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) June 30, December 31, 2023 2022 ASSETS Real estate properties: Land $ 1,112,598 $ 1,117,779 Buildings and improvements 4,031,041 4,058,329 Total real estate properties, gross 5,143,639 5,176,108 Accumulated depreciation ( 330,879 ) ( 273,467 ) Total real estate properties, net 4,812,760 4,902,641 Assets of properties held for sale 37,261 — Investment in unconsolidated joint venture 129,082 124,358 Acquired real estate leases, net 267,889 297,445 Cash and cash equivalents 71,695 48,261 Restricted cash 138,673 92,519 Rents receivable, including straight line rents of $ 87,797 and $ 80,710 , respectively 110,638 107,011 Other assets, net 94,082 103,931 Total assets $ 5,662,080 $ 5,676,166 LIABILITIES AND EQUITY Mortgages and notes payable, net $ 4,301,276 $ 4,244,501 Liabilities of properties held for sale 31 — Accounts payable and other liabilities 73,916 73,547 Assumed real estate lease obligations, net 20,420 22,523 Due to related persons 5,148 4,824 Total liabilities 4,400,791 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; 65,697,959 and 65,568,145 shares issued and outstanding, respectively 657 656 Additional paid in capital 1,015,138 1,014,201 Cumulative net income 66,548 117,185 Cumulative other comprehensive income 26,487 21,903 Cumulative common distributions ( 364,533 ) ( 363,221 ) Total equity attributable to common shareholders 744,297 790,724 Total equity attributable to noncontrolling interest 516,992 540,047 Total equity 1,261,289 1,330,771 Total liabilities and equity $ 5,662,080 $ 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 June 30, Six Months Ended June 30, 2023 2022 2023 2022 Rental income $ 108,043 $ 107,222 $ 218,301 $ 178,597 Expenses: Real estate taxes 15,100 13,275 31,567 22,711 Other operating expenses 8,519 7,053 17,837 13,825 Depreciation and amortization 44,909 42,699 90,366 65,577 General and administrative 8,131 9,709 16,038 15,786 Loss on impairment of real estate 254 100,747 254 100,747 Total expenses 76,913 173,483 156,062 218,646 Interest and other income 1,797 354 2,943 832 Interest expense (including net amortization of debt issuance costs, premiums and discounts of $ 6,721 , $ 34,448 , $ 13,434 , and $ 54,769 , respectively) ( 71,846 ) ( 77,548 ) ( 142,617 ) ( 118,547 ) Loss on sale of real estate — ( 10 ) ( 974 ) ( 10 ) Loss on equity securities — ( 9,450 ) — ( 5,758 ) Loss on early extinguishment of debt ( 359 ) — ( 359 ) ( 828 ) Loss before income tax expense and equity in earnings of unconsolidated joint venture ( 39,278 ) ( 152,915 ) ( 78,768 ) ( 164,360 ) Income tax expense ( 45 ) ( 16 ) ( 62 ) ( 85 ) Equity in earnings of unconsolidated joint venture 2,743 1,610 6,704 3,337 Net loss ( 36,580 ) ( 151,321 ) ( 72,126 ) ( 161,108 ) Net loss attributable to noncontrolling interest 10,752 7,782 21,489 11,055 Net loss attributable to common shareholders ( 25,828 ) ( 143,539 ) ( 50,637 ) ( 150,053 ) Other comprehensive income: Unrealized gain on derivatives 12,021 4,438 3,243 10,070 Less: unrealized gain (loss) on derivatives attributable to noncontrolling interest ( 419 ) ( 774 ) 1,341 ( 2,498 ) Other comprehensive (loss) income attributable to common shareholders 11,602 3,664 4,584 7,572 Comprehensive loss attributable to common shareholders $ ( 14,226 ) $ ( 139,875 ) $ ( 46,053 ) $ ( 142,481 ) Weighted average common shares outstanding - basic and diluted 65,369 65,221 65,339 65,217 Per common share data (basic and diluted): Net loss attributable to common shareholders $ ( 0.40 ) $ ( 2.20 ) $ ( 0.77 ) $ ( 2.30 ) 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 Net loss — — — ( 25,828 ) — — ( 25,828 ) ( 10,752 ) ( 36,580 ) Share grants 140,000 1 567 — — — 568 — 568 Share repurchases ( 7,110 ) — ( 12 ) — — — ( 12 ) — ( 12 ) Share forfeitures ( 900 ) — ( 2 ) — — — ( 2 ) — ( 2 ) Distributions to common shareholders — — — — — ( 656 ) ( 656 ) — ( 656 ) Net current period other comprehensive loss — — — — 11,602 — 11,602 419 12,021 Distributions to noncontrolling interest — — — — — — — ( 225 ) ( 225 ) Balance at June 30, 2023 65,697,959 $ 657 $ 1,015,138 $ 66,548 $ 26,487 $ ( 364,533 ) $ 744,297 $ 516,992 $ 1,261,289 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) 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, 2021 65,404,592 $ 654 $ 1,012,224 $ 343,908 $ — $ ( 318,744 ) $ 1,038,042 $ — $ 1,038,042 Net (loss) income — — — ( 6,514 ) — — ( 6,514 ) ( 3,273 ) ( 9,787 ) Share grants — — 407 — — — 407 — 407 Share repurchases ( 333 ) — ( 7 ) — — — ( 7 ) — ( 7 ) Share forfeitures ( 400 ) — ( 2 ) — — — ( 2 ) — ( 2 ) Net current period other comprehensive income — — — — 3,908 — 3,908 1,724 5,632 Contributions from noncontrolling interest — — — — — — — 591,268 591,268 Distributions to common shareholders — — — — — ( 21,584 ) ( 21,584 ) — ( 21,584 ) 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 Net (loss) income — — — ( 143,539 ) — — ( 143,539 ) ( 7,782 ) ( 151,321 ) Share grants 24,500 — 800 — — — 800 — 800 Share forfeitures ( 900 ) — ( 4 ) — — — ( 4 ) — ( 4 ) Net current period other comprehensive income — — — — 3,664 — 3,664 774 4,438 Distributions to noncontrolling interest — — — — — — — ( 1,365 ) ( 1,365 ) Distributions to common shareholders — — — — — ( 21,583 ) ( 21,583 ) — ( 21,583 ) Balance at June 30, 2022 65,427,459 $ 654 $ 1,013,418 $ 193,855 $ 7,572 $ ( 361,911 ) $ 853,588 $ 581,346 $ 1,434,934 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) Six Months Ended June 30, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 72,126 ) $ ( 161,108 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 62,464 43,375 Loss on impairment of real estate 254 100,747 Net amortization of debt issuance costs, premiums and discounts 13,434 54,769 Amortization of acquired real estate leases and assumed real estate lease obligations 26,308 17,477 Amortization of deferred leasing costs 1,101 735 Loss on equity securities — 5,758 Straight line rental income ( 7,117 ) ( 4,376 ) Loss on early extinguishment of debt 359 828 Loss on sale of real estate 974 — Proceeds from settlement of derivatives ( 24,445 ) — Other non-cash expenses 13,244 2,156 Distributions of earnings from unconsolidated joint venture 1,980 2,642 Equity in earnings of unconsolidated joint venture ( 6,704 ) ( 3,337 ) Change in assets and liabilities: Rents receivable 3,065 ( 9,933 ) Deferred leasing costs ( 4,194 ) ( 4,565 ) Other assets 2,332 ( 4,695 ) Accounts payable and other liabilities 310 25,539 Rents collected in advance ( 1,238 ) 9,030 Security deposits 301 672 Due to related persons 329 5,217 Net cash provided by operating activities 10,631 80,931 CASH FLOWS FROM INVESTING ACTIVITIES: Real estate acquisitions — ( 3,551,509 ) Real estate improvements ( 7,301 ) ( 5,305 ) Proceeds from sale of marketable securities — 140,792 Proceeds from settlement of derivatives 24,445 — Proceeds from sale of real estate 243 — Net cash provided by (used in) investing activities 17,387 ( 3,416,022 ) 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) Six Months Ended June 30, 2023 2022 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of mortgage notes payable 91,000 2,100,000 Repayment of mortgage notes payable ( 46,607 ) ( 7,161 ) 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 ( 1,271 ) ( 96,260 ) Distributions to common shareholders ( 1,312 ) ( 43,167 ) Proceeds from sale of noncontrolling interest, net — 587,440 Repurchase of common shares ( 15 ) ( 7 ) Distributions to noncontrolling interest ( 225 ) ( 1,365 ) Net cash provided by financing activities 41,570 3,742,638 Increase in cash, cash equivalents and restricted cash 69,588 407,547 Cash, cash equivalents and restricted cash at beginning of period 140,780 29,397 Cash, cash equivalents and restricted cash at end of period $ 210,368 $ 436,944 SUPPLEMENTAL DISCLOSURES: Interest paid $ 142,095 $ 55,065 Income taxes paid $ 545 $ 195 Interest capitalized $ 324 $ 15 NON-CASH INVESTING ACTIVITIES: Real estate acquired by assumption of mortgage notes payable $ — $ 323,432 Real estate improvements accrued not paid $ 4,950 $ 4,055 NON-CASH FINANCING ACTIVITIES: Assumption of mortgage notes payable $ — $ ( 323,432 ) 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 June 30, 2023 2022 Cash and cash equivalents $ 71,695 $ 291,866 Restricted cash (1) 138,673 145,078 Total cash, cash equivalents and restricted cash shown in the statements of cash flows $ 210,368 $ 436,944 (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. 