OFFICE PROPERTIES INCOME TRUST 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk (dollar amounts 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 has not materially changed since December 31, 2019 . Other than as described below, we do not currently foresee any significant changes in our exposure to fluctuations in interest rates or in how we manage this exposure in the near future. 37 Table of Contents Fixed Rate Debt At June 30, 2020 , our outstanding fixed rate debt consisted of the following: Debt Principal Balance (1) Annual Interest Rate (1) Annual Interest Expense (1) Maturity Interest Payments Due Senior unsecured notes $ 300,000 4.150% $ 12,450 2022 Semi-annually Senior unsecured notes 300,000 4.000% 12,000 2022 Semi-annually Senior unsecured notes 350,000 4.250% 14,875 2024 Semi-annually Senior unsecured notes 400,000 4.500% 18,000 2025 Semi-annually Senior unsecured notes 310,000 5.875% 18,213 2046 Quarterly Senior unsecured notes (2) 150,000 6.375% 9,563 2050 Quarterly Mortgage note (one property in Philadelphia, PA) 39,698 2.173% 863 2020 Monthly Mortgage note (one property in Lakewood, CO) 1,030 8.150% 84 2021 Monthly Mortgage note (one property in Washington, D.C.) 26,167 4.220% 1,104 2022 Monthly Mortgage note (three properties in Seattle, WA) 71,000 3.550% 2,521 2023 Monthly Mortgage note (one property in Chicago, IL) 50,000 3.700% 1,850 2023 Monthly Mortgage note (one property in Washington, D.C.) 23,901 4.800% 1,147 2023 Monthly Total $ 2,021,796 $ 92,670 (1) The principal balances and interest rates are the amounts stated in the applicable contracts. In accordance with GAAP, our carrying values and recorded interest expense may differ from these amounts because of market conditions at the time we issued or assumed these debts. For more information, see Notes 7 and 8 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. (2) In July 2020, we issued an additional $12,000 of these senior unsecured notes in connection with the underwriters partial exercise of their option to purchase additional notes. Our senior unsecured notes require semi-annual or quarterly interest payments through maturity. Our mortgages generally require principal and interest payments through maturity pursuant to amortization schedules. Because these debts require interest to be paid at a fixed rate, changes in market interest rates during the term of these debts will not affect our interest obligations. If these debts were refinanced at interest rates which are one percentage point higher or lower than shown above, our annual interest cost would increase or decrease by approximately $20,218 . Changes in market interest rates also would affect the fair value of our fixed rate debt obligations; increases in market interest rates decrease the fair value of our fixed rate debt, while decreases in market interest rates increase the fair value of our fixed rate debt. Based on the balances outstanding at June 30, 2020 , and discounted cash flow analyses through the respective maturity dates, and assuming no other changes in factors that may affect the fair value of our fixed rate debt obligations, a hypothetical immediate one percentage point increase in interest rates would change the fair value of those obligations by approximately $96,698 . Some of our fixed rate secured debt arrangements allow us to make repayments earlier than the stated maturity date. In some cases, we are not allowed to make early repayment prior to a cutoff date and we are generally allowed to make prepayments only at a premium equal to a make whole amount, as defined, which is generally designed to preserve a stated yield to the note holder. These prepayment rights may afford us opportunities to mitigate the risk of refinancing our debts at maturity at higher rates by refinancing prior to maturity. At June 30, 2020 , we owned 51% and 50% interests in two joint venture arrangements which own three properties that are secured by fixed rate debt consisting of the following mortgage notes: Debt Our JV Ownership Interest Principal Balance (1)(2) Annual Interest Rate (1) Annual Interest Expense (1) Maturity Interest Payments Due Mortgage note (two properties in Fairfax, VA) 51% $ 50,000 4.09% $ 2,045 2029 Monthly Mortgage note (one property in Washington, D.C.) 50% 32,000 3.69% 1,181 2024 Monthly Total $ 82,000 $ 3,226 (1) The principal balances and interest rates are the amounts stated in the applicable contracts. In accordance with GAAP, the joint ventures’ recorded interest expense may differ from these amounts because of market conditions at the time they incurred the debt. (2) Reflects the entire balance of the debt secured by the properties and is not adjusted to reflect the interests in the joint ventures we do not own. 38 Table of Contents Floating Rate Debt At June 30, 2020 , our floating rate debt consisted of $200,000 of borrowings under our $750,000 revolving credit facility. Our revolving credit facility matures on January 31, 2023 and, subject to the payment of an extension fee and meeting certain other conditions, we have the option to extend the stated maturity by two six month periods. No principal repayments are required under our revolving credit facility prior to maturity, and we can borrow, repay and reborrow funds available under our revolving credit facility, subject to conditions, at any time without penalty. Borrowings under our $750,000 revolving credit facility are in U.S. dollars and require interest to be paid at a rate of LIBOR plus premiums that are subject to adjustment based upon changes to our credit ratings. Accordingly, we are vulnerable to changes in U.S. dollar based short term rates, specifically LIBOR, and to changes in our credit ratings. In addition, upon renewal or refinancing of our revolving credit facility, we are vulnerable to increases in interest rate premiums due to market conditions or our perceived credit characteristics. 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 impact a one percentage point increase in interest rates would have on our annual floating rate interest expense as of June 30, 2020 : Impact of Changes in Interest Rates Annual Interest Rate (1) Outstanding Debt Total Interest Expense Per Year Annual Earnings Per Share Impact (2) At June 30, 2020 1.2 % $ 200,000 $ 2,400 $ 0.05 One percentage point increase 2.2 % $ 200,000 $ 4,400 $ 0.09 (1) Weighted based on the interest rate and outstanding borrowings under our revolving credit facility as of June 30, 2020 . (2) Based on the weighted average shares outstanding (diluted) for the six months ended June 30, 2020 . The following table presents the impact a one percentage point increase in interest rates would have on our annual floating rate interest expense as of June 30, 2020 if we were fully drawn on our revolving credit facility: Impact of an Increase in Interest Rates Annual Interest Rate (1) Outstanding Debt Total Interest Expense Per Year Annual Earnings Per Share Impact (2) At June 30, 2020 1.2 % $ 750,000 $ 9,000 $ 0.19 One percentage point increase 2.2 % $ 750,000 $ 16,500 $ 0.34 (1) Weighted based on the interest rate and outstanding borrowings under our revolving credit facility as of June 30, 2020 . (2) Based on the weighted average shares outstanding (diluted) for the six months ended June 30, 2020 . The foregoing tables show the impact of an immediate increase in floating interest rates as of June 30, 2020 . If interest rates were to increase 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 amount under our revolving credit facility or our other floating rate debt, if any. Although we have no present plans to do so, we may in the future enter into hedge arrangements from time to time to mitigate our exposure to changes in interest rates. LIBOR Phase Out LIBOR is currently expected to be phased out in 2021. We are required to pay interest on borrowings under our revolving credit facility at a floating rate based on LIBOR. Future debt that we may incur may also require that we pay interest based upon LIBOR. We currently expect that the determination of interest under our revolving credit facility would be revised as provided under our credit agreement or amended as necessary to provide for an interest rate that approximates the existing interest rate as calculated in accordance with LIBOR. Despite our current expectations, we cannot be sure that, if LIBOR is phased out or transitioned, the changes to the determination of interest under our agreements would approximate the current calculation in accordance with LIBOR. We do not know what standard, if any, will replace LIBOR if it is phased out or transitioned.