Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. 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, including fixed rate debt, and employing derivative instruments, including interest rate caps, to limit our exposure to increasing interest rates. 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 December 31, 2023, our outstanding floating rate debt consisted of the following:
Annual
Annual Interest
Principal Interest Interest Payments
Debt Balance
Rate (1)
Expense
Maturity Due
ILPT Floating Rate Loan $ 1,235,000 6.18 % $ 77,383 2024 Monthly
Floating Rate Loan 1,400,000 6.17 % 87,580 2024 Monthly
$ 2,635,000 $ 164,963
(1) The annual interest rate is the rate stated in the applicable contract, as adjusted by our interest rate caps.
At December 31, 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. 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 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, including increases in the cost of replacement interest rate caps, 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 December 31, 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 December 31, 2023
6.17 % $ 2,635,000 $ 164,963 $ (2.52)
One percentage point increase 7.17 % $ 2,635,000 $ 191,679 $ (2.92)
(1) Based on the diluted weighted average common shares outstanding for the year ended December 31, 2023.
The foregoing table shows the impact of an immediate one percentage point change in floating interest rates, excluding the impact of our interest rate caps. 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.
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Tabl e of Contents
Fixed Rate Debt
At December 31, 2023, our outstanding fixed rate debt consisted of the following mortgage notes:
Annual
Annual Interest
Principal Interest Interest Payments
Debt Balance
Rate (1)
Expense
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)
11,380 3.67 % 418 2031 Monthly
Mortgage note (3)
12,916 4.14 % 535 2032 Monthly
Mortgage note (3)
28,622 4.02 % 1,151 2033 Monthly
Mortgage note (3)
40,019 4.13 % 1,653 2033 Monthly
Mortgage note (3)
24,433 3.10 % 757 2035 Monthly
Mortgage note (3)
39,411 2.95 % 1,163 2036 Monthly
Mortgage note (3)
43,850 4.27 % 1,872 2037 Monthly
Mortgage note (3)
49,313 3.25 % 1,603 2038 Monthly
$ 1,690,944 $ 73,795
(1) The annual interest rate is the rate stated in the applicable contract.
(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 $16,909.
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. In response to significant and prolonged increases in inflation, the U.S. Federal Reserve has raised interest rates multiple times since the beginning of 2022. Although the U.S. Federal Reserve has indicated that it may lower interest rates in 2024, we cannot be sure that it will do so, and interest rates may remain at the current high levels or continue to increase. Based on the balances outstanding at December 31, 2023 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 these obligations by approximately $87,358.
Item 8. Financial Statements and Supplementary Data
The information required by this item is included in Item 15 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.