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, 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 June 30, 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 June 30, 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 $ 7,651 and $ 10,080 during the three months ended June 30, 2023 and 2022, respectively, and $ 12,582 and $ 13,845 for the six months ended June 30, 2023 and 2022, respectively. During the six months ended June 30, 2023, we committed $ 5,832 for expenditures related to tenant improvements and leasing costs for leases executed during the period for approximately 3,110,000 square feet. Committed, but unspent, tenant related obligations based on existing leases as of June 30, 2023 were $ 23,876 , of which $ 6,481 is expected to be spent during the next 12 months. We regularly evaluate whether events or changes in circumstances have occurred that could indicate an impairment in the value of long lived assets. Impairment indicators may include declining tenant occupancy, lack of progress releasing vacant space, tenant bankruptcies, low long term prospects for improvement in property performance, weak or declining tenant profitability, cash flow or liquidity, our decision to dispose of an asset before the end of its estimated useful life and legislative, market or industry changes that could permanently reduce the value of a property. If there is an indication that the carrying value of an asset is not recoverable, we estimate the projected undiscounted cash flows to determine if an impairment loss should be recognized. The future net undiscounted cash flows are subjective and are based in part on assumptions regarding hold periods, market rents and terminal capitalization rates. We determine the amount of any impairment loss by comparing the historical carrying value to estimated fair value. We estimate fair value through an evaluation of recent financial performance and projected discounted cash flows using standard industry valuation techniques. In addition to consideration of impairment upon the events or changes in circumstances described above, we regularly evaluate the remaining useful lives of our long lived assets. If we change our estimate of the remaining useful lives, we allocate the carrying value of the affected assets over their revised remaining useful lives. 9 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) During the three months ended June 30, 2023, we recorded a loss on impairment of real estate of $ 254 to reduce the carrying value of one of the two properties that were classified as held for sale at June 30, 2023 to its estimated sales price less costs to sell. As of March 31, 2022, we classified 30 properties we acquired as part of our acquisition of Monmouth Real Estate Investment Corporation, or MNR, on February 25, 2022, as held for sale in our condensed consolidated balance sheet. During the three months ended June 30, 2022, we determined not to sell these properties as a result of market conditions and reclassified those properties to held and used and recorded a $ 100,747 loss on impairment of real estate to adjust the carrying value of 25 of those 30 properties to their estimated fair value. Disposition Activities As of June 30, 2023, we had two Mainland Properties with 551,000 square feet and an aggregate carrying value of $ 36,864 classified as held for sale. See Note 5 for more information on our properties held for sale. 