interest rate for the three months ended March 31, 2023 were both 6.18 %. Subject to the satisfaction of certain conditions, we have the option to prepay up to $ 247,000 of the ILPT Floating Rate Loan at par with no premium, and to prepay the balance of the ILPT Floating Rate Loan in full or in part at any time, subject to a premium, and beginning in October 2023, without a premium. Our $ 1,400,000 interest only floating rate loan, secured by 82 properties owned by our consolidated joint venture, or the Floating Rate Loan, matures in March 2024, subject to three , one year extension options, and requires that interest be paid at an annual rate of SOFR, which is capped at an annual rate of 3.40 % through the initial term of the Floating Rate Loan, plus a premium of 2.77 %. The interest rate payable on the Floating Rate Loan as of March 31, 2023 was 6.17 %. The weighted average annual interest rate payable under the Floating Rate Loan was 6.17 % for the three months ended March 31, 2023, and was 3.01 % for the period from February 25, 2022 to March 31, 2022. Subject to the satisfaction of certain conditions, we have the option to prepay up to $ 280,000 of the Floating Rate Loan at par with no premium, and to prepay the balance of the Floating Rate Loan at any time, subject to a premium. 11 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) See Note 10 for more information regarding our interest rate caps. The following table provides a summary of the mortgage debts of the unconsolidated joint venture: Principal Balance Interest at March 31, Joint Venture (Unconsolidated) Rate Maturity Date 2023 (1) Mortgage notes payable (secured by one property in Florida) 3.60 % (2) 10/1/2023 $ 56,980 Mortgage notes payable (secured by 5 properties in four states) 5.30 % 10/1/2027 97,000 Mortgage notes payable (secured by 11 other properties in eight states) 3.33 % (2) 11/7/2029 350,000 Weighted average/total 3.74 % (2) $ 503,980 (1) Amounts are not adjusted for our minority interest; none of the debt is recourse to us. (2) Includes the effect of mark to market purchase accounting. The agreements governing certain of our indebtedness contain customary covenants and provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default. Note 5. Fair Value of Assets and Liabilities Our financial instruments include cash and cash equivalents, restricted cash, rents receivable, floating and fixed rate loans, accounts payable, rents collected in advance, interest rate caps, security deposits and amounts due from or to related persons. At March 31, 2023 and December 31, 2022, 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 March 31, 2023 At December 31, 2022 Carrying Estimated Carrying Estimated Value (1) Fair Value Value (1) Fair Value Fixed rate loan, 3.76 % interest rate, due in 2028 $ 13,034 $ 12,461 $ 13,556 $ 12,784 Fixed rate loan, 4.31 % interest rate, due in 2029 646,805 464,814 646,669 592,295 Fixed rate loan, 3.77 % interest rate, due in 2030 4,720 4,482 4,865 4,553 Fixed rate loan, 3.85 % interest rate, due in 2030 4,992 4,753 5,145 4,829 Fixed rate loan, 3.56 % interest rate, due in 2030 13,987 13,140 14,392 13,315 Fixed rate loan, 3.67 % interest rate, due in 2031 12,368 11,604 12,691 11,713 Fixed rate loan, 4.42 % interest rate, due in 2032 694,847 642,257 694,704 623,133 Fixed rate loan, 4.14 % interest rate, due in 2032 13,842 13,163 14,144 13,182 Fixed rate loan, 4.02 % interest rate, due in 2033 30,376 28,177 30,949 28,195 Fixed rate loan, 4.13 % interest rate, due in 2033 42,432 39,560 43,219 39,573 Fixed rate loan, 3.10 % interest rate, due in 2035 25,744 22,489 26,175 22,373 Fixed rate loan, 2.95 % interest rate, due in 2036 41,425 35,696 42,087 35,444 Fixed rate loan, 4.27 % interest rate, due in 2037 45,553 42,419 46,109 41,880 Fixed rate loan, 3.25 % interest rate, due in 2038 51,360 44,453 52,031 43,878 $ 1,641,485 $ 1,379,468 $ 1,646,736 $ 1,487,147 (1) Includes unamortized debt issuance costs, premiums and discounts of $ 8,348 and $ 8,627 as of March 31, 2023 and December 31, 2022, respectively. We estimate the fair value of our mortgage notes payable using discounted cash flow analyses and current prevailing market rates as of the measurement date (Level 3 inputs). As Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value. 12 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) The table below presents certain of our assets measured on a recurring and non-recurring basis at fair value at March 31, 2023 and December 31, 2022, 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) At March 31, 2023 Recurring fair value measurements Investment in unconsolidated joint venture (1) $ 127,329 $ — $ — $ 127,329 Interest rate cap derivatives (2) $ 58,215 $ — $ 58,215 $ — At December 31, 2022 Recurring fair value measurements Investment in unconsolidated joint venture (1) $ 124,358 $ — $ — $ 124,358 Interest rate cap derivatives (2) $ 73,133 $ — $ 73,133 $ — Non-recurring fair value measurements Real estate properties (3) $ 555,123 $ — $ — $ 555,123 (1) The investment in the unconsolidated joint venture reflected in our condensed consolidated balance sheet is reported at fair value based on significant unobservable inputs (Level 3 inputs). The significant unobservable inputs used in the fair value are discount rates of between 5.25 % and 7.00 %, exit capitalization rates of between 4.95 % and 6.00 %, holding periods of approximately 10 years and market rents. Our 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 Notes 2, 4, 8 and 9 for more information regarding this joint venture. (2) Our