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, 2022. 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. 29 Table of Contents Fixed Rate Debt At March 31, 2023, our outstanding fixed rate debt consisted of the following: Debt Principal Balance (1) Annual Interest Rate (1) Annual Interest Expense Maturity Interest Payments Due Senior unsecured notes $ 350,000 4.250% $ 14,875 2024 Semi-annually Senior unsecured notes 650,000 4.500% 29,250 2025 Semi-annually Senior unsecured notes 300,000 2.650% 7,950 2026 Semi-annually Senior unsecured notes 350,000 2.400% 8,400 2027 Semi-annually Senior unsecured notes 400,000 3.450% 13,800 2031 Semi-annually Senior unsecured notes 162,000 6.375% 10,328 2050 Quarterly Mortgage note (one property in Chicago, IL) 50,000 3.700% 1,850 2023 Monthly Total $ 2,262,000 $ 86,453 (1) The principal balances and annual 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 5 and 6 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Our senior unsecured notes require semi-annual or quarterly interest payments through maturity. Our mortgage note requires interest only payments through maturity. 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 $22,620. 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. Since the beginning of 2022, the U.S. Federal Reserve has been raising interest rates in an effort to combat inflation and may continue to do so. Based on the balances outstanding at March 31, 2023, 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 $72,794. Our fixed rate debt arrangements may 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 a higher rate by refinancing prior to maturity. In addition to the fixed rate debt presented in the table above, at March 31, 2023, we had noncontrolling ownership interests of 51% and 50% in two unconsolidated joint ventures that 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 Maturity Interest Payments Due Mortgage note (two properties in Fairfax, VA) 51% $ 50,000 4.090% $ 2,045 2029 Monthly Mortgage note (one property in Washington, D.C.) 50% 32,000 3.690% 1,181 2024 Monthly Total $ 82,000 $ 3,226 (1) The principal balances and annual 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. None of the debt is recourse to us. Floating Rate Debt At March 31, 2023, our floating rate debt consisted of $245,000 outstanding under our $750,000 revolving credit facility. Our revolving credit facility matures on July 31, 2023 and, subject to the payment of an extension fee and meeting certain other 30 Table of Contents conditions, we have the option to extend the maturity date of our revolving credit facility by one six month period. 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 revolving credit facility are in U.S. dollars and require interest to be paid at a rate of SOFR 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 SOFR, 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 March 31, 2023: 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 March 31, 2023 6.0 % $ 245,000 $ 14,700 $ 0.30 One percentage point increase 7.0 % $ 245,000 $ 17,150 $ 0.35 (1) Based on SOFR plus a premium, which was 110 basis points per annum, as of March 31, 2023. Effective April 1, 2023, based upon changes to our credit ratings, the interest rate premium increased to 145 basis points per annum. (2) Based on the weighted average shares outstanding (diluted) for the three months ended March 31, 2023. 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 March 31, 2023 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 March 31, 2023 6.0 % $ 750,000 $ 45,000 $ 0.93 One percentage point increase 7.0 % $ 750,000 $ 52,500 $ 1.09 (1) Based on SOFR plus a premium, which was 110 basis points per annum, as of March 31, 2023. Effective April 1, 2023, based upon changes to our credit ratings, the interest rate premium increased to 145 basis points per annum. (2) Based on the weighted average shares outstanding (diluted) for the three months ended March 31, 2023. The foregoing tables show the impact of an immediate increase in floating interest rates as of March 31, 2023. 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.