UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the quarterly period ended September 30, 2020

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

Commission File Number 001-38342 

INDUSTRIAL LOGISTICS PROPERTIES TRUST

(Exact Name of Registrant as Specified in Its Charter)

Maryland	82-2809631
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

Two Newton Place,	255 Washington Street,	Suite 300,	Newton,	Massachusetts	02458-1634
(Address of Principal Executive Offices)					(Zip Code)

617-219-1460

(Registrant’s Telephone Number, Including Area Code)

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol(s)	Name Of Each Exchange On Which Registered
Common Shares of Beneficial Interest	ILPT	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

    If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided in Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No ☒

Number of registrant’s common shares of beneficial interest, $.01 par value per share, outstanding as of October 26, 2020: 65,301,088

INDUSTRIAL LOGISTICS PROPERTIES TRUST

FORM 10-Q

September 30, 2020

INDEX

		Page
PART I	Financial Information	3
Item 1.	Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets — September 30, 2020 and December 31, 2019	3
	Condensed Consolidated Statements of Comprehensive Income — Three and Nine Months Ended September 30, 2020 and 2019	4
	Condensed Consolidated Statements of Shareholders’ Equity — Three and Nine Months Ended September 30, 2020 and 2019	5
	Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2020 and 2019	7
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	35
	Warning Concerning Forward-Looking Statements	36
	Statement Concerning Limited Liability	39
PART II	Other Information	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 6.	Exhibits	42
	Signatures	43

References in this Quarterly Report on Form 10-Q to the Company, we, us or our include Industrial Logistics Properties Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.

2

PART I Financial Information

Item 1.  Financial Statements

INDUSTRIAL LOGISTICS PROPERTIES TRUST 

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

(unaudited)

	September 30,		December 31,
	2020		2019
ASSETS
Real estate properties:
Land	$	757,522	$	747,794
Buildings and improvements	1,632,842		1,588,170
Total real estate properties, gross	2,390,364		2,335,964
Accumulated depreciation	(160,570)		(131,468)
Total real estate properties, net	2,229,794		2,204,496
Assets of property held for sale	10,136		—
Acquired real estate leases, net	123,146		138,596
Cash and cash equivalents	39,105		28,415
Restricted cash	12,806		6,135
Rents receivable, including straight line rents of $64,236 and $58,336, respectively	70,597		62,782
Deferred leasing costs, net	6,037		6,581
Debt issuance costs, net	1,846		2,954
Due from related persons	—		1,504
Other assets, net	5,527		3,438
Total assets	$	2,498,994	$	2,454,901
LIABILITIES AND EQUITY
Revolving credit facility	$	320,000	$	310,000
Mortgage notes payable, net	1,048,521		1,096,608
Liabilities of property held for sale	227		—
Assumed real estate lease obligations, net	15,778		17,508
Accounts payable and other liabilities	19,162		16,475
Rents collected in advance	8,098		9,442
Security deposits	6,698		6,680
Due to related persons	3,087		2,498
Total liabilities	1,421,571		1,459,211
Commitments and contingencies
Equity:
Equity attributable to common shareholders:
Common shares of beneficial interest, $.01 par value: 100,000,000 shares authorized; 65,301,088 and 65,180,628 shares issued and outstanding, respectively	653		652
Additional paid in capital	1,010,139		999,302
Cumulative net income	183,911		142,155
Cumulative common distributions	(210,959)		(146,419)
Total equity attributable to common shareholders	983,744		995,690
Noncontrolling interest:
Total equity attributable to noncontrolling interest	93,679		—
Total equity	1,077,423		995,690
Total liabilities and equity	$	2,498,994	$	2,454,901

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3

INDUSTRIAL LOGISTICS PROPERTIES TRUST 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(amounts in thousands, except per share data)

(unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Rental income	$	65,106	$	60,958	$	194,494	$	167,035
Expenses:
Real estate taxes	9,036		8,586		26,779		21,646
Other operating expenses	5,511		4,821		15,733		12,405
Depreciation and amortization	18,488		17,568		55,303		43,888
Acquisition and certain other transaction related costs	178		—		178		—
General and administrative	5,180		4,475		14,857		13,131
Total expenses	38,393		35,450		112,850		91,070
Interest income	—		81		113		580
Interest expense (including net amortization of debt issuance costs, premiums and discounts of $664, $524, $1,893 and $1,421, respectively)	(12,886)		(14,687)		(40,610)		(36,207)
Gain on early extinguishment of debt	—		—		120		—
Income before income tax expense and equity in earnings of an investee	13,827		10,902		41,267		40,338
Income tax expense	(13)		(63)		(202)		(131)
Equity in earnings of an investee	—		83		—		617
Net income	13,814		10,922		41,065		40,824
Net loss attributable to noncontrolling interest	275		—		691		—
Net income attributable to common shareholders	14,089		10,922		41,756		40,824
Other comprehensive income:
Equity in unrealized gains of an investee	—		(46)		—		91
Other comprehensive income	—		(46)		—		91
Comprehensive income attributable to common shareholders	$	14,089	$	10,876	$	41,756	$	40,915
Weighted average common shares outstanding - basic	65,112		65,055		65,092		65,042
Weighted average common shares outstanding - diluted	65,129		65,060		65,101		65,048
Per common share data (basic and diluted):
Net income attributable to common shareholders	$	0.22	$	0.17	$	0.64	$	0.63

