NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands,
except per share data)
Note 1. Basis of Presentation
The accompanying
condensed consolidated financial statements of Tremont Mortgage Trust and its consolidated subsidiaries 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, 2020, or our 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.
Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.
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 accompanying condensed consolidated financial statements include the fair
value of financial instruments.
On April
26, 2021, we and RMR Mortgage Trust, or RMRM, entered into an Agreement and Plan of Merger, or the Merger Agreement, pursuant to which,
on the terms and subject to the satisfaction or waiver of the conditions thereof, we have agreed to merge with and into RMRM, with RMRM
continuing as the surviving entity in the merger, or the Merger. Pursuant to the terms and subject to the conditions set forth in the
Merger Agreement, at the effective time of the Merger, or the Effective Time, each of our common shares of beneficial interest, $0.01
par value per share, or our common shares, issued and outstanding immediately prior to the Effective Time will be converted into the
right to receive 0.52, or the Exchange Ratio, of one newly issued common share of beneficial interest, $0.001 par value per share, of
RMRM, or the RMRM Common Shares, subject to adjustment as described in the Merger Agreement, with cash paid in lieu of fractional shares.
Under the Merger Agreement, the Exchange Ratio is fixed and will not be adjusted to reflect changes in the market price of our common
shares or the RMRM Common Shares prior to the Effective Time. Pursuant to the Merger Agreement, at the Effective Time, any unvested common
share awards outstanding under our equity compensation plan generally will be converted into an unvested RMRM Common Share award under
RMRM’s equity compensation plan, subject to substantially similar vesting requirements and other terms and conditions, determined
by multiplying the number of our unvested common shares subject to such award by the Exchange Ratio (rounded down to the nearest whole
number). The Merger and the other transactions contemplated by the Merger Agreement are collectively referred to herein as the other
Transactions. We have incurred $1,849 of transaction expenses related to the Merger that are included in transaction related expenses
in the condensed consolidated statements of operations for the six months ended June 30, 2021.
Following
the consummation of the Merger, the combined company will continue to be managed by our and RMRM’s current manager, Tremont Realty
Advisors LLC, or TRA or our Manager, pursuant to the terms of RMRM’s existing management agreement with TRA. Contemporaneously with
the execution of the Merger Agreement, we, RMRM and TRA entered into a letter agreement, or the TRA Letter Agreement, pursuant to which,
on the terms and subject to conditions contained therein, we, RMRM and TRA have acknowledged and agreed that, effective upon consummation
of the Merger, we shall have terminated our management agreement with TRA, and TRA shall have waived its right to receive payment of the
termination fee pursuant to such agreement. In consideration of this waiver, RMRM has agreed that, effective upon consummation of the
Merger and the termination of our management agreement with TRA, certain of the expenses TRA had paid on our behalf pursuant to such management
agreement will be included in the “Termination Fee” under and as defined in RMRM’s existing management agreement with
TRA. The TRA Letter Agreement further provides that such termination by us and waiver by TRA shall apply only in respect of the Merger
and will not apply in respect of any competing proposal or superior proposal (as those terms are defined in the Merger Agreement) or to
any other transaction or arrangement.
Contemporaneously
with the execution of the Merger Agreement, we entered into a voting agreement, or the Voting Agreement, with Diane Portnoy, in her capacity
as a greater than 5% holder of RMRM Common Shares, pursuant to which she has agreed to vote all of the RMRM Common Shares which she is
entitled to vote in favor of approval of the issuance of RMRM Common Shares to be issued in the Merger, or the Merger Share Issuance,
at the special meeting of RMRM’s shareholders scheduled to be held on September 17, 2021 for that purpose, and against any competing
acquisition proposal.
TREMONT MORTGAGE TRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (dollars
in thousands, except per share data)
Also contemporaneously
with the execution of the Merger Agreement, RMRM entered into a voting agreement with TRA pursuant to which TRA has agreed to vote all
of our common shares which it is entitled to vote in favor of approval of the Merger and the other Transactions to which we are a party
at the special meeting of our shareholders, scheduled to be held on September 17, 2021 for that purpose, and against any competing acquisition
proposal.
Note 2. Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards
Board, or FASB, issued Accounting Standards Update, or ASU, 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. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including
interim periods within those fiscal years. As an emerging growth company that has opted to take advantage of the extended transition period,
we expect to adopt ASU No. 2016-13 on January 1, 2023. We are currently assessing the potential impact the adoption of ASU No. 2016-13
will have on our condensed consolidated financial statements.
Note 3. Loans Held for Investment
We originate first mortgage loans secured by middle
market and transitional commercial real estate, or CRE, which we generally hold until maturity or, if earlier, repayment. We funded our
existing loan portfolio using cash on hand and advancements under our master repurchase facility with Citibank, N.A., or Citibank, or
our Master Repurchase Facility, and other debt financing. See Note 4 for further information regarding our Master Repurchase Facility.
The table below provides overall statistics for
our loan portfolio as of June 30, 2021 and December 31, 2020:
|
|
As of June 30, 2021
|
|
|
As of December 31, 2020
|
|
Number of loans
|
|
|
13
|
|
|
|
14
|
|
Total loan commitments
|
|
$
|
246,029
|
|
|
$
|
293,890
|
|
Unfunded loan commitments (1)
|
|
$
|
9,085
|
|
|
$
|
12,236
|
|
Principal balance
|
|
$
|
236,944
|
|
|
$
|
281,654
|
|
Unamortized net deferred origination and exit fees
|
|
$
|
753
|
|
|
$
|
592
|
|
Carrying value
|
|
$
|
237,697
|
|
|
$
|
282,246
|
|
Weighted average coupon rate
|
|
|
5.61
|
%
|
|
|
5.70
|
%
|
Weighted average all in yield (2)
|
|
|
6.36
|
%
|
|
|
6.39
|
%
|
Weighted average LIBOR floor
|
|
|
1.94
|
%
|
|
|
2.10
|
%
|
Weighted average maximum maturity (years) (3)
|
|
|
2.2
|
|
|
|
2.6
|
|
Weighted average risk rating
|
|
|
3.0
|
|
|
|
3.2
|
|
Weighted average LTV (4)
|
|
|
65
|
%
|
|
|
67
|
%
|
|
(1)
|
Unfunded loan commitments are primarily used to finance property and building improvements and leasing capital and are generally funded
over the term of the loan.
|
|
(2)
|
All in yield represents the yield on a loan, excluding any repurchase debt funding applicable to the loan, and including amortization
of deferred fees over the initial term of the loan.
|
|
(3)
|
Maximum maturity assumes all borrower loan extension options have been exercised, which options are subject to the borrower meeting
certain conditions.
|
|
(4)
|
Loan to value ratio, or LTV, represents the initial loan amount divided by the underwritten in-place value of the underlying collateral
at closing.
|
TREMONT MORTGAGE TRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (dollars
in thousands, except per share data)
The table below represents our loan activities
during the three months ended June 30, 2021:
|
Principal Balance
|
|
|
Deferred Fees
|
|
|
Carrying Value
|
|
Balance at March 31, 2021
|
$
|
259,390
|
|
|
$
|
789
|
|
|
$
|
260,179
|
|
Additional funding
|
|
210
|
|
|
|
—
|
|
|
|
210
|
|
Originations
|
|
13,506
|
|
|
|
(208
|
)
|
|
|
13,298
|
|
Repayments
|
|
(36,162
|
)
|
|
|
137
|
|
|
|
(36,025
|
)
|
Net amortization of deferred fees
|
|
—
|
|
|
|
35
|
|
|
|
35
|
|
Balance at June 30, 2021
|
$
|
236,944
|
|
|
$
|
753
|
|
|
$
|
237,697
|
|
The table below represents our loan activities
during the six months ended June 30, 2021:
|
|
Principal Balance
|
|
|
Deferred Fees
|
|
|
Carrying Value
|
|
Balance at December 31, 2020
|
|
$
|
281,654
|
|
|
$
|
592
|
|
|
$
|
282,246
|
|
Additional funding
|
|
|
2,746
|
|
|
|
—
|
|
|
|
2,746
|
|
Originations
|
|
|
13,506
|
|
|
|
(307
|
)
|
|
|
13,199
|
|
Repayments
|
|
|
(60,962
|
)
|
|
|
137
|
|
|
|
(60,825
|
)
|
Net amortization of deferred fees
|
|
|
—
|
|
|
|
331
|
|
|
|
331
|
|
Balance at June 30, 2021
|
|
$
|
236,944
|
|
|
$
|
753
|
|
|
$
|
237,697
|
|
In February 2021, we amended the agreement governing
our loan secured by a retail property located in Coppell, TX to extend the maturity date of the loan by six months to August 12, 2021.
