Industrial Logistics Properties Trust 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk ( dollars in thousands, except per share data ) We are exposed to risks associated with market changes in interest rates. We manage our exposure to this market risk by monitoring available financing alternatives. Our strategy to manage exposure to changes in interest rates is materially unchanged since December 31, 2022. Other than as described below, we do not currently expect any significant changes in our exposure to fluctuations in interest rates or in how we manage this exposure in the near future. Floating Rate Debt At June 30, 2023, our outstanding floating rate debt consisted of the following: Annual Annual Interest Principal Interest Interest Payments Debt Balance (1) Rate (1) Expense (1) Maturity Due ILPT Floating Rate Loan $ 1,235,000 6.18 % $ 76,323 2024 Monthly Floating Rate Loan 1,400,000 6.17 % 86,380 2024 Monthly $ 2,635,000 $ 162,703 (1) The principal balance, annual interest rate and annual interest expense are the amounts stated in the applicable contract, as adjusted by our interest rate caps as applicable. In accordance with GAAP, our carrying values and recorded interest expense may differ from these amounts because of market conditions at the time we assumed or issued this debt. At June 30, 2023, our aggregate floating rate debt was $2,635,000, consisting of the $1,235,000 outstanding principal amount of the ILPT Floating Rate Loan, and the $1,400,000 outstanding principal amount of the Floating Rate Loan secured by 82 properties owned by our consolidated joint venture. The ILPT Floating Rate Loan matures on October 9, 2024, subject to three, one year extension options, and requires that interest be paid at an annual rate of SOFR plus a weighted average premium of 3.93%. The Floating Rate Loan matures on March 9, 2024, subject to three, one year extension options, and requires that interest be paid at an annual rate of SOFR plus a premium of 2.77%. We are vulnerable to changes in the U.S. dollar based on 33 Table of Contents short term rates, specifically SOFR. In conjunction with these borrowings, to hedge our exposure to risks related to changes in SOFR rates, we purchased interest rate caps with a SOFR strike rate equal to 2.25% for the ILPT Floating Rate Loan and 3.40% for the Floating Rate Loan. In addition, upon renewal or refinancing of these obligations, we are vulnerable to increases in interest rate premiums due to market conditions and our perceived credit risk. Generally, a change in interest rates would not affect the value of our floating rate debt but would affect our operating results. The following table presents the approximate impact a one percentage point increase in interest rates would have on our annual floating rate interest expense at June 30, 2023, excluding the impact of our interest rate caps: Impact of an Increase in Interest Rates Total Interest Annual Interest Rate Outstanding Expense Earnings Per Per Year Debt Per Year Share Impact (1) At June 30, 2023 6.17 % $ 2,635,000 $ 162,703 $ 2.49 One percentage point increase 7.17 % $ 2,635,000 $ 188,930 $ 2.89 (1) Based on the diluted weighted average common shares outstanding for the six months ended June 30, 2023. The foregoing table shows the impact of an immediate one percentage point change in floating interest rates. If interest rates were to change gradually over time, the impact would be spread over time. Our exposure to fluctuations in floating interest rates will increase or decrease in the future with increases or decreases in the outstanding amounts of any floating rate debt we may incur. Fixed Rate Debt At June 30, 2023, our outstanding fixed rate debt consisted of the following mortgage notes: Annual Annual Interest Principal Interest Interest Payments Debt Balance (1) Rate (1) Expense (1) Maturity Due Mortgage notes (186 Hawaii Properties) $ 650,000 4.31 % $ 28,015 2029 Monthly Mortgage notes (17 Mainland Properties) 700,000 4.42 % 30,940 2032 Monthly Mortgage note (2) 91,000 6.25 % 5,688 2030 Monthly Mortgage note (3) 12,042 3.67 % 442 2031 Monthly Mortgage note (3) 13,536 4.14 % 560 2032 Monthly Mortgage note (3) 29,797 4.02 % 1,198 2033 Monthly Mortgage note (3) 41,636 4.13 % 1,720 2033 Monthly Mortgage note (3) 25,310 3.10 % 785 2035 Monthly Mortgage note (3) 40,759 2.95 % 1,202 2036 Monthly Mortgage note (3) 44,991 4.27 % 1,921 2037 Monthly Mortgage note (3) 50,684 3.25 % 1,647 2038 Monthly $ 1,699,755 $ 74,118 (1) The principal balance, annual interest rate and annual interest expense are the amounts stated in the applicable contract. In accordance with GAAP, our carrying values and recorded interest expense may differ from these amounts because of market conditions at the time we assumed or issued this debt. (2) Our consolidated joint venture, in which we own a 61% equity interest, obtained this mortgage loan, which is secured by four properties. (3) Our consolidated joint venture, in which we own a 61% equity interest, assumed these former MNR mortgage loans, which are secured by eight properties in aggregate. Our $650,000, $700,000 and $91,000 mortgage notes require interest only payments until maturity. The remaining fixed rate mortgage notes require amortizing payment of principal and interest until maturity. Because our mortgage notes require interest to be paid at a fixed rate, changes in market interest rates during the terms of these mortgage notes will not affect our interest obligations. If these mortgage notes are refinanced at an interest rate which is one percentage point higher or lower than shown above, our annual interest cost would increase or decrease by approximately $16,998. 34 Table of Contents Changes in market interest rates would affect the fair value of our fixed rate debt obligations. Increases in market interest rates decrease the fair value of our fixed rate debt, while decreases in market interest rates increase the fair value of our fixed rate debt. The U.S. Federal Reserve has raised interest rates multiple times since the beginning of 2022 in an effort to combat inflation and may continue to do so. Based on the balances outstanding at June 30, 2023 and discounted cash flow analyses through the maturity date, and assuming no other changes in factors that may affect the fair value of our fixed rate debt obligation, a hypothetical immediate one percentage point change in the interest rates would change the fair value of this obligation by approximately $91,876.