Industrial Logistics Properties Trust(ILPT) - 2019 Q4 - Annual Report

Financial Structure and Debt - The company has a $750.0 million unsecured revolving credit facility for working capital and acquisition funding [53]. - In January 2019, the company secured a $650.0 million mortgage loan backed by 186 properties with 9.6 million rentable square feet in Oahu, HI [53]. - As of December 31, 2019, the company had outstanding fixed rate debt totaling $1,105,730, with an annual interest expense of $43,666 [332]. - The company’s mortgage notes require interest-only payments until maturity, and a one percentage point change in interest rates would affect annual interest costs by approximately $11,057 [334]. - The company’s floating rate debt amounted to $310,000 under a revolving credit facility, with an annual interest expense of $10,106 at a rate of 3.26% [337]. - A one percentage point increase in interest rates would raise the annual interest expense on the floating rate debt to $13,206, impacting earnings per share by $(0.20) [338]. - If fully drawn on the revolving credit facility, a one percentage point increase in interest rates would increase annual interest expense to $31,950, impacting earnings per share by $(0.49) [339]. - The company is exposed to market risks associated with interest rate fluctuations, but does not expect significant changes in its exposure in the near future [330]. - The company’s fixed rate debt obligations would see a fair value change of approximately $80,690 with a hypothetical one percentage point change in interest rates [335]. Real Estate Investment Trust (REIT) Status - The company has elected to be taxed as a REIT since the 2018 taxable year and believes it will continue to qualify under the IRC [71]. - The company is generally not subject to federal income tax on net income distributed as dividends to shareholders, provided it meets certain requirements [72]. - If the company fails to qualify as a REIT in any year, it will be subject to federal income tax as a C corporation, which could significantly reduce cash available for distribution to shareholders [74]. - The company must distribute at least 85% of its REIT ordinary income and 95% of its REIT capital gain net income to avoid a 4% excise tax on the excess [77]. - The company has no outstanding preferred shares, meaning all distributions are made on common shares [72]. - The company believes it has satisfied the REIT qualification tests during the requisite periods and will continue to do so [78]. - The company’s subsidiaries that are C corporations will be required to pay federal corporate income tax on their earnings [82]. - The company has invested in real estate through partnerships, which are treated as partnerships for federal income tax purposes [83]. - The company’s counsel has opined that it has qualified for taxation as a REIT for the 2018 and 2019 taxable years [73]. - The company is subject to various penalties if it fails to meet REIT qualification requirements due to reasonable cause [81]. - The company intends to file a protective TRS election effective for Q1 2020 and will reaffirm this election annually unless ownership falls below 10% [85]. - The company believes that all or substantially all of its rents and related service charges have qualified as "rents from real property" under Section 856 of the IRC [93]. - The company expects that any gain from future asset dispositions will generally qualify as income satisfying the 75% and 95% gross income tests [97]. - The company is permitted to own up to 20% of the total value of its assets in TRS securities without affecting its REIT status [86]. - The company has complied with TRS status requirements and expects to continue compliance for all current and future TRSs [87]. - The company anticipates that protective TRS elections will not impact compliance with the 75% and 95% gross income tests [85]. - The company believes that its TRSs can perform services for tenants without disqualifying rents under the gross income tests [88]. - The company is subject to restrictions to ensure TRSs are taxed appropriately, including excise taxes on excessive payments [89]. - The company aims to avoid prohibited transactions and intends to structure activities through TRSs to mitigate tax implications [96]. - The company expects to maintain compliance with the 75% asset test through its subsidiary REITs [84]. - The company believes it has satisfied the 75% and 95% gross income tests and will continue to do so in the future [99]. - At least 75% of the value of the company's total assets must consist of real estate assets, including real property and cash [99]. - The company must maintain records of asset values to document compliance with the REIT asset tests [105]. - The company is required to make annual distributions equal to at least 90% of its real estate investment trust taxable income to qualify for REIT taxation [106]. - If the company fails to meet distribution requirements, it may be subject to a 4% nondeductible excise tax [110]. - The company may need to arrange new debt or equity financing to meet distribution requirements if it lacks sufficient cash [111]. - Upon acquiring a C corporation, the company must distribute all inherited C corporation earnings and profits to maintain REIT qualification [117]. - The company generally depreciates its real property on a straight-line basis over 40 years [118]. - The company may incur corporate income taxation on built-in gains if it sells assets acquired from a C corporation within five years [116]. - The company intends to take actions to cure any failures to satisfy asset tests within specified timeframes [103]. - The company expects to make distributions to shareholders, which may include cash and property distributions [123]. Taxation and Shareholder Implications - The maximum federal income tax rate for long-term capital gains for noncorporate U.S. shareholders is generally 15% or 20% depending on income thresholds [124]. - Distributions not designated as capital gain dividends will generally be treated as ordinary income dividends to the extent of available earnings and profits [125]. - If the company retains net capital gain income, U.S. shareholders will be taxed on their proportionate share as if it were distributed [127]. - Non-U.S. shareholders' distributions and proceeds from the sale of shares are expected not to be treated as income effectively connected with a U.S. trade or business [138]. - The company has carried over SIR's tax basis and depreciation schedule for assets received, adjusted by recognized gains [120]. - If the Deemed Exchange is deemed taxable, the company may face lower depreciation deductions than anticipated [121]. - The company believes its leases will be classified as true leases for federal income tax purposes [122]. - Distributions in excess of current or accumulated earnings will reduce the shareholder's basis in shares and may be taxed as capital gains [129]. - The company urges shareholders to consult tax advisors regarding the specific tax treatment of redemptions and distributions [123]. - Non-U.S. shareholders may face a 30% federal income tax withholding on distributions not designated as capital gain dividends [139]. - Capital gain dividends paid to non-U.S. shareholders on shares listed on a U.S. national securities exchange are not subject to withholding [140]. - Tax treaties may reduce withholding obligations, but specific conditions must be met for REITs [141]. - If shares are not listed on a U.S. national securities exchange, distributions may be taxed as effectively connected with a U.S. trade or business [142]. - Non-U.S. shareholders' gains on the sale of shares are generally not subject to U.S. federal income taxation if shares are not USRPIs [143]. - A "domestically controlled" REIT status is maintained if less than 50% of shares are held by non-U.S. shareholders over the preceding five years [144]. - Non-U.S. financial institutions must comply with diligence and reporting requirements to avoid a 30% withholding tax [151]. - Legislative changes may retroactively affect tax treatment for the company and its shareholders [152]. - Fiduciaries of ERISA Plans must consider fiduciary obligations and potential personal liability for investment decisions [154]. - Prohibited transactions under ERISA and the IRC may result in penalties and loss of tax-exempt status for certain accounts [157]. Company Operations and Market Position - The company operates in a competitive market against various public and private REITs and financial institutions [57]. - RMR LLC, the company's manager, had more than 600 full-time employees as of December 31, 2019 [59]. - The company has transitioned to standalone property insurance coverage after not renewing a combined property insurance program [60]. - The company is monitoring the phase-out of LIBOR, which is expected to occur in 2021, and is assessing the impact on its floating rate debt [340].