As part of this amendment, the borrower funded an interest reserve of $500 and repaid $250 of the principal balance of the loan, thereby
reducing the total loan commitment to $19,865. This amendment also includes a six month extension option contingent upon the borrower
repaying an additional $250 of the principal balance and meeting certain other conditions. We collected a fee from the borrower of $99
in connection with this amendment.
In February 2021, we received $24,830 of repayment
proceeds from the borrower on our loan that was used to finance the acquisition of a 432 unit apartment community located in Rochester,
NY, which included the $24,550 principal amount outstanding under the loan, as well as accrued interest, an exit fee and our associated
legal expenses.
In April 2021, we amended the agreement governing
our loan secured by an office property located in Metairie, LA to extend the maturity date of the loan by six months to October 11, 2021
and to eliminate any further borrower extension rights. We collected a fee from the borrower of $45 in connection with this amendment.
As of June 30, 2021, the outstanding principal amount under this loan was $17,351.
In May 2021, we originated a first mortgage loan
of $15,250 to refinance an office property with 125,000 square feet located in Westminster, CO. This loan requires the borrower to pay
interest at the floating rate of LIBOR plus a premium of 375 basis points per annum. This floating rate loan includes an initial funding
of $13,506 and a future funding allowance of $1,744 for tenant improvements, leasing commissions and capital expenditures and has a three
year initial term with two, one-year extension options, subject to the borrower meeting certain conditions.
Also in May 2021, we received $36,726 of repayment
proceeds from the borrower under our loan secured by an industrial facility located in Barrington, NJ, which included the $36,162 principal
amount outstanding under the loan, as well as accrued interest, an exit fee and our associated legal expenses.
In June 2021, at the borrower's request, we amended
the agreement governing our loan secured by an office property located in Houston, TX to extend the maturity date of the loan by 45 days
to August 10, 2021. As of June 30, 2021, the outstanding principal amount under this loan was $14,489.
In July 2021, the borrower under our loan secured
by a retail property located in Paradise Valley, AZ notified us that the property is expected to be sold during the third quarter of 2021.
Upon sale, we expect to be repaid the principal amount outstanding under the loan, as well as accrued interest, an exit fee and our associated
legal expenses. As of June 30, 2021, the outstanding principal amount under this loan was $11,197.
TREMONT MORTGAGE TRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) (dollars
in thousands, except per share data)
Also in July 2021, the borrower under our loan
secured by a multifamily property located in Houston, TX notified us that the property is expected to be sold during the third quarter
of 2021. Upon sale, we expect to be repaid the principal amount outstanding under the loan, as well as accrued interest, an exit fee and
our associated legal expenses. As of June 30, 2021, the outstanding principal amount under this loan was $27,929.
Also in July 2021, the borrower under our loan
secured by an office property located in Dublin, OH notified us that the property is expected to be refinanced during the third quarter
of 2021. Upon refinance, we expect to be repaid the principal amount outstanding under the loan, as well as accrued interest, an exit
fee and our associated legal expenses. As of June 30, 2021 the outstanding principal under this loan was $21,556.
The tables below detail the property type and
geographic location of the properties securing the loans in our portfolio as of June 30, 2021 and December 31, 2020:
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
Property Type
|
|
Number of Loans
|
|
|
Carrying Value
|
|
|
Percentage of Value
|
|
|
Number of Loans
|
|
|
Carrying Value
|
|
|
Percentage of Value
|
|
Office
|
|
|
6
|
|
|
$
|
109,208
|
|
|
|
46
|
%
|
|
|
5
|
|
|
$
|
94,412
|
|
|
|
34
|
%
|
Multifamily
|
|
|
2
|
|
|
|
46,276
|
|
|
|
19
|
%
|
|
|
3
|
|
|
|
70,417
|
|
|
|
25
|
%
|
Industrial
|
|
|
1
|
|
|
|
13,960
|
|
|
|
6
|
%
|
|
|
2
|
|
|
|
49,209
|
|
|
|
17
|
%
|
Retail
|
|
|
3
|
|
|
|
44,284
|
|
|
|
19
|
%
|
|
|
3
|
|
|
|
44,298
|
|
|
|
16
|
%
|
Hotel
|
|
|
1
|
|
|
|
23,969
|
|
|
|
10
|
%
|
|
|
1
|
|
|
|
23,910
|
|
|
|
8
|
%
|
|
|
|
13
|
|
|
$
|
237,697
|
|
|
|
100
|
%
|
|
|
14
|
|
|
$
|
282,246
|
|
|
|
100
|
%
|
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
Geographic Location
|
|
Number of Loans
|
|
|
Carrying Value
|
|
|
Percentage of Value
|
|
|
Number of Loans
|
|
|
Carrying Value
|
|
|
Percentage of Value
|
|
East
|
|
|
3
|
|
|
$
|
46,321
|
|
|
|
20
|
%
|
|
|
5
|
|
|
$
|
105,695
|
|
|
|
37
|
%
|
South
|
|
|
5
|
|
|
|
104,216
|
|
|
|
44
|
%
|
|
|
5
|
|
|
|
104,256
|
|
|
|
37
|
%
|
Midwest
|
|
|
3
|
|
|
|
62,484
|
|
|
|
26
|
%
|
|
|
3
|
|
|
|
61,185
|
|
|
|
22
|
%
|
West
|
|
|
2
|
|
|
|
24,676
|
|
|
|
10
|
%
|
|
|
1
|
|
|
|
11,110
|
|
|
|
4
|
%
|
|
|
|
13
|
|
|
$
|
237,697
|
|
|
|
100
|
%
|
|
|
14
|
|
|
$
|
282,246
|
|
|
|
100
|
%
|
Loan Risk Ratings
We evaluate each of our loans for impairment at
least quarterly by assessing a variety of risk factors in relation to each loan and assigning a risk rating to each loan based on those
factors. The higher the number, the greater the risk level. See our Annual Report for more information regarding our loan risk ratings.
The following table allocates the carrying value of our loan portfolio at June 30, 2021 and December 31, 2020 based on our internal
risk rating policy:
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
Risk Rating
|
|
Number of Loans
|
|
|
Carrying Value
|
|
|
Number of Loans
|
|
|
Carrying Value
|
|
1
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
2
|
|
|
3
|
|
|
|
67,567
|
|
|
|
3
|
|
|
|
77,553
|
|
3
|
|
|
6
|
|
|
|
98,921
|
|
|
|
4
|
|
|
|
76,343
|
|
4
|
|
|
4
|
|
|
|
71,209
|
|
|
|
7
|
|
|
|
128,350
|
|
5
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
13
|
|
|
$
|
237,697
|
|
|
|
14
|
|
|
$
|
282,246
|
|
The weighted average risk rating of our
loans by carrying value was 3.0 and 3.2 as of June 30, 2021 and December 31, 2020, respectively. The COVID-19 pandemic has
negatively impacted some of our borrowers’ business operations or tenants, particularly in the cases of our retail and
hospitality collateral, some of which are the types of properties that have been most negatively impacted by the pandemic. We expect
that those negative impacts may continue and may apply to other borrowers and/or their tenants. Further, although economic activity
in the United States has improved significantly from the low points during the pandemic to date, certain industries have not
recovered to their pre-pandemic positions. Therefore, certain of our borrowers’ business plans will likely take longer to
execute than initially expected and certain of our borrowers may be unable to pay their debt service obligations owed and due to us
as currently scheduled or at all. As of June 30, 2021, we had four loans representing 30% of the carrying value of our loan
portfolio with a loan risk rating of “4” or “higher risk", compared to seven loans representing 45% of the
carrying value of our loan portfolio as of December 31, 2020. We did not have any impaired loans or nonaccrual loans as of
June 30, 2021 or December 31, 2020.