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

INDUSTRIAL LOGISTICS PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(dollars in thousands)

(unaudited)

										Total Equity		Total Equity
	Number of			Additional				Cumulative		Attributable to		Attributable to
	Common	Common		Paid In		Cumulative		Common		Common		Noncontrolling		Total
	Shares	Shares		Capital		Net Income		Distributions		Shareholders		Interest		Equity
Balance at December 31, 2019	65,180,628	$	652	$	999,302	$	142,155	$	(146,419)	$	995,690	$	—	$	995,690
Net income (loss)	—	—		—		12,846		—		12,846		(152)		12,694
Share grants	6,000	—		326		—		—		326		—		326
Share repurchases	(951)	—		(18)		—		—		(18)		—		(18)
Distributions to common shareholders	—	—		—		—		(21,510)		(21,510)		—		(21,510)
Contributions from noncontrolling interest	—	—		6,972		—		—		6,972		100,668		107,640
Balance at March 31, 2020	65,185,677	652		1,006,582		155,001		(167,929)		994,306		100,516		1,094,822
Net income (loss)	—	—		—		14,821		—		14,821		(264)		14,557
Share grants	24,500	—		654		—		—		654		—		654
Share repurchases	(613)	—		(13)		—		—		(13)		—		(13)
Distributions to common shareholders	—	—		—		—		(21,511)		(21,511)		—		(21,511)
Distributions to noncontrolling interest	—	—		—		—		—		—		(1,898)		(1,898)
Balance at June 30, 2020	65,209,564	652		1,007,223		169,822		(189,440)		988,257		98,354		1,086,611
Net income (loss)	—	—		—		14,089		—		14,089		(275)		13,814
Share grants	108,600	1		675		—		—		676		—		676
Share repurchases	(16,496)	—		(351)		—		—		(351)		—		(351)
Share forfeitures	(580)	—		(3)		—		—		(3)		—		(3)
Distributions to common shareholders	—	—		—		—		(21,519)		(21,519)		—		(21,519)
Contributions from noncontrolling interest	—	—		2,595		—		—		2,595		(2,293)		302
Distributions to noncontrolling interest	—	—		—		—		—		—		(2,107)		(2,107)
Balance at September 30, 2020	65,301,088	$	653	$	1,010,139	$	183,911	$	(210,959)	$	983,744	$	93,679	$	1,077,423

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5

INDUSTRIAL LOGISTICS PROPERTIES TRUST

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(dollars in thousands)

(unaudited)

								Cumulative
	Number of			Additional				Other		Cumulative
	Common	Common		Paid In		Cumulative		Comprehensive		Common		Total
	Shares	Shares		Capital		Net Income		Income		Distributions		Equity
Balance at December 31, 2018	65,074,791	$	651	$	998,447	$	89,657	$	—	$	(60,482)	$	1,028,273
Net income	—	—		—		16,786		—		—		16,786
Equity in unrealized gains of investee	—	—		—		—		66		—		66
Share grants	—	—		73		—		—		—		73
Distributions to common shareholders	—	—		—		—		—		(21,474)		(21,474)
Balance at March 31, 2019	65,074,791	651		998,520		106,443		66		(81,956)		1,023,724
Net income	—	—		—		13,116		—		—		13,116
Equity in unrealized gains of investee	—	—		—		—		71		—		71
Share grants	15,000	—		345		—		—		—		345
Share repurchases	(1,362)	—		(28)		—		—		—		(28)
Share forfeitures	(240)	—		(1)		—		—		—		(1)
Distributions to common shareholders	—	—		—		—		—		(21,475)		(21,475)
Balance at June 30, 2019	65,088,189	651		998,836		119,559		137		(103,431)		1,015,752
Net income	—	—		—		10,922		—		—		10,922
Equity in unrealized losses of investee	—	—		—		—		(46)		—		(46)
Share grants	104,200	1		521		—		—		—		522
Share repurchases	(10,476)	—		(223)		—		—		—		(223)
Distributions to common shareholders	—	—		—		—		—		(21,479)		(21,479)
Balance at September 30, 2019	65,181,913	$	652	$	999,134	$	130,481	$	91	$	(124,910)	$	1,005,448

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6

INDUSTRIAL LOGISTICS PROPERTIES TRUST 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