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. As of July 25, 2023, we have entered into agreements to sell three properties containing approximately 762,000 rentable square feet for an aggregate sales price of $ 65,265 , excluding closing costs. These pending sales are subject to conditions; accordingly, we cannot be sure that we will complete these sales or that these sales will not be delayed or the terms will not change. Joint Venture Activities As of June 30, 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 June 30, 2023 Properties Location Feet Mountain Industrial REIT LLC Consolidated 61 % N/A 94 Various 20,980,661 The Industrial Fund REIT LLC Unconsolidated 22 % $ 129,082 18 Various 11,726,137 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 June 30, 2023 and 2022, for the six months ended June 30, 2023 and the period from this joint venture’s formation date, February 25, 2022 to June 30, 2022. The portion of this joint venture's net loss not attributable to us, or $ 10,676 and $ 7,781 , for the three months ended June 30, 2023 and 2022, respectively, and $ 21,404 and $ 11,042 for the six months ended June 30, 2023 and for the period from February 25, 2022 to June 30, 2022, respectively, is reported as net loss attributable to noncontrolling interest in our condensed consolidated statements of comprehensive income (loss). As of June 30, 2023, our consolidated joint venture had total assets of $ 3,092,534 and total liabilities of $ 1,775,802 . 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 $ 2,743 and $ 1,610 for the three months ended June 30, 2023 and 2022, respectively, and $ 6,704 and $ 3,337 for the six months ended June 30, 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 10 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) $ 1,322 during the three months ended June 30, 2023 and 2022, respectively, and $ 1,980 and $ 2,642 for the six months ended June 30, 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 $ 76 and $ 1 , for the three months ended June 30, 2023 and 2022, respectively, and $ 85 and $ 13 for the six months ended June 30, 2023 and the period from the date we acquired our interest in this property, February 25, 2022 to June 30, 2022, respectively, is reported as net loss attributable to noncontrolling interest in our condensed consolidated statements of comprehensive income (loss). During the three and six months ended June 30, 2023, this tenancy in common made cash distributions of $ 225 to the unrelated third party investor, which is reflected as a decrease in the total equity attributable to noncontrolling interest in our condensed consolidated balance sheet. See Notes 4, 5, 7, 8 and 9 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 $ 3,355 and $ 3,220 to record revenue on a straight line basis during the three months ended June 30, 2023 and 2022, respectively, and $ 7,117 and $ 4,376 for the six months ended June 30, 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 $ 18,291 and $ 16,828 for the three months ended June 30, 2023 and 2022, respectively, and $ 39,390 and $ 29,407 for the six months ended June 30, 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 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 $ 4,867 and $ 4,943 , respectively, as of June 30, 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 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 $ 28 and $ 91 for three months ended June 30, 2023 and 2022, respectively, and $ 129 and $ 179 for the six months ended June 30, 2023 and the period from February 25, 2022 to June 30, 2022, respectively. 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. 