TREMONT MORTGAGE TRUST
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
As of July 26, 2021, all of our borrowers
had paid all of their debt service obligations owed and due to us and none of the loans included in our investment portfolio were in default.
Note 4. Debt Agreements
The table below summarizes our debt agreements
as of June 30, 2021 and December 31, 2020:
|
|
Debt Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Collateral
|
|
|
|
Maximum
Facility Size
|
|
|
Principal
Balance
|
|
|
Carrying
Value
|
|
|
Coupon
Rate
|
|
Remaining
Maturity (1)
(years)
|
|
|
Principal
Balance
|
|
|
Fair
Value (2)
|
|
June 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master Repurchase Facility
|
|
$
|
213,482
|
|
|
$
|
156,167
|
|
|
$
|
155,562
|
|
|
L + 2.00
|
%
|
|
0.6
|
|
|
$
|
236,944
|
|
|
$
|
233,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master Repurchase Facility
|
|
$
|
213,482
|
|
|
$
|
201,051
|
|
|
$
|
200,233
|
|
|
L + 2.00
|
%
|
|
1.1
|
|
|
$
|
281,654
|
|
|
$
|
279,381
|
|
|
(1)
|
The weighted average remaining maturity is determined using the current maturity date of the corresponding loans, assuming no borrower
loan extension options have been exercised. Our Master Repurchase Facility matures on November 6, 2022.
|
|
(2)
|
See Note 5 for further discussion of our financial assets and liabilities not carried at fair value.
|
Master Repurchase Facility
Under our Master Repurchase Agreement, the initial
purchase price paid by Citibank for each purchased asset is up to 75% of the lesser of the market value of the purchased asset or the
unpaid principal balance of such purchased asset, subject to Citibank’s approval. Upon the repurchase of a purchased asset, we are
required to pay Citibank the outstanding purchase price of the purchased asset, accrued interest and all accrued and unpaid expenses of
Citibank relating to such purchased asset. The price differential (or interest rate) relating to a purchased asset is equal to LIBOR plus
a premium of 200 to 250 basis points, determined by the yield of the purchased asset and the property type of the purchased asset’s
real estate collateral. Citibank has the discretion under our Master Repurchase Agreement to make advancements at margins higher than
75% and at premiums of less than 200 basis points. The weighted average interest rate for advancements under our Master Repurchase Facility
was 1.98% and 2.47% for the three months ended June 30, 2021, and 2020, respectively, and
2.18% and 2.97% for the six months ended June 30, 2021 and 2020, respectively. At June 30, 2021, we had approximately $605 of capitalized
financing costs, net of amortization.
In connection with our Master Repurchase Agreement,
we entered into a guaranty, or, as amended, the Guaranty, which requires us to guarantee 25% of our subsidiary's prompt and complete payment
of the purchase price, purchase price differential and any costs and expenses of Citibank related to our Master Repurchase Agreement.
The Guaranty also requires us to comply with customary financial covenants, which include the maintenance of a minimum tangible net worth,
minimum cash liquidity, a total indebtedness to tangible net worth ratio and a minimum interest coverage ratio. These maintenance provisions
provide Citibank with the right, in certain circumstances related to a credit event, as defined in our Master Repurchase Agreement, to
re-determine the value of purchased assets. Where a decline in the value of purchased assets has resulted in a margin deficit, Citibank
may require us to eliminate such margin deficit through a combination of purchased asset repurchases and cash transfers to Citibank, subject
to Citibank's approval. As of June 30, 2021, we have not received a margin call under our Master
Repurchase Agreement.
Our
Master Repurchase Agreement also provides for acceleration of the date of repurchase of the purchased assets and Citibank’s
liquidation of the purchased assets upon the occurrence and continuation of certain events of default, including a change of control
of us, which includes our Manager, ceasing to act as our sole manager or to be a wholly owned subsidiary of The RMR Group
LLC, or RMR LLC. As of June 30, 2021, we were in compliance with all of the covenants and other
terms under our Master Repurchase Agreement and the Guaranty.
TREMONT MORTGAGE TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
Note 5. Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurements,
establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives
the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level I), and the lowest priority
to unobservable inputs (Level III). A financial asset’s or financial liability’s fair value measurement level within the fair
value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used
need to maximize the use of observable inputs and minimize the use of unobservable inputs.
The carrying values of cash and cash equivalents,
restricted cash and accounts payable approximate their fair values due to the short term nature of these financial instruments. The outstanding
principal balances under our Master Repurchase Facility approximate their fair values, as interest is based on floating rates based on
LIBOR plus a spread, and the spread is consistent with those demanded by the market.
We estimate the fair values of our loans held
for investment and outstanding principal balances under our Master Repurchase Facility by using Level III inputs, including discounted
cash flow analyses and currently prevailing market terms as of the measurement date, determined by significant unobservable market inputs,
which include holding periods, discount rates based on LTV, property types and loan pricing expectations which are corroborated by a comparison
with other market participants to determine the appropriate market spread to add to the one month LIBOR (Level III inputs as defined
in the fair value hierarchy under GAAP).
The table below provides information regarding
financial assets and liabilities not carried at fair value on a recurring basis in our condensed consolidated balance sheets:
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for investment
|
|
$
|
237,697
|
|
|
$
|
233,032
|
|
|
$
|
282,246
|
|
|
$
|
279,381
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master Repurchase Facility
|
|
$
|
155,562
|
|
|
$
|
155,962
|
|
|
$
|
200,233
|
|
|
$
|
199,936
|
|
There were no transfers of financial assets or
liabilities within the fair value hierarchy during the three or six months ended June 30, 2021.
Note 6. Shareholders' Equity
Common Share Awards and Repurchases
We have common shares available for issuance under
the terms of our 2017 Amended and Restated Equity Compensation Plan, or the 2017 Plan. The values of the share awards are based upon the
closing price of our common shares on The Nasdaq Stock Market LLC, or Nasdaq, on the date of award. The common shares awarded to our Trustees
vest immediately. The common shares awarded to our officers and other employees of our Manager and of RMR LLC vest in five equal annual
installments beginning on the date of award. We recognize the value of awarded shares in general and administrative expenses ratably over
the vesting period. We recognize share forfeitures as they occur.
On February 19, 2021, in accordance with our Trustee
compensation arrangements, we awarded one of our Trustees 3,000 of our common shares, valued at $4.81 per common share, the closing price
of our common shares on the Nasdaq that day.
On May 27, 2021, in accordance with our Trustee
compensation arrangements, we awarded to each of our five Trustees 3,000 of our common shares, valued at $6.11 per common share, the closing
price of our common shares on the Nasdaq that day.
TREMONT MORTGAGE TRUST
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
On June 30, 2021, we purchased 8,589 of our common
shares, valued at $6.07 per common share, the closing price of our common shares on Nasdaq on that day, from our former Trustee and officer
and from a former officer and employee of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting
of awards of our common shares.
Distributions
For the six months ended June 30, 2021, we declared
and paid a distribution to common shareholders as follows:
Record Date
|
|
Payment Date
|
|
Distribution Per Share
|
|
|
Total Distribution
|
|
December 17, 2020
|
|
January 15, 2021
|
|
$
|
0.53
|
|
|
$
|
4,401
|
|
April 26, 2021
|
|
May 20, 2021
|
|
|
0.10
|
|
|
|
831
|
|
|
|
|
|
$
|
0.63
|
|
|
$
|
5,232
|
|
Our distribution paid on January 15, 2021 is treated
for federal income tax purposes as having been paid and received on December 31, 2020.