	Nine Months Ended September 30,
	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	41,065	$	40,824
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	34,307		27,161
Net amortization of debt issuance costs, premiums and discounts	1,893		1,421
Amortization of acquired real estate leases and assumed real estate lease obligations	19,458		15,085
Amortization of deferred leasing costs	952		659
Straight line rental income	(6,183)		(3,960)
Gain on early extinguishment of debt	(120)		—
Other non-cash expenses	1,652		939
Equity in earnings of an investee	—		(617)
Change in assets and liabilities:
Rents receivable	(1,984)		4
Deferred leasing costs	(514)		(584)
Due from related persons	1,504		858
Other assets	(2,413)		(7,863)
Accounts payable and other liabilities	3,865		7,440
Rents collected in advance	(1,210)		6,106
Security deposits	71		688
Due to related persons	589		997
Net cash provided by operating activities	92,932		89,158
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate acquisitions and deposits	(71,628)		(884,445)
Real estate improvements	(4,495)		(7,789)
Distributions in excess of earnings from Affiliates Insurance Company	287		—
Net cash used in investing activities	(75,836)		(892,234)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of mortgage notes payable	—		650,000
Borrowings under revolving credit facility	180,000		736,000
Repayments of revolving credit facility	(170,000)		(499,000)
Repayment of mortgage note payable	(48,750)		—
Payment of debt issuance costs	—		(5,517)
Distributions to common shareholders	(64,540)		(64,428)
Proceeds from noncontrolling interest, net	107,942		—
Distributions to noncontrolling interest	(4,005)		—
Repurchase of common shares	(382)		(251)
Net cash provided by financing activities	265		816,804
Increase in cash, cash equivalents and restricted cash	17,361		13,728
Cash, cash equivalents and restricted cash at beginning of period	34,550		9,608
Cash, cash equivalents and restricted cash at end of period	$	51,911	$	23,336

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

7

INDUSTRIAL LOGISTICS PROPERTIES TRUST 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(dollars in thousands)

(unaudited)

	Nine Months Ended September 30,
	2020		2019
SUPPLEMENTAL DISCLOSURES:
Interest paid	$	39,125	$	31,995
Income taxes paid	$	199	$	164
NON-CASH INVESTING ACTIVITIES:
Real estate acquired by assumption of mortgage note payable	$	—	$	(56,980)
NON-CASH FINANCING ACTIVITIES:
Assumption of mortgage note payable	$	—	$	56,980

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 September 30,
	2020		2019
Cash and cash equivalents	$	39,105	$	23,336
Restricted cash	12,806		—
Total cash, cash equivalents and restricted cash shown in the statements of cash flows	$	51,911	$	23,336

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

8

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 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, 2019, or our 2019 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. Reclassifications have been made to the prior year’s condensed consolidated financial statements to conform to the current year’s presentation.

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, impairments of real estate and related intangibles.

In February and March 2020, we entered into agreements related to a joint venture with an institutional investor for 12 of our properties located in the mainland United States. The investor owns a 39% equity interest in the joint venture, and we own the remaining 61% equity interest in the joint venture. We have determined that this joint venture is a variable interest entity, or VIE, as defined under the Consolidation Topic of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification. We concluded that we must consolidate this VIE because we are the entity with the power to direct the activities that most significantly impact the VIE’s economic performance and we have the obligation to absorb losses of, and the right to receive benefits from, the VIE that could be significant to the VIE, and therefore are the primary beneficiary of the VIE. The assets of this VIE were $655,618 as of September 30, 2020 and consist primarily of the real estate owned by the joint venture. The liabilities of this VIE were $408,906 as of September 30, 2020 and consist primarily of mortgage debts secured by the properties owned by the joint venture. The joint venture investor's interest in this consolidated entity is reflected as noncontrolling interest in our condensed consolidated financial statements. See Note 11 for further information about this joint venture.

Note 2. Recent Accounting Pronouncements

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. We adopted this standard which was effective as of January 1, 2020 using the modified retrospective approach. The implementation of this standard did not have a material impact in our condensed consolidated financial statements.

Note 3. Real Estate Properties

As of September 30, 2020, we owned 301 properties with a total of approximately 43,759,000 rentable square feet, including 226 buildings, leasable land parcels and easements with a total of approximately 16,756,000 rentable square feet of primarily industrial lands located on the island of Oahu, HI, or our Hawaii Properties, and 75 properties with a total of approximately 27,003,000 rentable square feet of industrial properties located in 30 other states, or our Mainland Properties, including 12 properties with approximately 9,227,000 rentable square feet owned by a joint venture in which we own a 61% equity interest and one property with approximately 308,000 rentable square feet which is classified as held for sale.

9

INDUSTRIAL LOGISTICS PROPERTIES TRUST 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

We operate in one business segment: ownership and leasing of properties that include industrial and logistics buildings and leased industrial lands. For the three months ended September 30, 2020 and 2019, approximately 40.7% and 40.5%, respectively, of our rental income was from our Hawaii Properties. For the nine months ended September 30, 2020 and 2019, approximately 41.0% and 45.2%, respectively, of our rental income was from our Hawaii Properties. In addition, a subsidiary of Amazon.com, Inc., which is a tenant at certain of our Mainland Properties, accounted for $10,288, or 15.8%, and $8,992, or 14.8%, of our rental income for the three months ended September 30, 2020 and 2019, respectively, and $30,349, or 15.6%, and $22,557, or 13.5%, of our rental income for the nine months ended September 30, 2020 and 2019, respectively.