derivative assets are carried at fair value as required by GAAP. The estimated fair values of the derivative assets are based on current market prices in secondary markets for similar derivative contracts, (Level 2 inputs). See Notes 4 and 11 for more information regarding our derivatives and hedging activities. (3) We recorded a loss on impairment of real estate of $ 100,747 during the year ended December 31, 2022 to reduce the carrying value of 25 properties in our condensed consolidated balance sheet to their estimated fair value, based on third party offers (Level 3 inputs as defined in the fair value hierarchy under GAAP), due to a change in plans to sell and the reclassification of those properties from held for sale to held and used. Note 6. Shareholders’ Equity Common Share Purchases: During the three months ended March 31, 2023, we purchased an aggregate of 976 of our common shares, valued at a weighted average price of $ 3.33 per common share, from certain former officers and employees of The RMR Group LLC, or RMR, in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares. Distributions: During the three months ended March 31, 2023, we declared and paid regular quarterly distributions to common shareholders as follows: Declaration Date Record Date Payment Date Distribution Per Share Total Distribution January 12, 2023 January 23, 2023 February 16, 2023 $ 0.01 $ 656 On April 13, 2023, we declared a regular quarterly distribution to common shareholders of record on April 24, 2023 of $ 0.01 per share, or approximately $ 656 . We expect to pay this distribution to our shareholders on or about May 18, 2023 using cash balances. 13 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 loss 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 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 March 31, 2023 2022 Numerators: Net loss attributable to common shareholders $ ( 24,809 ) $ ( 6,514 ) Loss attributable to unvested participating securities 3 — Net loss attributable to common shareholder used in calculating earnings per share $ ( 24,806 ) $ ( 6,514 ) Denominators: Weighted average common shares for basic earnings per share 65,309 65,212 Effect of dilutive securities: unvested share awards — — Weighted average common shares for diluted earnings per share (1) 65,309 65,212 Net loss attributable to common shareholders per common share - basic and diluted $ ( 0.38 ) $ ( 0.10 ) (1) For the three months ended March 31, 2023 and 2022, 257 and 18 unvested common shares, respectively, were not included in the calculation of diluted earnings per share because doing so would have been antidilutive. Note 8. Business and Property Management Agreements with RMR We have no employees. The personnel and various services we require to operate our business are provided to us by RMR. We have two agreements with RMR 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, we recognized net business management fees of $ 5,726 and $ 4,399 for the three months ended March 31, 2023 and 2022, respectively. Based on our common share total return, as defined in our business management agreement, as of March 31, 2023 and 2022, no incentive fees are included in the net business management fees we recognized for the three months ended March 31, 2023 or 2022. The actual amount of annual incentive fees for 2023, 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, 2023, and will be payable in January 2024. We did no t incur any incentive fee payable to RMR for the year ended December 31, 2022. We include business management fees in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss). RMR provides management services to our two joint ventures. See Note 9 for further information regarding our joint ventures’ management arrangements with RMR and the related impact on our management fees payable to RMR. Pursuant to our property management agreement with RMR, we recognized aggregate property management and construction supervision fees of $ 3,452 and $ 2,763 for the three months ended March 31, 2023 and 2022, respectively. Of these amounts, for the three months ended March 31, 2023 and 2022, $ 3,319 and $ 2,098 , respectively, were expensed to other operating expenses in our condensed consolidated financial statements and $ 133 and $ 31 , 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 on our behalf. We are generally not responsible for payment of RMR’s employment, office or administrative expenses incurred to provide management services to us, except for the employment and related expenses of RMR’s employees assigned to work exclusively or partly at our properties, our share of the wages, benefits and other related costs of RMR’s centralized accounting personnel, our share of RMR’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 14 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) incurred by RMR. We reimbursed RMR $ 1,841 and $ 1,604 for these expenses and costs for the three months ended March 31, 2023 and 2022, respectively. These amounts are included in other operating expenses and general and administrative expenses, as applicable, in our condensed consolidated statements of comprehensive income (loss). Management Agreements Between Our Joint Ventures and RMR. We have two separate joint venture arrangements, our consolidated joint venture and the unconsolidated joint venture. See Notes 2, 4, 5, 9 and 10 for further information about these joint ventures. RMR provides management services to both of these joint ventures. We are not obligated to pay management fees to RMR under our management agreements with