11 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) Tenant Concentration As of June 30, 2023, we had a concentration of properties leased to tenants, including their applicable subsidiaries, that leased over 5.0 % of our total rentable square footage. The following table presents rental income recognized from these tenants for the three and six months ended June 30, 2023 and 2022: % of Rentable Rental Income Rental Income Square Three Months Ended Six Months Ended Tenant Feet 6/30/2023 6/30/2022 6/30/2023 6/30/2022 FedEx Corporation/ FedEx Ground Package System, Inc. 22.0 % $ 32,934 30.5 % $ 31,063 29.0 % $ 67,721 31.0 % $ 44,531 24.9 % Amazon.com Services, Inc./ Amazon.com Services LLC 7.6 % 7,326 6.8 % 7,236 6.7 % 14,841 6.8 % 12,852 7.2 % Total 29.6 % $ 40,260 37.3 % $ 38,299 35.7 % $ 82,562 37.8 % $ 57,383 32.1 % Geographic Concentration For the three months ended June 30, 2023 and 2022, approximately 28.1 % and 29.8 %, respectively, of our rental income was from our Hawaii Properties. For the six months ended June 30, 2023 and 2022, approximately 27.8 % and 32.8 %, respectively, of our rental income was from our Hawaii Properties. 12 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 June 30, 2023, our outstanding indebtedness consisted of the following: Net Book Value Principal Balance as of of Collateral June 30, December 31, Interest At June 30, 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 $ 1,056,804 ILPT Fixed Rate - Interest only 186 Properties 650,000 650,000 4.31 % 02/07/29 490,023 ILPT Fixed Rate - Interest only 17 Properties 700,000 700,000 4.42 % 03/09/32 511,664 Mountain JV (2) Floating Rate - Interest only 82 Properties 1,400,000 1,400,000 6.17 % 03/09/24 1,883,377 Mountain JV (2) Fixed Rate - Interest only Four Properties 91,000 — 6.25 % 06/10/30 190,883 Mountain JV (2) Fixed Rate - Amortizing One Property 12,042 12,691 3.67 % 05/01/31 29,257 Mountain JV (2) Fixed Rate - Amortizing One Property 13,536 14,144 4.14 % 07/01/32 44,143 Mountain JV (2) Fixed Rate - Amortizing One Property 29,797 30,949 4.02 % 10/01/33 85,968 Mountain JV (2) Fixed Rate - Amortizing One Property 41,636 43,219 4.13 % 11/01/33 130,644 Mountain JV (2) Fixed Rate - Amortizing One Property 25,310 26,175 3.10 % 06/01/35 47,056 Mountain JV (2) Fixed Rate - Amortizing One Property 40,759 42,087 2.95 % 01/01/36 100,502 Mountain JV (2) Fixed Rate - Amortizing One Property 44,991 46,109 4.27 % 11/01/37 111,510 Mountain JV (2) Fixed Rate - Amortizing One Property 50,684 52,031 3.25 % 01/01/38 115,042 Mountain JV (2) Fixed Rate - Amortizing One Property — 13,556 3.76 % 10/01/28 N/A Mountain JV (2) Fixed Rate - Amortizing One Property — 4,865 3.77 % 04/01/30 N/A Mountain JV (2) Fixed Rate - Amortizing One Property — 5,145 3.85 % 04/01/30 N/A Mountain JV (2) Fixed Rate - Amortizing One Property — 14,392 3.56 % 09/01/30 N/A Total indebtedness $ 4,334,755 $ 4,290,363 $ 4,796,873 Unamortized debt issuance costs ( 33,479 ) ( 45,862 ) Total indebtedness, net $ 4,301,276 $ 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, 7, 8 and 9 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 June 30, 2023 was 6.18 %. The weighted average interest rate payable under the ILPT Floating Rate Loan was 6.18 % for both the three and six months ended June 30, 2023. 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 June 30, 2023 was 6.17 %. The weighted average annual interest rate payable under the Floating Rate Loan was 6.17 % for both the three and six months ended June 30, 2023. The weighted average annual interest rate payable under the Floating Rate Loan was 3.61 % and 3.38 % for the three months ended June 30, 2022 and the period from the date we obtained the Floating Rate loan, February 25, 2022 to June 30, 2022, 13 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) respectively. 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. See Note 9 for more information regarding our interest rate caps. In May 2023, our consolidated joint venture obtained a $ 91,000 fixed rate, interest only mortgage loan secured by four properties owned by our consolidated joint venture. This mortgage loan matures in June 2030 and requires that interest be paid at an annual rate of 6.25 %. A portion of the net proceeds from this mortgage loan was used to repay four outstanding mortgage loans of our consolidated joint venture with an aggregate outstanding principal balance of $ 35,910 and a weighted average interest rate of 3.70 %. We recognized a loss on extinguishment of debt of $ 359 in conjunction with the repayment of these mortgage loans. The following table provides a summary of the mortgage debts of the unconsolidated joint venture: Principal Balance Interest at June 30, 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 six properties in four states) 5.30 % 10/1/2027 123,700 Mortgage notes payable (secured by 11 other properties in eight states) 3.33 % 11/7/2029 350,000 Weighted average/total 3.82 % (2) $ 530,680 (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. 