During the nine months ended September 30, 2020, we completed the acquisition of an industrial property containing 820,384 rentable square feet for a purchase price of $71,628, including acquisition related costs of $147. This acquisition was accounted for as an asset acquisition. We allocated the purchase price for this acquisition based on the estimated fair value of the acquired assets as follows:

		Number	Rentable					Buildings		Acquired
		of	Square	Purchase				and		Real Estate
Date	Market Area	Properties	Feet	Price		Land		Improvements		Leases
February 2020	Phoenix, AZ	1	820,384	$	71,628	$	11,214	$	54,676	$	5,738
		1	820,384	$	71,628	$	11,214	$	54,676	$	5,738

In September 2020, we entered into an agreement to sell one property located in Virginia containing approximately 308,000 rentable square feet for a sales price of $11,000, excluding closing costs. This sale is expected to occur during the fourth quarter of 2020. However, this sale is subject to conditions; accordingly, we cannot be sure that we will complete this sale, that this sale will not be delayed or that the terms will not change. We have classified this property as held for sale in our condensed consolidated balance sheets as of September 30, 2020.

During the nine months ended September 30, 2020, we committed $1,614 for expenditures related to tenant improvements and leasing costs for leases executed during the period for approximately 849,000 square feet. Committed but unspent tenant related obligations based on existing leases as of September 30, 2020 were $499.

Certain of our industrial lands in Hawaii may require environmental remediation, especially if the use of those lands is changed; however, we do not have any present plans to change the use of those lands. As of both September 30, 2020 and December 31, 2019, accrued environmental remediation costs of $6,940 were included in accounts payable and other liabilities in our condensed consolidated balance sheets. These accrued environmental remediation costs relate to maintenance of our properties for current uses, and, because of the indeterminable timing of the remediation, these amounts have not been discounted to present value. In general, we do not have any insurance designated to limit any losses that we may incur as a result of known or unknown environmental conditions which are not caused by an insured event, such as fire or flood, although some of our tenants may maintain such insurance that may benefit us. Although we do not believe that there are environmental conditions at any of our properties that will have a material adverse effect on us, we cannot be sure that such conditions are not present at our properties or that costs we incur to remediate contamination will not have a material adverse effect on our business or financial condition. Charges for environmental remediation costs, if any, are included in other operating expenses in our condensed consolidated statements of comprehensive income.

Note 4. 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 the leases; therefore, we have determined to evaluate our leases as lease arrangements.

Our leases provide for base rent payments and in addition may include variable payments. Rental income from operating leases, including any payments derived by index or market-based indices, is recognized 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. Some of our leases have options to extend or terminate the lease exercisable at the option of our tenants, which are considered when determining the lease term. 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 $11,943 and $10,915 for the three months ended September 30, 2020 and 2019, respectively, of which tenant reimbursements totaled

10

INDUSTRIAL LOGISTICS PROPERTIES TRUST 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

$11,698 and $10,915, respectively, and $35,103 and $28,679 for the nine months ended September 30, 2020 and 2019, respectively, of which tenant reimbursements totaled $34,368 and $27,517, respectively.

We increased rental income to record revenue on a straight line basis by $2,120 and $979 for the three months ended September 30, 2020 and 2019, respectively, and $6,183 and $3,960 for the nine months ended September 30, 2020 and 2019, respectively.

Certain of our tenants have requested relief from their obligations to pay rent due to us in response to the current economic conditions resulting from the COVID-19 pandemic. As of October 23, 2020, we granted requests to certain of our tenants to defer aggregate rent payments of $3,578. In most cases, these tenants were obligated to pay the deferred rents in 12 equal monthly installments beginning in September 2020. We have elected to use the FASB relief package regarding the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 pandemic. The FASB relief package provides entities with the option to account for lease concessions resulting from the COVID-19 pandemic outside of the existing lease modification guidance if the resulting cash flows from the modified lease are substantially the same as the original lease. Because the deferred rents referenced above will be repaid, the cash flows from the respective leases are substantially the same as before the rent deferrals. These deferred amounts did not impact our operating results for the three and nine months ended September 30, 2020 and as of September 30, 2020, we recognized $2,847 in our accounts receivable related to these deferred amounts.

Note 5. Indebtedness

As of September 30, 2020, our outstanding indebtedness consisted of the following:

								Net Book
								Value
	Principal Balance as of							of Collateral
	September 30,		December 31,		Interest			At September 30,
	2020 (1)		2019 (1)		Rate		Maturity	2020
Unsecured revolving credit facility (2)	$	320,000	$	310,000	1.56	%	Dec 2021	$	—
Mortgage note payable (secured by one property in Florida) (3)	56,980		56,980		4.22	%	Oct 2023	104,173
Mortgage note payable (secured by 186 properties in Hawaii)	650,000		650,000		4.31	%	Feb 2029	491,724
Mortgage note payable (secured by 11 Mainland Properties) (3)	350,000		350,000		3.33	%	Nov 2029	490,109
Mortgage note payable (secured by one property in Virginia)	—		48,750		N/A		N/A	N/A
	1,376,980		1,415,730					$	1,086,006
Unamortized debt issuance costs, premiums and discounts	(8,459)		(9,122)
	$	1,368,521	$	1,406,608

(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) The maturity date of our revolving credit facility is December 29, 2021 and we have the option to extend the maturity date for two, six month periods through December 29, 2022.

(3) The properties encumbered by these mortgages are owned by a joint venture in which we own a 61% equity interest.