RMR for the services it provides to the unconsolidated joint venture. We are obligated to pay management fees to RMR under our management agreements with RMR for the services it provides regarding our consolidated joint venture; however, that joint venture pays management fees directly to RMR, and any such fees paid by our consolidated joint venture are credited against the fees payable by us to RMR. See Note 9 for further information regarding our relationships, agreements and transactions with RMR. Note 9. Related Person Transactions We have relationships and historical and continuing transactions with RMR, The RMR Group Inc., or RMR Inc., and others related to them, including other companies to which RMR or its subsidiaries provide management services and some of which have trustees, directors or officers who are also our Trustees or officers. RMR is a majority owned subsidiary of RMR Inc. The Chair of our Board of Trustees and one of our Managing Trustees, Adam D. Portnoy, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., the chair of the board of directors, a managing director and the president and chief executive officer of RMR Inc. and an officer and employee of RMR. Matthew P. Jordan, our other Managing Trustee, is an executive vice president and the chief financial officer and treasurer of RMR Inc., an officer and employee of RMR and an officer of ABP Trust. John G. Murray, one of our Managing Trustees until June 1, 2022 and our President and Chief Executive Officer until March 31, 2022, also serves as an officer and employee of RMR, and each of our current officers is also an officer and employee of RMR. Some of our Independent Trustees also serve as independent trustees or independent directors of other public companies to which RMR or its subsidiaries provide management services. Adam D. Portnoy serves as chair of the boards and as a managing trustee or managing director of those companies. Other officers of RMR, including Messrs. Jordan and Murray and certain of our officers, serve as managing trustees, managing directors or officers of certain of these companies. Our Manager, RMR . We have two agreements with RMR to provide management services to us. See Note 8 for further information regarding our management agreements with RMR. Joint Ventures. We have two separate joint venture arrangements. RMR provides management services to each of these joint ventures. See Notes 2, 4, 5, 8 and 10 for further information regarding our joint ventures and RMR’s management agreements with our joint ventures. As of December 31, 2022 and March 31, 2023, we owed $ 616 and $ 640 , respectively, to the unconsolidated joint venture for rents that we collected on behalf of that joint venture. These amounts are presented as due to related persons in our condensed consolidated balance sheet. We paid these amounts in January 2023 and April 2023, respectively. For further information about these and other such relationships and certain other related person transactions, see our 2022 Annual Report. Note 10. Derivatives and Hedging Activities Risk Management Objective of Using Derivatives We are exposed to certain risks relating to our ongoing business operations, including the impact of changes in interest rates. The only risk currently managed by us using derivative instruments is a part of our interest rate risk. We have an interest rate cap agreement to manage our interest rate risk exposure on each of the ILPT Floating Rate Loan and the Floating Rate Loan, both with interest payable at a rate equal to SOFR plus a premium. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, we only enter into derivative financial instruments with counterparties with high credit ratings 15 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) and with major financial institutions with which we or our related parties may also have other financial relationships. We do not anticipate that any of the counterparties will fail to meet their obligations. Cash Flow Hedges of Interest Rate Risk As required by Accounting Standards Codification 815, Derivatives and Hedging , we record all derivatives on the balance sheet at fair value. The following table summarizes the terms of our outstanding interest rate cap agreements designated as cash flow hedges of interest rate risk as of March 31, 2023: Interest Rate Derivative Balance Sheet Line Item Underlying Instrument Number of Instruments Strike Rate Notional Amount Fair Value at March 31, 2023 Interest Rate Cap Other assets Floating Rate Loan (1) 1 3.40 % $ 1,400,000 $ 18,386 Interest Rate Cap Other assets ILPT Floating Rate Loan 2 2.25 % $ 1,235,000 $ 39,829 (1) The Floating Rate Loan was entered into by our consolidated joint venture. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. For derivatives designated and qualifying as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income (loss) and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis, as documented at hedge inception in accordance with our accounting policy election. The earnings recognition of excluded components is presented in interest expense. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on our applicable debt. Three Months Ended March 31, 2023 2022 Amount of (loss) gain recognized in cumulative other comprehensive income (loss) $ ( 3,776 ) $ 5,375 Amount reclassified from cumulative other comprehensive income (loss) into interest expense ( 5,002 ) 257 Unrealized (loss) gain on derivative instrument recognized in cumulative other comprehensive (loss) income, net $ ( 8,778 ) $ 5,632 16 Table of Contents