14 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, 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 June 30, 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 June 30, 2023 At December 31, 2022 Carrying Estimated Carrying Estimated Value (1) Fair Value Value (1) Fair Value Fixed rate loan, 4.31 % interest rate, due in 2029 $ 646,941 $ 612,132 $ 646,669 $ 592,295 Fixed rate loan, 6.25 % interest rate, due in 2030 89,994 94,568 — — Fixed rate loan, 3.67 % interest rate, due in 2031 12,042 11,318 12,691 11,713 Fixed rate loan, 4.42 % interest rate, due in 2032 694,991 609,028 694,704 623,133 Fixed rate loan, 4.14 % interest rate, due in 2032 13,536 12,889 14,144 13,182 Fixed rate loan, 4.02 % interest rate, due in 2033 29,797 27,684 30,949 28,195 Fixed rate loan, 4.13 % interest rate, due in 2033 41,636 38,875 43,219 39,573 Fixed rate loan, 3.10 % interest rate, due in 2035 25,310 22,166 26,175 22,373 Fixed rate loan, 2.95 % interest rate, due in 2036 40,759 35,213 42,087 35,444 Fixed rate loan, 4.27 % interest rate, due in 2037 44,991 41,946 46,109 41,880 Fixed rate loan, 3.25 % interest rate, due in 2038 50,684 43,961 52,031 43,878 Fixed rate loan, 3.76 % interest rate, due in 2028 (2) — — 13,556 12,784 Fixed rate loan, 3.77 % interest rate, due in 2030 (2) — — 4,865 4,553 Fixed rate loan, 3.85 % interest rate, due in 2030 (2) — — 5,145 4,829 Fixed rate loan, 3.56 % interest rate, due in 2030 (2) — — 14,392 13,315 $ 1,690,681 $ 1,549,780 $ 1,646,736 $ 1,487,147 (1) Includes unamortized debt issuance costs, premiums and discounts of $ 9,073 and $ 8,628 as of June 30, 2023 and December 31, 2022, respectively. (2) This loan was repaid in May 2023. 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. 15 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 June 30, 2023, 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 June 30, 2023 Recurring fair value measurements Investment in unconsolidated joint venture (1) $ 129,082 $ — $ — $ 129,082 Interest rate cap derivatives (2) $ 64,097 $ — $ 64,097 $ — Non-recurring fair value measurements Real estate properties (3) $ 1,414 $ — $ — $ 1,414 (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, 7 and 8 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 9 for more information regarding our derivatives and hedging activities. (3) We recorded a loss on impairment of real estate of $ 254 to reduce the carrying value of one of the two properties that were classified as held for sale at June 30, 2023 on our condensed consolidated balance sheet to its estimated sales price less costs to sell (Level 3 inputs). See Note 2 for more information on our properties held for sale. Note 6. Shareholders’ Equity Common Share Awards: On June 1, 2023, in accordance with our Trustee compensation arrangements, we awarded to each of our seven Trustees 20,000 of our common shares, valued at $ 1.78 per share, the closing price of our common shares on The Nasdaq Stock Market LLC, or Nasdaq, on that day. Common Share Purchases: During the six months ended June 30, 2023, we purchased an aggregate of 8,086 of our common shares, valued at a weighted average price of $ 2.00 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 six months ended June 30, 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 April 13, 2023 April 24, 2023 May 18, 2023 0.01 656 $ 0.02 $ 1,312 On July 13, 2023, we declared a regular quarterly distribution to common shareholders of record on July 24, 2023 of $ 0.01 per share, or approximately $ 657 . We expect to pay this distribution to our shareholders on or about August 17, 2023 using cash balances. 