On July 15, 2021, we declared a quarterly distribution
of $0.10 per common share, or approximately $831 in aggregate, to shareholders of record as of July 26, 2021. We expect to pay this distribution
on or about August 19, 2021.
Note 7. Management Agreement with our Manager
We have no employees. The personnel and various
services we require to operate our business are provided to us by our Manager pursuant to a management agreement, which provides for the
day to day management of our operations by our Manager, subject to the oversight and direction of our Board of Trustees.
We recognized base management fees of $341 and
no management incentive fees for the three months ended June 30, 2021, and base management fees of $682 and management incentive fees
of $620 for the six months ended June 30, 2021. Our Manager previously waived any base management or management incentive fees otherwise
due and payable by us under our management agreement for the period beginning July 1, 2018 until December 31, 2020. As a result, we did
not recognize any base management or management incentive fees for the three or six months ended June 30, 2020. If our Manager had
not waived these base management and management incentive fees, we would have recognized $323 and $643 of base management fees for the
three and six months ended June 30, 2020 and $36, respectively, of management incentive fees would have been paid or payable for
both the three and six months ended June 30, 2020.
Our Manager, and not us, is responsible for the
costs of its employees who provide services to us, including the cost of our Manager’s personnel who originate our loans, unless
any such payment or reimbursement is specifically approved by a majority of our Independent Trustees, is a shared services cost or relates
to awards made under any equity compensation plan adopted by us. We are required to pay or to reimburse our Manager and its affiliates
for all other costs and expenses of our operations. Some of these overhead, professional and other services are provided by RMR LLC pursuant
to a shared services agreement between our Manager and RMR LLC. We reimburse our Manager for shared services costs our Manager pays to
RMR LLC. These reimbursements include an allocation of the cost of personnel employed by RMR LLC and our share of RMR LLC’s costs
for providing our internal audit function. These shared services costs are subject to approval by a majority of our Independent Trustees
at least annually. We incurred shared services costs of $241 and $280 payable to our Manager for the three months ended June 30, 2021
and 2020, respectively, and $417 and $638 for the six months ended June 30, 2021 and 2020, respectively. We include these amounts in reimbursement
of shared services expenses or general and administrative expenses, as applicable, in our condensed consolidated statements of operations.
Pursuant to the TRA Letter Agreement, on the terms
and subject to conditions contained therein, we and our Manager agreed that, effective upon consummation of the Merger, we shall have
terminated our management agreement, and our Manager shall have waived its right to receive payment of the termination fee due on account
thereof. Following termination of the management agreement in accordance with the TRA Letter Agreement, pro rata base management and management
incentive fees will continue to be payable under the terms of the management agreement. See Note 1 for further information regarding the
TRA Letter Agreement and the Merger.
TREMONT MORTGAGE TRUST
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
Note 8. Related Person Transactions
We have relationships and historical and continuing
transactions with our Manager, 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. Our Manager is a subsidiary of RMR LLC, which is a majority owned subsidiary of RMR Inc., and RMR Inc. is the managing member
of RMR LLC. RMR LLC provides certain shared services to our Manager that are applicable to us, and we reimburse our Manager for the amounts
it pays for those services. 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., and he is also a director of our Manager, a managing director and the
president and chief executive officer of RMR Inc., and an officer and employee of RMR LLC. David M. Blackman served as our other Managing
Trustee and our President and Chief Executive Officer, and as a director and the president, and chief executive officer of our Manager
until his resignation from those positions on December 31, 2020 in connection with his retirement. Following Mr. Blackman’s resignation,
Matthew P. Jordan was appointed as our other Managing Trustee and Thomas J. Lorenzini was appointed as our President, each effective January
1, 2021. Also effective January 1, 2021, Mr. Jordan was appointed as a director and the president and chief executive officer of our Manager.
Mr. Jordan is an officer of RMR Inc. and an officer and employee of RMR LLC and Mr. Lorenzini is an officer and employee of our Manager
and an officer of RMR LLC. In addition, each of our other officers is also an officer and/or employee of our Manager or RMR LLC.
Our Independent Trustees also serve as independent
directors or independent trustees of other public companies to which RMR LLC or its subsidiaries provide management services. Adam Portnoy
serves as the chair of the boards of trustees and boards of directors of several of these public companies and as a managing director
or managing trustee of all of these companies. Other officers of RMR LLC, including Mr. Jordan and certain of our other officers and officers
of our Manager, serve as managing trustees, managing directors or officers of certain of these companies.
Our Manager, Tremont Realty Advisors LLC.
We have a management agreement with our Manager to provide management services to us. See Note 7 for further information regarding our
management agreement with our Manager.
Our Manager is our largest shareholder and, as
of June 30, 2021, owned 1,600,100 of our common shares, or approximately 19.2% of our outstanding common shares.
RMR Mortgage Trust. As described further
in Note 1, on April 26, 2021, we and RMRM entered into the Merger Agreement. Adam D. Portnoy and Matthew P. Jordan, our Managing Trustees,
are also RMRM’s managing trustees. Thomas J. Lorenzini, our President, also serves as president of RMRM, and G. Douglas Lanois,
our Chief Financial Officer and Treasurer, also serves as chief financial officer and treasurer of RMRM. John L. Harrington serves as
one of our Independent Trustees and is also an independent trustee of RMRM, and Joseph L. Morea, one of our Independent Trustees, previously
served as an independent trustee of RMRM; Jeffrey P. Somers previously served as one of our Independent Trustees and is currently an independent
trustee of RMRM. See Note 1 for further information regarding the Merger and the other Transactions.
For further information about these and other
such relationships and certain other related person transactions, refer to our Annual Report and to our Current Report on Form 8-K dated
April 26, 2021.
Note 9. Income Taxes
We have elected to be taxed as real estate investment
trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the IRC. Accordingly, we generally are not, and will not be, subject
to U.S. federal income tax, provided that we meet certain distribution and other requirements. We are subject to certain state and local
taxes, certain of which amounts are or will be reported as income taxes in our condensed consolidated statements of operations.
Note 10. Weighted Average Common Shares
Unvested share awards and other potentially dilutive
common share issuances, and the related impact on earnings, are considered when calculating diluted net income per share.
TREMONT MORTGAGE TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
The table below provides a reconciliation of the weighted average number
of common shares used in the calculation of basic and diluted net income per share (amounts in thousands):
|
|
For the Three Months Ended June 30,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Weighted average common shares for basic net income per share
|
|
|
8,218
|
|
|
|
8,177
|
|
|
|
8,215
|
|
|
|
8,173
|
|
Effect of dilutive securities: unvested share awards (1)
|
|
|
48
|
|
|
|
—
|
|
|
|
38
|
|
|
|
—
|
|
Weighted average common shares for diluted net income per share
|
|
|
8,266
|
|
|
|
8,177
|
|
|
|
8,253
|
|
|
|
8,173
|
|
|
(1)
|
For the three and six months ended June 30, 2020, 105 and 64 unvested common shares, respectively, were not included in the calculation
of diluted earnings per share because to do so would have been antidilutive.
|
Note 11. Commitments and Contingencies
Unfunded Loan Commitments
As of June 30, 2021, we had unfunded loan
commitments of $9,085 related to our loans held for investment that are not reflected in our condensed consolidated balance sheets. These
unfunded loan commitments had a weighted average initial maturity of 0.8 years as of June 30, 2021. See Note 3 for further information
related to our loans held for investment.
Secured Borrowings
As of June 30, 2021, we had an aggregate
of $156,167 in principal amount outstanding under our Master Repurchase Facility with a weighted average life to maturity of 0.6 years.
See Note 4 for further information regarding our secured debt agreements.