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INDUSTRIAL LOGISTICS PROPERTIES TRUST 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

We have a $750,000 unsecured revolving credit facility that is available for our general business purposes, including acquisitions. The maturity date of our revolving credit facility is December 29, 2021. We may borrow, repay and reborrow funds under our revolving credit facility until maturity, and no principal repayment is due until maturity. Interest on borrowings under our revolving credit facility is calculated at floating rates based on LIBOR plus a premium that varies based on our leverage ratio. We have the option to extend the maturity date of our revolving credit facility for two, six month periods, subject to payment of extension fees and satisfaction of other conditions. We are also required to pay a commitment fee on the unused portion of our revolving credit facility. The agreement governing our revolving credit facility, or our credit agreement, also includes a feature under which the maximum borrowing availability under our revolving credit facility may be increased to up to $1,500,000 in certain circumstances. As of September 30, 2020, interest payable on the amount outstanding under our revolving credit facility was LIBOR plus 140 basis points and our commitment fee was 25 basis points. As of September 30, 2020 and December 31, 2019, the interest rate payable on borrowings under our revolving credit facility was 1.56% and 3.26%, respectively. The weighted average interest rate for borrowings under our revolving credit facility was 1.57% and 3.73% for the three months ended September 30, 2020 and 2019, respectively, and 2.51% and 3.75% for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020 and October 26, 2020, we had $320,000 and $293,000, respectively, outstanding under our revolving credit facility, and $430,000 and $457,000, respectively, available to borrow under our revolving credit facility.

Our credit agreement provides for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, such as a change of control of us, which includes The RMR Group LLC, or RMR LLC, ceasing to act as our business manager and property manager. Our credit agreement also contains a number of covenants, including covenants that restrict our ability to incur debts or to make distributions in certain circumstances, and generally requires us to maintain certain financial ratios. We believe we were in compliance with the terms and conditions of the covenants under our credit agreement at September 30, 2020.

In May 2020, we prepaid at par plus accrued interest a mortgage note secured by one of our properties with an outstanding principal balance of approximately $48,750, an annual interest rate of 3.48% and a maturity date in November 2020. As a result of the prepayment of this mortgage note, we recorded a gain on early extinguishment of debt of $120 for the nine months ended September 30, 2020 to write off unamortized debt premiums.

Note 6. Fair Value of Assets and Liabilities

Our financial instruments include cash and cash equivalents, restricted cash, rents receivable, our revolving credit facility, mortgage notes payable, accounts payable, rents collected in advance, security deposits and amounts due from or to related persons. At September 30, 2020 and December 31, 2019, 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 September 30, 2020				At December 31, 2019
	Carrying		Estimated		Carrying		Estimated
	Value (1)		Fair Value		Value (1)		Fair Value
Mortgage notes payable	$	1,048,521	$	1,140,188	$	1,096,608	$	1,143,437

(1)Includes unamortized debt issuance costs, premiums and discounts of $8,459 and $9,122 as of September 30, 2020 and December 31, 2019, respectively.

We estimate the fair value of our mortgage notes payable using discounted cash flow analyses and currently prevailing market rates as of the measurement date (Level 3 inputs). Because Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value.

Note 7. Shareholders’ Equity

Common Share Awards:

On February 21, 2020, in connection with the election of two of our Trustees, we awarded to each such Trustee 3,000 of our common shares, valued at $23.54 per share, the closing price of our common shares on The Nasdaq Stock Market LLC, or Nasdaq, on that day.

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INDUSTRIAL LOGISTICS PROPERTIES TRUST 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

On May 28, 2020, in accordance with our Trustee compensation arrangements, we awarded to each of our then seven Trustees 3,500 of our common shares, valued at $18.77 per share, the closing price of our common shares on Nasdaq on that day.

On September 17, 2020, we awarded under our equity compensation plan an aggregate of 108,600 of our common shares, valued at $22.65 per share, the closing price of our common shares on Nasdaq on that day, to our officers and certain other employees of RMR LLC.

Common Share Purchases:

During the nine months ended September 30, 2020, we purchased our common shares from our officers and certain former and current officers and employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares, valued at the closing price of our common shares on Nasdaq on the purchase dates, as follows:

Date Purchased	Number of Shares	Price per Share
1/9/2020	420	$	22.01
3/13/2020	531	$	17.75
6/30/2020	613	$	20.55
9/21/2020	16,496	$	21.27

Distributions:

During the nine months ended September 30, 2020, we declared and paid a regular quarterly distribution to common shareholders as follows:

Record Date	Payment Date	Distribution Per Share		Total Distribution
January 27, 2020	February 20, 2020	$	0.33	$	21,510
April 16, 2020	May 21, 2020	$	0.33	$	21,511
July 27, 2020	August 20, 2020	$	0.33	$	21,519

On October 15, 2020, we declared a regular quarterly distribution of $0.33 per common share, or approximately $21,550, to shareholders of record on October 26, 2020. We expect to pay this distribution on or about November 19, 2020.