16 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) Note 7. 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 $ 5,656 and $ 11,382 for the three and six months ended June 30, 2023, respectively, and $ 6,957 and $ 11,356 for the three and six months ended June 30, 2022, respectively. Based on our common share total return, as defined in our business management agreement, as of June 30, 2023 and 2022, no incentive fees are included in the net business management fees we recognized for the three and six months ended June 30, 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). Pursuant to our property management agreement with RMR, we recognized aggregate property management and construction supervision fees of $ 3,370 and $ 6,822 for the three and six months ended June 30, 2023, respectively, and $ 2,764 and $ 5,527 for the three and six months ended June 30, 2022, respectively. Of these amounts, for the three and six months ended June 30, 2023, $ 3,133 and $ 6,452 , respectively, were expensed to other operating expenses in our condensed consolidated financial statements and $ 237 and $ 370 , respectively, were capitalized as building improvements in our condensed consolidated balance sheets. For the three and six months ended June 30, 2022, $ 2,396 and $ 5,128 , respectively, were expensed to other operating expenses in our condensed consolidated financial statements and $ 368 and $ 399 , 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 incurred by RMR. We reimbursed RMR $ 2,000 and $ 3,841 for these expenses and costs for the three and six months ended June 30, 2023, respectively, and $ 1,704 and $ 3,308 for the three and six months ended June 30, 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, 8 and 9 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 8 for further information regarding our relationships, agreements and transactions with RMR. 17 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) Note 8. 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 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 of those companies. Other officers of RMR, including Messrs. Jordan and Murray and certain of our officers, serve as managing trustees or officers of certain of these companies. Our Manager, RMR . We have two agreements with RMR to provide management services to us. See Note 7 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, 7 and 9 for further information regarding our joint ventures and RMR’s management agreements with our joint ventures. As of June 30, 2023 and December 31, 2022, we owed $ 556 and $ 616 , 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 July 2023, respectively. For further information about these and other such relationships and certain other related person transactions, see our 2022 Annual Report. Note 9. 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 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 June 30, 2023: Interest Rate Derivative Balance Sheet Line Item Underlying Instrument Number of Instruments Strike Rate Notional Amount Fair Value at June 30, 2023 Interest Rate Cap Other assets Floating Rate Loan (1) 1 3.40 % $ 1,400,000 $ 19,022 Interest Rate Cap Other assets ILPT Floating Rate Loan 2 2.25 % $ 1,235,000 $ 45,075 $ 64,097 (1) The Floating Rate Loan was entered into by our consolidated joint venture. 18 Table of Contents INDUSTRIAL LOGISTICS PROPERTIES TRUST NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollars in thousands, except per share data) 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 June 30, Six Months Ended June 30, 2023 2022 2023 2022 Amount of gain recognized in cumulative other comprehensive income (loss) $ 20,025 $ 3,778 $ 16,249 $ 9,153 Amount reclassified from cumulative other comprehensive income (loss) into interest expense ( 8,004 ) 660 ( 13,006 ) 917 Unrealized gain on derivative instrument recognized in cumulative other comprehensive (loss) income, net $ 12,021 $ 4,438 $ 3,243 $ 10,070 19 Table of Contents