Note 12. Legal Proceedings and Claims
As of July 26, 2021, three lawsuits have been
filed by purported shareholders of ours in connection with the proposed Merger between us and RMRM. The lawsuits were brought by the plaintiffs
individually and are captioned Bishins v. Tremont Mortgage Trust, et al., Case No. 1:21-cv-05435 (S.D.N.Y., filed June 21, 2021), Lee
v. Tremont Mortgage Trust, et al., Case No. 1:21-cv-05618 (S.D.N.Y., filed June 29, 2021) and Merewether v. Tremont Mortgage Trust, et
al., Case No. 1:21-cv-13116 (D.N.J., filed June 29, 2021), each, a complaint, and collectively, the complaints. The Bishins, Lee and Merewether
complaints name as defendants us and our Board of Trustees. The Bishins and Lee complaints also name RMRM as a defendant.
The plaintiffs generally assert claims under Section
14(a) and Section 20(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, contending that the registration statement
on Form S-4 filed with the Securities and Exchange Commission, or SEC, on June 9, 2021, and serving as the preliminary joint proxy statement/prospectus,
omitted or misrepresented material information regarding the proposed merger between us and RMRM. The complaints generally seek injunctive
relief preventing us and RMRM from consummating the Merger, rescission or rescissory damages, an award of plaintiffs’ costs, including
attorneys’ fees and expenses, and such other relief the court may deem just and proper. The Bishins complaint also seeks a declaration
that the Merger Agreement was entered into in breach of the Bishins individual defendants’ fiduciary duties and is therefore unlawful
and unenforceable. The Lee and Merewether complaints additionally seek a declaration that the defendants violated Sections 14(a) and 20(a)
of the Exchange Act and an order directing the defendants to disseminate a registration statement that does not contain any untrue or
misleading statements of material fact.
We and our Board of Trustees deny that we have
violated any laws or breached any duties to our shareholders and believe the claims asserted in the complaints are without merit.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion should be read in conjunction
with our condensed consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q and
in our Annual Report.
OVERVIEW (dollars
in thousands, except share data)
We are a REIT that was organized under Maryland
law in 2017. Our business strategy is focused on originating and investing in first mortgage loans secured by middle market and transitional
CRE. We define middle market CRE as commercial properties that have values up to $100,000 and transitional CRE as commercial properties
subject to redevelopment or repositioning activities that are expected to increase the value of the properties. We classify our assets
as loans held for investment in our condensed consolidated balance sheets. Loans held for investment are reported at cost, net of any
unamortized loan fees and origination costs as applicable, unless the assets are deemed impaired.
Our Manager is registered with the SEC as an investment
adviser under the Investment Advisers Act of 1940, as amended. We believe that our Manager provides us with significant experience and
expertise in investing in middle market and transitional CRE.
We operate our business in a manner consistent
with our qualification for taxation as a REIT under the IRC. As such, we generally are not subject to U.S. federal income tax, provided
that we meet certain distribution and other requirements. We also operate our business in a manner that permits us to maintain our exemption
from registration under the Investment Company Act of 1940, as amended, or the Investment Company Act.
As noted earlier in this Quarterly Report on Form
10-Q, on April 26, 2021, we entered into the Merger Agreement with RMRM pursuant to which we have agreed, on the terms and subject to
the conditions set forth therein, to consummate the Merger and the other Transactions, subject to the satisfaction or waiver of certain
conditions. Pursuant to the terms and subject to the conditions set forth in the Merger Agreement,
at the Effective Time, each of our common shares issued and outstanding immediately prior to the Effective Time will be converted into
the right to receive the Exchange Ratio of one newly issued RMRM Common Share, subject to adjustment as described in the Merger Agreement,
with cash paid in lieu of fractional shares. Under the Merger Agreement, the Exchange Ratio is fixed and will not be adjusted to reflect
changes in the market price of our common shares or the RMRM Common Shares prior to the Effective Time. Pursuant to the Merger Agreement,
at the Effective Time, any unvested common share awards outstanding under our equity compensation plan generally will be converted into
an unvested RMRM Common Share award under RMRM’s equity compensation plan, subject to substantially similar vesting requirements
and other terms and conditions, determined by multiplying the number of our unvested common shares subject to such award by the Exchange
Ratio (rounded down to the nearest whole number). Pursuant to the Merger Agreement, effective upon consummation of the Merger, RMRM’s
declaration of trust will be amended to, among other things, change its name to "Seven Hills Realty Capital Trust” and provide
its board of trustees authority to effect the conversion of RMRM into a Maryland real estate investment trust without shareholder approval.
Following the consummation of the Merger, the RMRM Common Shares will continue to trade on Nasdaq under the new ticker symbol “SHRC”.
The completion
of the Merger is subject to the satisfaction or waiver of various conditions, including, among other things: (1) approval of the Merger
and the other Transactions to which we are a party by at least a majority of all the votes entitled to be cast by holders of our outstanding
common shares at the special meeting of our shareholders scheduled to be held on September 17, 2021 for that purpose; (2) approval of
the Merger Share Issuance by at least a majority of all the votes cast by the holders of outstanding RMRM Common Shares entitled to vote
at the special meeting of RMRM’s shareholders scheduled to be held on September 17, 2021 for that purpose; (3) the absence of any
law or order by any governmental authority prohibiting, making illegal, enjoining or otherwise restricting, preventing or prohibiting
the consummation of the Merger and the other Transactions; (4) the effectiveness of the registration statement on Form S-4, or the Form
S-4, to be filed by RMRM with the SEC to register the RMRM Common Shares to be issued in the Merger; (5) Nasdaq’s approval of the
listing of the RMRM Common Shares to be issued in the Merger, subject to official notice of issuance; and (6) the receipt of certain tax
opinions from each party’s tax counsel. The Form S-4 was declared effective by the SEC on July 26, 2021. The Merger is expected
to close in the third quarter of 2021, and the Merger Agreement provides that either party may terminate the agreement if the Merger is
not consummated by December 31, 2021. The Merger is intended to qualify as a tax-free reorganization under the IRC and to provide a tax-free
exchange for our shareholders for the RMRM Common Share consideration they receive in the Merger, except that our shareholders generally
may recognize gain or loss with respect to cash received in lieu of fractional shares of RMRM Common Shares.
The Merger
Agreement contains certain customary representations, warranties and covenants, including, among others, covenants with respect to the
conduct of our and RMRM’s respective businesses prior to closing, subject to certain consent rights by us and RMRM, respectively,
and covenants prohibiting us and RMRM from soliciting, providing information or entering into discussions concerning competing proposals
(generally defined as proposals for 20% or more of the assets, revenues or earnings or equity of the applicable party), subject to certain
exceptions.
The Merger
Agreement contains certain termination rights for both us and RMRM, including that under specified circumstances, either party is entitled
to terminate the Merger Agreement to accept a superior proposal (generally defined as proposals for 75% or more of the assets, revenues
or earnings or equity of such party, which proposal such party’s board of trustees (or an authorized committee thereof) has determined
in good faith, after consultation with outside financial advisors and outside legal counsel, (1) would, if consummated, result in a transaction
that is more favorable to the shareholders of such party from a financial point of view than the Merger and the other Transactions, (2)
for which the third party has demonstrated that the financing for such superior proposal is fully committed or is reasonably likely to
be obtained, and (3) which is reasonably likely to receive all required approvals from any governmental authority and otherwise reasonably
likely to be consummated on the terms proposed); provided that we may only terminate the Merger Agreement after we have held the special
meeting of our shareholders scheduled to be held on September 17, 2021 for the purpose of approving the Merger. Each party is required
to pay the other party a termination fee of $2,156 plus the other party’s reasonable fees and expenses under certain circumstances
related to such party’s change in recommendation, breach or termination in connection with a superior proposal. Except with respect
to the foregoing, all fees and expenses incurred in connection with the Merger and the other Transactions will be paid by the party incurring
those expenses, except that we and RMRM will share equally any filing fees incurred in connection with the filing of the Form S-4 and
the related joint proxy statement/prospectus.