Note 8. Per Common Share Amounts

The following table provides a reconciliation of the weighted average number of common shares used in the calculation of basic and diluted earnings per share (in thousands):

	Three Months Ended September 30,		Nine Months Ended September 30,
	2020	2019	2020	2019
Weighted average common shares for basic earnings per share	65,112	65,055	65,092	65,042
Effect of dilutive securities: unvested share awards	17	5	9	6
Weighted average common shares for diluted earnings per share	65,129	65,060	65,101	65,048

Note 9. Business and Property Management Agreements with RMR LLC

We have no employees. The personnel and various services we require to operate our business are provided to us by RMR LLC. We have two agreements with RMR LLC 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.

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INDUSTRIAL LOGISTICS PROPERTIES TRUST 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

Pursuant to our business management agreement with RMR LLC, we recognized net business management fees of $3,410 and $9,994 for the three and nine months ended September 30, 2020, respectively, and $3,291 and $8,576 for the three and nine months ended September 30, 2019, respectively. The net business management fees we recognized for the three and nine months ended September 30, 2020 include $347 and $823, respectively, of management fees related to our subsidiary level management agreement with RMR LLC entered in connection with our joint venture arrangement, which arrangement is further described in Note 11. Based on our common share total return, as defined in our business management agreement, as of September 30, 2020 and 2019, no incentive fees are included in the net business management fees we recognized for the three or nine months ended September 30, 2020 or 2019. The actual amount of annual incentive fees for 2020, if any, will be based on our common share total return, as defined in our business management agreement, for the period from January 12, 2018 to December 31, 2020 and will be payable in 2021. We did not incur any incentive fee payable to RMR LLC for the year ended December 31, 2019. We include business management fees in general and administrative expenses in our condensed consolidated statements of comprehensive income.

Pursuant to our property management agreement with RMR LLC, we recognized aggregate property management and construction supervision fees of $1,914 and $5,697 for the three and nine months ended September 30, 2020, respectively, and $2,098 and $5,367 for the three and nine months ended September 30, 2019, respectively. These amounts are included in other operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.

We are generally responsible for all our operating expenses, including certain expenses incurred or arranged by RMR LLC on our behalf. We are generally not responsible for payment of RMR LLC’s employment, office or administrative expenses incurred to provide management services to us, except for the applicable employment and related expenses of RMR LLC’s employees assigned to work exclusively or partly at our properties, our share of the wages, benefits and other related costs of RMR LLC’s centralized accounting personnel, our share of RMR LLC’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 LLC. We reimbursed RMR LLC $1,328 and $3,744 for these expenses and costs for the three and nine months ended September 30, 2020, respectively, and $1,203 and $3,132 for the three and nine months ended September 30, 2019, respectively. These amounts are included in other operating expenses and general and administrative expenses, as applicable, in our condensed consolidated statements of comprehensive income.

See Note 10 for further information regarding our relationships, agreements and transactions with RMR LLC.

Note 10. Related Person Transactions

We have relationships and historical and continuing transactions with RMR LLC, The RMR Group Inc., or RMR Inc., and others related to them, including other companies to which RMR LLC or its subsidiaries provide management services and some of which have trustees, directors or officers who are also our Trustees or officers. RMR LLC is a majority owned subsidiary of RMR Inc. The Chair of our Board of Trustees and one of our Managing Trustees, Adam Portnoy, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., a managing director and the president and chief executive officer of RMR Inc. and an officer and employee of RMR LLC. John Murray, our other Managing Trustee and our President and Chief Executive Officer, also serves as an officer of RMR LLC, and each of our other officers is also an officer and employee of RMR LLC. Some of our Independent Trustees also serve as independent trustees or independent directors of other public companies to which RMR LLC or its subsidiaries provide management services. Adam Portnoy serves as chair of the boards of trustees or boards of directors of several of these public companies and as a managing director or managing trustee of these public companies. Other officers of RMR LLC, including Mr. Murray and certain of our other officers, serve as managing trustees, managing directors or officers of certain of these companies.

See Note 7 for information relating to the awards of our common shares we made in September 2020 to our officers and certain other employees of RMR LLC and common shares we purchased in 2020 from our officers and certain former and current officers and employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares. We include amounts recognized as expense for awards of our common shares to our officers and RMR LLC employees in general and administrative expenses in our condensed consolidated statements of comprehensive income.

Our Manager, RMR LLC. We have two agreements with RMR LLC to provide management services to us. See Note 9 for further information regarding our management agreements with RMR LLC.

14

INDUSTRIAL LOGISTICS PROPERTIES TRUST 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except per share data)

OPI. Office Properties Income Trust, or OPI, owed to us $1,504 as of December 31, 2019 for rents that it collected on our behalf from certain of our tenants. A predecessor of OPI previously owned those properties and those tenants first became tenants at those properties prior to our ownership. OPI paid these amounts due to us or collected on our behalf in January 2020.

AIC. Until its dissolution on February 13, 2020, we, ABP Trust and five other companies to which RMR LLC provides management services owned Affiliates Insurance Company, or AIC, an Indiana insurance company, in equal amounts. Certain of our Trustees and certain trustees or directors of the other AIC shareholders served on the board of directors of AIC, until its dissolution.