The Merger,
the Merger Share Issuance and the other Transactions and the terms thereof were evaluated, negotiated and recommended, as applicable,
to each of our and RMRM’s board of trustees by special committees of our and RMRM’s board of trustees, respectively, each
comprised solely of our and RMRM’s disinterested, independent trustees, respectively, and were separately unanimously approved and
adopted by our and RMRM’s independent trustees and by our and RMRM’s board of trustees, with independent trustees unanimously
approving the Merger, the Merger Share Issuance and the other Transactions, as applicable. Citigroup Global Markets Inc. acted as financial
advisor to the special committee of our Board of Trustees and UBS Securities LLC acted as financial advisor to the special committee of
RMRM’s board of trustees.
For further information regarding the Merger and
the other Transactions, see Notes 1, 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 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity
and Capital Resources—Our Investment and Financing Liquidity and Resources” of this Quarterly Report on Form 10-Q.
COVID-19 Pandemic
The COVID-19 pandemic and the various governmental
and market responses intended to contain and mitigate the spread of the virus and its detrimental public health impact have had a significant
impact on the global economy, including the U.S. economy. Many of the restrictions that had been imposed in the United States during the
pandemic have been lifted and commercial activity in the United States has increasingly returned to pre-pandemic practices and operations.
To date, the COVID-19 pandemic has not had a significant impact on our business.
There remains uncertainty as to the ultimate duration
and severity of the COVID-19 pandemic, including risks that may arise from mutations or related strains of the virus, the ability to successfully
administer vaccinations to a sufficient number of persons or attain immunity to the virus by natural or other means to achieve herd immunity,
and the impact on the U.S. economy that may result from the inability of other countries to administer vaccinations to their citizens
or their citizens’ ability to otherwise achieve immunity to the virus. As a result, we are unable to determine what the ultimate
impact will be on our borrowers’ 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, and the related actions our Manager has taken
in response to the pandemic, see "COVID-19 Pandemic" in Part I, Item 1 and "Risk Factors" in Part I, Item 1A of our
Annual Report.
Book Value per Common Share
The table below calculates our book value per
common share:
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
Shareholders' equity
|
|
$
|
89,873
|
|
|
$
|
88,903
|
|
Total outstanding common shares
|
|
|
8,312
|
|
|
|
8,303
|
|
Book value per common share
|
|
$
|
10.81
|
|
|
$
|
10.71
|
|
Our Loan Portfolio
The table below provides overall statistics for
our loan portfolio as of June 30, 2021 and December 31, 2020:
|
|
As of June 30, 2021
|
|
|
As of December 31, 2020
|
|
Number of loans
|
|
|
13
|
|
|
|
14
|
|
Total loan commitments
|
|
$
|
246,029
|
|
|
$
|
293,890
|
|
Unfunded loan commitments (1)
|
|
$
|
9,085
|
|
|
$
|
12,236
|
|
Principal balance
|
|
$
|
236,944
|
|
|
$
|
281,654
|
|
Unamortized net deferred origination and exit fees
|
|
$
|
753
|
|
|
$
|
592
|
|
Carrying value
|
|
$
|
237,697
|
|
|
$
|
282,246
|
|
Weighted average coupon rate
|
|
|
5.61
|
%
|
|
|
5.70
|
%
|
Weighted average all in yield (2)
|
|
|
6.36
|
%
|
|
|
6.39
|
%
|
Weighted average LIBOR floor
|
|
|
1.94
|
%
|
|
|
2.10
|
%
|
Weighted average maximum maturity (years) (3)
|
|
|
2.2
|
|
|
|
2.6
|
|
Weighted average loan rating
|
|
|
3.0
|
|
|
|
3.2
|
|
Weighted average LTV (4)
|
|
|
65
|
%
|
|
|
67
|
%
|
|
(1)
|
Unfunded loan commitments are primarily used to finance property
and building improvements and leasing capital and are generally funded over the term of the loan.
|
|
(2)
|
All in yield represents the yield on a loan, excluding any repurchase
debt funding applicable to the loan and including amortization of deferred fees over the initial term of the loan.
|
|
(3)
|
Maximum maturity assumes all borrower loan extension options
have been exercised, which options are subject to the borrower meeting certain conditions.
|
|
(4)
|
LTV represents the initial loan amount divided by the underwritten
in-place value of the underlying collateral at closing.
|
Loan Portfolio Details
The table below provides details of our loan investments
as of June 30, 2021:
Location
|
|
Property
Type
|
|
Origination
Date
|
|
Committed
Principal
Amount
|
|
|
Principal
Balance
|
|
|
Coupon
Rate
|
|
All
in
Yield (1)
|
|
Maturity
(date)
|
|
Maximum
Maturity (2)
(date)
|
|
LTV
(3)
|
|
|
Risk
Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Houston,
TX
|
|
Office
|
|
06/26/2018
|
|
$
|
15,200
|
|
|
$
|
14,489
|
|
|
L
+ 4.00%
|
|
L
+ 4.57%
|
|
08/10/2021
|
|
08/10/2021
|
|
|
69
|
%
|
|
|
3
|
|
Coppell,
TX
|
|
Retail
|
|
02/05/2019
|
|
|
19,865
|
|
|
|
19,865
|
|
|
L
+ 3.50%
|
|
L
+ 4.24%
|
|
08/12/2021
|
|
02/12/2022
|
|
|
73
|
%
|
|
|
4
|
|
Metairie,
LA
|
|
Office
|
|
04/11/2018
|
|
|
18,102
|
|
|
|
17,351
|
|
|
L
+ 5.00%
|
|
L
+ 5.65%
|
|
10/11/2021
|
|
10/11/2021
|
|
|
79
|
%
|
|
|
3
|
|
Houston,
TX
|
|
Multifamily
|
|
05/10/2019
|
|
|
27,929
|
|
|
|
27,929
|
|
|
L
+ 3.50%
|
|
L
+ 4.52%
|
|
11/10/2021
|
|
11/10/2022
|
|
|
56
|
%
|
|
|
3
|
|
Paradise
Valley, AZ
|
|
Retail
|
|
11/30/2018
|
|
|
11,853
|
|
|
|
11,197
|
|
|
L
+ 4.25%
|
|
L
+ 5.71%
|
|
11/30/2021
|
|
11/30/2022
|
|
|
48
|
%
|
|
|
3
|
|
St.
Louis, MO
|
|
Office
|
|
12/19/2018
|
|
|
29,500
|
|
|
|
27,763
|
|
|
L
+ 3.25%
|
|
L
+ 3.74%
|
|
12/19/2021
|
|
12/19/2023
|
|
|
72
|
%
|
|
|
2
|
|
Atlanta,
GA
|
|
Hotel
|
|
12/21/2018
|
|
|
24,000
|
|
|
|
23,904
|
|
|
L
+ 3.25%
|
|
L
+ 3.72%
|
|
12/21/2021
|
|
12/21/2023
|
|
|
62
|
%
|
|
|
4
|
|
Dublin,
OH
|
|
Office
|
|
02/18/2020
|
|
|
22,820
|
|
|
|
21,556
|
|
|
L
+ 3.75%
|
|
L
+ 4.83%
|
|
02/18/2022
|
|
02/18/2023
|
|
|
33
|
%
|
|
|
2
|
|
Omaha,
NE
|
|
Retail
|
|
06/14/2019
|
|
|
14,500
|
|
|
|
13,054
|
|
|
L
+ 3.65%
|
|
L
+ 4.05%
|
|
06/14/2022
|
|
06/14/2024
|
|
|
77
|
%
|
|
|
4
|
|
Yardley,
PA
|
|
Office
|
|
12/19/2019
|
|
|
14,900
|
|
|
|
14,264
|
|
|
L
+ 3.75%
|
|
L
+ 4.47%
|
|
12/19/2022
|
|
12/19/2024
|
|
|
75
|
%
|
|
|
4
|
|
Orono,
ME
|
|
Multifamily
|
|
12/20/2019
|
|
|
18,110
|
|
|
|
18,066
|
|
|
L
+ 3.25%
|
|
L
+ 3.85%
|
|
12/20/2022
|
|
12/20/2024
|
|
|
72
|
%
|
|
|
2
|
|
Allentown,
PA
|
|
Industrial
|
|
01/24/2020
|
|
|
14,000
|
|
|
|
14,000
|
|
|
L
+ 3.50%
|
|
L
+ 4.02%
|
|
01/24/2023
|
|
01/24/2025
|
|
|
67
|
%
|
|
|
3
|
|
Westminster,
CO
|
|
Office
|
|
05/24/2021
|
|
|
15,250
|
|
|
|
13,506
|
|
|
L
+ 3.75%
|
|
L
+ 5.09%
|
|
05/24/2024
|
|
05/24/2026
|
|
|
66
|
%
|
|
|
3
|
|
Total/weighted
average
|
|
|
|
|
|
$
|
246,029
|
|
|
$
|
236,944
|
|
|
L
+ 3.66%
|
|
L
+ 4.42%
|
|
|
|
|
|
|
65
|
%
|
|
|
3.0
|
|
|
(1)
|
All in yield represents the yield on a loan, excluding any repurchase debt funding applicable to the loan and including amortization
of deferred fees over the initial term of the loan.
|
|
(2)
|
Maximum maturity assumes all borrower loan extension options have been exercised, which options are subject to the borrower meeting
certain conditions.
|
|
(3)
|
LTV represents the initial loan amount divided by the underwritten in-place value of the underlying collateral at closing.
|
As of June 30, 2021, we had $246,029 in aggregate
loan commitments, consisting of a diverse portfolio, geographically and by property type, of 13 first mortgage loans. The impact
from the COVID-19 pandemic has negatively impacted some of our borrowers’ business operations or tenants, particularly in the cases
of our retail and hospitality collateral, which are some of the types of properties that have been most negatively impacted by the pandemic.
We expect that those negative impacts may continue and may apply to other borrowers and/or their tenants. Further, although economic activity
in the United States has improved significantly from the low points during the pandemic to date, certain industries have not recovered
to their pre-pandemic positions. Therefore, certain of our borrowers’ business plans will likely take longer to execute than initially
expected and certain of our borrowers may be unable to pay their debt service obligation owed and due to us as currently scheduled. As
of June 30, 2021, we had four loans representing 30% of the carrying value of our loan portfolio with a loan risk rating of “4”
or “higher risk”. One of these loans was downgraded from a risk rating of "3" or "acceptable risk" during
the six months ended June 30, 2021. Four loans with a loan risk rating of "4" or "higher risk" as of December 31,
2020 were upgraded to a risk rating of "3" or "acceptable risk" during the six months ended June 30, 2021.
All of the loans in our portfolio are structured
with risk mitigation mechanisms, such as cash flow sweeps or interest reserves, to help protect us against investment losses. In addition,
we continue to actively engage with our borrowers regarding their execution of the business plans for the underlying collateral, among
other things.
As of July 26, 2021, all of our borrowers had
paid all of their debt service obligations owed and due to us and none of the loans included in our investment portfolio were in default.
We did not have any impaired loans, non-accrual
loans or loans in default as of June 30, 2021; thus, we did not record a reserve for loan loss as of that date. However, depending
on the duration and severity of the COVID-19 pandemic, our borrowers' businesses, operations and liquidity may be materially adversely
impacted. As a result, they may become unable to pay their debt service obligations owed and due to us, which may result in the impairment
of those loans, and our recording loan loss reserves with respect to those loans and recording of any income with respect to those loans
on a nonaccrual basis. For further information regarding our risk rating policy and the risks associated with our loan portfolio, see
our Annual Report.
Financing Activities
The table below is an overview of our Master Repurchase
Facility, which provided financing for our loans held for investment, as of June 30, 2021 and December 31, 2020:
|
|
Maturity
Date
|
|
Principal
Balance
|
|
|
Unused
Capacity
|
|
|
Maximum
Facility
Size
|
|
|
Collateral
Principal
Balance
|
|
June 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master Repurchase Facility
|
|
11/06/2022
|
|
$
|
156,167
|
|
|
$
|
57,315
|
|
|
$
|
213,482
|
|
|
$
|
236,944
|
|
December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master Repurchase Facility
|
|
11/06/2022
|
|
$
|
201,051
|
|
|
$
|
12,431
|
|
|
$
|
213,482
|
|
|
$
|
281,654
|
|
The table below details our Master Repurchase
Facility activities during the three months ended June 30, 2021:
|
|
Total
|
|
Balance at March 31, 2021
|
|
$
|
180,040
|
|
Advancements
|
|
|
13,500
|
|
Repayments
|
|
|
(38,085
|
)
|
Amortization of deferred fees
|
|
|
107
|
|
Balance at June 30, 2021
|
|
$
|
155,562
|
|
The table below details our Master Repurchase
Facility activities during the six months ended June 30, 2021:
|
|
Total
|
|
Balance at December 31, 2020
|
|
$
|
200,233
|
|
Advancements
|
|
|
17,112
|
|
Repayments
|
|
|
(61,997
|
)
|
Amortization of deferred fees
|
|
|
214
|
|
Balance at June 30, 2021
|
|
$
|
155,562
|
|
As of June 30, 2021, outstanding advancements
under our Master Repurchase Facility had a weighted average interest rate of LIBOR plus 200 basis points per annum, excluding associated
fees and expenses. For further information regarding our Master Repurchase Agreement, see Note 4 to the Notes to Unaudited Condensed
Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
As of June 30, 2021, we had a $156,167 aggregate
outstanding principal balance under our Master Repurchase Agreement. Our Master Repurchase Agreement is structured with risk mitigation
mechanisms, including a cash flow sweep, which would allow Citibank to control interest payments from our borrowers under our loans
that are financed under our Master Repurchase Facility, and the ability to accelerate dates of repurchase and institute margin calls,
which may require us to pay down balances associated with one or more of our loans that are financed under our Master Repurchase Facility.
As of July 26, 2021, we believe we were in compliance with all the covenants and other terms under our Master Repurchase Agreement
and, to date, Citibank has not utilized any such risk mitigation mechanisms under our Master Repurchase Agreement.
We could experience a loss on repurchase transactions
under our Master Repurchase Agreement if a counterparty to these transactions defaults on its obligation to resell the underlying collateral
back to us at the end of the transaction term, or if the value of the underlying assets has declined as of the end of that term, or if
we default on our obligations under the applicable agreement governing any such arrangement.
Our ability to obtain additional financing advancements
under our Master Repurchase Facility is contingent upon our making additional advancements to our existing borrowers or our ability to
effectively reinvest any additional capital, including any loan repayment proceeds, that we may obtain or receive. However, we cannot
be sure that we will be able to obtain additional cost-effective capital or additional financing advancements under our Master Repurchase
Facility. It may take an extended period for us to reinvest any additional capital we may receive, and any reinvestments we may be able
to make may not provide us with similar returns or comparable risks as those of our current investments. See “—Factors Affecting
Operating Results—Market Conditions” below for information regarding the impact of the current market conditions on the access
of capital for CRE lenders such as us.