We and the other AIC shareholders historically participated in a combined property insurance program arranged and insured or reinsured in part by AIC. The policies under that program expired on June 30, 2019, and we and the other AIC shareholders elected not to renew the AIC property insurance program; we have instead purchased standalone property insurance coverage with unrelated third party insurance providers.

As of September 30, 2020 and December 31, 2019, our investment in AIC had a carrying value of $11 and $298, respectively. These amounts are included in other assets in our condensed consolidated balance sheets. In June 2020, we received an additional liquidating distribution of approximately $287 from AIC in connection with its dissolution. We did not recognize any income related to our investment in AIC for the three and nine months ended September 30, 2020, respectively, and recognized $83 and $617 related to our investment in AIC for the three and nine months ended September 30, 2019, respectively, which amounts are presented as equity in earnings of an investee in our condensed consolidated statements of comprehensive income. Our other comprehensive income included our proportionate share of unrealized gains on securities, if any, which were owned by AIC, related to our investment in AIC.

For further information about these and other such relationships and certain other related person transactions, see our 2019 Annual Report.

Note 11. Noncontrolling Interest

In February and March 2020, we entered into agreements related to a joint venture for 12 of our Mainland Properties with an Asian institutional investor. We contributed to the joint venture 11 of these properties in February 2020 and the remaining property in March 2020. We received from the investor $108,676 in aggregate for a 39% equity interest in the joint venture, and we retained the remaining 61% equity interest. The joint venture assumed $406,980 of then existing mortgage debts on the properties we contributed. We incurred transaction costs of $734 in connection with the formation of this joint venture.

We recognized a noncontrolling interest in our condensed consolidated balance sheets of $98,375 as of the completion of this transaction, which was equal to 39% of our aggregate carrying value of the total equity of the properties immediately prior to our respective contributions of the properties to the joint venture. The difference between the net proceeds received from this transaction and the noncontrolling interest recognized, which was $9,567, has been reflected as an increase in additional paid in capital in our condensed consolidated balance sheets. The portion of the joint venture's net loss not attributable to us, or $275 and $691 for the three and nine months ended September 30, 2020, respectively, is reported as noncontrolling interest in our condensed consolidated statements of comprehensive income. During the three and nine months ended September 30, 2020, the joint venture made aggregate cash distributions of $2,107 and $4,005, respectively, to the other joint venture investor, which are reflected as a decrease in total equity attributable to noncontrolling interest in our condensed consolidated balance sheets. As of September 30, 2020, the joint venture held real estate assets with an aggregate net book value of $655,618, including restricted cash of $12,806, and had liabilities of $408,906.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and with our 2019 Annual Report.

IMPACT OF COVID-19

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic and, in response to the outbreak, the U.S. Health and Human Services Secretary declared a public health emergency in the United States and many states and municipalities declared public health emergencies. The virus that causes COVID-19 has continued to spread throughout the United States and the world. Various governmental and market responses attempting to contain and mitigate the spread of the virus have negatively impacted, and continue to negatively impact, the global economy, including the U.S. economy. As a result, most market observers believe the global economy and the U.S. economy are in a recession. Our business is focused on industrial and logistics properties. The industrial and logistics sector has fared better than some other industries thus far in response to the COVID-19 pandemic, including other real estate sectors, due to the demand for e-commerce. We believe that demand was initially supported in part by increased demand by businesses and households to stock up on supplies as the implications of the COVID-19 pandemic and resulting governmental and market responses materialized and e-commerce companies have benefited from the closure of certain retail consumer outlets since the beginning of the second quarter of 2020. States and municipalities across the United States have generally allowed most businesses to re-open and have generally eased certain restrictions they had previously implemented in response to the COVID-19 pandemic, often in stages that are phased in over time, although some states and municipalities have imposed or re-imposed certain restrictions in response to increases in COVID-19 infections experienced since then. Recently, economic data have indicated that the U.S. economy has increasingly improved since the lowest periods experienced in March and April 2020, although some recent data indicate a slowing in those improvements. It is unclear whether the increases in the number of COVID-19 infections will continue or amplify in the United States or elsewhere and, if so, what the impact of that would be on human health and safety, the economy, our tenants or our business.

We believe that the industrial and logistics sector and many of our tenants are critical to sustaining a resilient supply chain to support essential services and daily consumption across the United States. However, if economic conditions do not continue to improve or if they worsen, including in response to any increase in the number or severity of COVID-19 infections, continued or worsening economic conditions, demand for e-commerce may also decline. If that occurs, our tenants and their businesses may become negatively impacted, which may result in our tenants seeking assistance from us regarding their rent obligations owed to us, their being unable to pay us rent, their ceasing to pay us rent and their ceasing to continue as going concerns.

We are continuing to closely monitor the impact of the COVID-19 pandemic on all aspects of our business, including:

•our tenants and their ability to withstand the current, and possible future deteriorating, economic conditions and ability to pay us rent;

•our operations, liquidity and capital needs and resources;

•conducting financial modeling and sensitivity analyses;

•actively communicating with our tenants and other key constituents and stakeholders in order to help assess market conditions, opportunities, best practices and mitigate risks and potential adverse impacts; and

•monitoring, with the assistance of counsel and other specialists, possible government relief funding sources and other programs that may be available to us or our tenants to enable us and them to operate through the current economic conditions and enhance our tenants’ ability to pay us rent.

We believe that our current financial resources and our expectations as to the future performance of the industrial and logistics sector and our tenants will enable us to withstand the COVID-19 pandemic and its aftermath. As of October 26, 2020, we had:

•$457,000 of availability under our revolving credit facility;

•no outstanding debt scheduled to mature during the remainder of 2020 and our next debt maturity being our credit facility in December 2021, which maturity is subject to two six month extensions at our option;

16

•75.7% of our annualized rental revenues, as of September 30, 2020, derived from investment grade rated tenants, subsidiaries of investment grade rated parent entities or Hawaii land leases; and

•only 3.3% of our annualized rental revenues, as of September 30, 2020, scheduled to expire over the next 12 months.

In light of the above resources, expectations and conditions, we believe that we are well positioned to weather the present disruptions facing the real estate industry. However, as a result of the COVID-19 pandemic and its aftermath, certain of our tenants have requested relief from their obligations to pay rent due to us. We evaluate these requests on a tenant by tenant basis. As of October 23, 2020, we granted requests to certain of our tenants to defer aggregate rent payments of $3,578 with respect to leases that represent, as of September 30, 2020, approximately 8.6% of our annualized rental revenues. As of September 30, 2020, we recognized $2,847 in our accounts receivable related to these deferred amounts. In most cases, these tenants were obligated to pay the deferred rents in 12 equal monthly installments beginning in September 2020. These deferred amounts did not negatively impact our financial results for the three and nine months ended September 30, 2020, and will continue to be reflected in our financial results in the applicable future reporting periods, assuming these tenants continue to pay the deferred rents due to us. For the three months ended September 30, 2020, we collected approximately 98.4% of our contractual rents due after giving effect to such rent deferrals.

We do not have any employees and the personnel and various services we require to operate our business are provided to us by RMR LLC pursuant to our business and property management agreements with RMR LLC. RMR LLC has implemented enhanced cleaning protocols and social distancing guidelines at its corporate headquarters and its regional offices, as well as business continuity plans to ensure that RMR LLC employees remain safe and able to support us and other companies managed by RMR LLC or its subsidiaries, including providing appropriate information technology such as notebook computers, smart phones, computer applications, information technology security applications and technology support.

All RMR LLC property management and engineering personnel have been trained on COVID-19 precaution procedures. As states and local communities across the United States moved to stay at home orders, RMR LLC worked to reduce and optimize our operating costs at our properties by:

•deferring non-emergency work;

•implementing energy reduction protocols for lighting and HVAC systems;

•reducing non-essential building services and staff; and

•reducing the frequency of trash removal.

RMR LLC’s property management teams have also established business continuity plans to ensure operational stability at our properties. RMR LLC regional management offices limit walk-in visitors and maintain maximum office occupancy limits as required by state and local guidelines, including weekly rotations of employees as needed.

As stay at home orders are lifted or loosened across the United States, RMR LLC has implemented additional procedures at our properties based on recommended guidelines from the U.S. Centers for Disease Control and Prevention and other regulatory agencies. For example:

•focusing on sanitizing high touch points in common areas and restrooms;

•shutting down certain building amenities;

•prudently managing the execution or deferment of tenant work orders to limit RMR LLC staff and tenant interactions at our properties;

•installing signage throughout our properties with social distancing reminders;

•changing certain building HVAC systems and equipment, including adjusting outdoor air control programs to increase the amount of outside air delivered to interior spaces and to adjust control sequences to maintain space relative humidity in order to help minimize the concentration of the virus;

•flushing domestic water systems to prepare for re-occupancy;

•performing service calls and preventative maintenance after business hours to limit social interactions;

17

•requiring vendors to follow best practices under COVID-19 pandemic conditions, including providing RMR LLC with documented preventative measures for their employees and requiring staff to wear appropriate personal protective equipment when working at our properties; and

•altering cleaning schedules to perform vacuuming at times intended to reduce the potential airborne spread of the virus.

RMR LLC has significantly reduced non-essential work travel and its regional leadership personnel have not been allowed to work in the same locations at the same time. RMR LLC also requires its employees who work at our properties to use personal protective equipment and business continuity bonus payments have been provided to certain essential workers at our properties.

There are extensive uncertainties surrounding the COVID-19 pandemic and its aftermath. These uncertainties include, among others:

•the duration and severity of the negative economic impact;

•the strength and sustainability of any economic recovery;

•the timing and process for how the federal, state and local governments and other market participants may oversee and conduct the return of economic activity when the COVID-19 pandemic abates, such as what continuing restrictions and protective measures may remain in place or be added and what restrictions and protective measures may be lifted or reduced in order to foster a return of increased economic activity in the United States; and

•the responses of governments, businesses and the general public to any increased level or rates of COVID-19 infections.

As a result of these uncertainties, we are unable to determine what the ultimate impact will be on our, our tenants’ and other stakeholders’ businesses, operations, financial results and financial position. For further information and risks relating to the COVID-19 pandemic on us and our business, see Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q.