RESULTS OF OPERATIONS (dollars in thousands, except share
data)
Three Months Ended June 30, 2021 Compared to Three Months Ended
June 30, 2020:
|
|
Three Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
% Change
|
|
INCOME FROM INVESTMENTS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from investments
|
|
$
|
4,148
|
|
|
$
|
4,496
|
|
|
$
|
(348
|
)
|
|
|
(7.7
|
)%
|
Less: interest and related expenses
|
|
|
(988
|
)
|
|
|
(1,368
|
)
|
|
|
380
|
|
|
|
(27.8
|
)%
|
Income from investments, net
|
|
|
3,160
|
|
|
|
3,128
|
|
|
|
32
|
|
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base management fees
|
|
|
341
|
|
|
|
—
|
|
|
|
341
|
|
|
|
n/m
|
|
General and administrative expenses
|
|
|
685
|
|
|
|
524
|
|
|
|
161
|
|
|
|
30.7
|
%
|
Reimbursement of shared services expenses
|
|
|
206
|
|
|
|
242
|
|
|
|
(36
|
)
|
|
|
(14.9
|
)%
|
Transaction related expenses
|
|
|
1,822
|
|
|
|
—
|
|
|
|
1,822
|
|
|
|
n/m
|
|
Total expenses
|
|
|
3,054
|
|
|
|
766
|
|
|
|
2,288
|
|
|
|
298.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
106
|
|
|
|
2,362
|
|
|
|
(2,256
|
)
|
|
|
(95.5
|
)%
|
Income tax expense
|
|
|
(8
|
)
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
n/m
|
|
Net income
|
|
$
|
98
|
|
|
$
|
2,362
|
|
|
$
|
(2,264
|
)
|
|
|
(95.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
8,218
|
|
|
|
8,177
|
|
|
|
41
|
|
|
|
0.5
|
%
|
Weighted average common shares outstanding - diluted
|
|
|
8,266
|
|
|
|
8,177
|
|
|
|
89
|
|
|
|
1.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share - basic and diluted
|
|
$
|
0.01
|
|
|
$
|
0.29
|
|
|
$
|
(0.28
|
)
|
|
|
(96.6
|
)%
|
n/m - not meaningful
Interest income from investments. The decrease
in interest income from investments was primarily the result of the repayment of two loan investments during the three months ended June
30, 2021, partially offset by the origination of one loan investment during the three months ended June 30, 2021.
Interest and related expenses. The decrease
in interest and related expenses was primarily the result of a decline in LIBOR since June 30, 2020 and the repayment of outstanding
balances under our Master Repurchase Facility during three months ended June 30, 2021.
Base management fees. Our Manager waived
any base management fees that would otherwise have been due and payable by us under our management agreement for the period beginning
July 1, 2018 until December 31, 2020. If our Manager had not waived these base management fees, we would have recognized $323 of base
management fees for the three months ended June 30, 2020.
General and administrative expenses. The
increase in general and administrative expenses was primarily due to increases in professional fees and insurance costs.
Reimbursement of shared services expenses.
Reimbursement of shared services expenses represents reimbursement of the costs for the services that our Manager arranges on our
behalf from RMR LLC. The decrease in reimbursement of shared services expenses was primarily the result of our Manager's increased cost
effectiveness resulting from the increased sharing of services provided by RMR LLC as a result of our Manager also providing services
to RMRM during the three months ended June 30, 2021.
Transaction related expenses. Transaction
related expenses represent costs we have incurred related to the Merger and the other Transactions.
Income tax expense. Income tax expense
represents income taxes paid or payable by us in certain jurisdictions where we are subject to state income taxes.
Net income. The decrease in net income
was due to the changes noted above.
Six Months Ended June 30, 2021 Compared to Six Months Ended June
30, 2020:
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
% Change
|
|
INCOME FROM INVESTMENTS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from investments
|
|
$
|
8,634
|
|
|
$
|
8,780
|
|
|
$
|
(146
|
)
|
|
|
(1.7
|
)%
|
Less: interest and related expenses
|
|
|
(2,123
|
)
|
|
|
(3,125
|
)
|
|
|
1,002
|
|
|
|
(32.1
|
)%
|
Income from investments, net
|
|
|
6,511
|
|
|
|
5,655
|
|
|
|
856
|
|
|
|
15.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base management fees
|
|
|
682
|
|
|
|
—
|
|
|
|
682
|
|
|
|
n/m
|
|
Management incentive fees
|
|
|
620
|
|
|
|
—
|
|
|
|
620
|
|
|
|
n/m
|
|
General and administrative expenses
|
|
|
1,328
|
|
|
|
1,064
|
|
|
|
264
|
|
|
|
24.8
|
%
|
Reimbursement of shared services expenses
|
|
|
344
|
|
|
|
563
|
|
|
|
(219
|
)
|
|
|
(38.9
|
)%
|
Transaction related expenses
|
|
|
1,849
|
|
|
|
—
|
|
|
|
1,849
|
|
|
|
n/m
|
|
Total expenses
|
|
|
4,823
|
|
|
|
1,627
|
|
|
|
3,196
|
|
|
|
196.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
1,688
|
|
|
|
4,028
|
|
|
|
(2,340
|
)
|
|
|
(58.1
|
)%
|
Income tax expense
|
|
|
(15
|
)
|
|
|
—
|
|
|
|
(15
|
)
|
|
|
n/m
|
|
Net income
|
|
$
|
1,673
|
|
|
$
|
4,028
|
|
|
$
|
(2,355
|
)
|
|
|
(58.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic and diluted
|
|
|
8,215
|
|
|
|
8,173
|
|
|
|
42
|
|
|
|
0.5
|
%
|
Weighted average common shares outstanding - diluted
|
|
|
8,253
|
|
|
|
8,173
|
|
|
|
80
|
|
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share - basic and diluted
|
|
$
|
0.20
|
|
|
$
|
0.49
|
|
|
$
|
(0.29
|
)
|
|
|
(59.2
|
)%
|
n/m - not meaningful
Interest income from investments. The decrease
in interest income from investments was primarily the result of the repayment of two loan investments during the six months ended June
30, 2021, partially offset by additional interest income recognized from one loan investment originated during the six months ended June
30, 2021 and additional interest income recognized during the six months ended June 30, 2021 related to two loan investments that were
originated during the six months ended June 30, 2020.
Interest and related expenses. The decrease
in interest and related expenses was primarily the result of a decline in LIBOR since June 30, 2020 and the repayment of outstanding balances
under our Master Repurchase Facility during the six months ended June 30, 2021.
Base management fees. Our Manager waived
any base management fees that would otherwise have been due and payable by us under our management agreement for the period beginning
July 1, 2018 until December 31, 2020. If our Manager had not waived these base management fees, we would have recognized $643 of base
management fees for the six months ended June 30, 2020.
Management incentive fees. Our Manager
waived any management incentive fees that would otherwise have been due and payable by us under our management agreement for the period
beginning July 1, 2018 until December 31, 2020. If our Manager had not waived these management incentive fees, $36 in management incentive
fees would have been paid or payable by us for the six months ended June 30, 2020.
General and administrative expenses. The
increase in general and administrative expenses was primarily due to increases in professional fees and insurance costs.
Reimbursement of shared services
expenses. Reimbursement of shared services expenses represents reimbursement of the costs for the services that our Manager
arranges on our behalf from RMR LLC. The decrease in reimbursement of shared services expenses was primarily the result of our
Manager's increased cost effectiveness resulting from the increased sharing of services provided by RMR LLC as a result of our
Manager also providing services to RMRM during the six months ended June 30, 2021 and our reduced usage of shared services due to
our loan portfolio being fully invested through February 2021.
Transaction related expenses. Transaction
related expenses represent costs we have incurred related to the Merger and the other Transactions.
Income tax expense. Income tax expense
represents income taxes paid or payable by us in certain jurisdictions where we are subject to state income taxes.
Net income. The decrease in net income
was due to the changes noted above.
Non-GAAP Financial Measures
We present Distributable Earnings and Adjusted
Distributable Earnings, which are considered “non-GAAP financial measures” within the meaning of the applicable SEC rules.
Distributable Earnings and Adjusted Distributable Earnings do not represent net income or cash generated from operating activities and
should not be considered as alternatives to net income determined in accordance with GAAP or indications of our cash flows from operations
determined in accordance with GAAP, measures of our liquidity or operating performance or indications of funds available for our cash
needs. In addition, our methodologies for calculating Distributable Earnings and Adjusted Distributable Earnings may differ from the methodologies
employed by other companies to calculate the same or similar supplemental performance measures; therefore, our reported Distributable
Earnings and Adjusted Distributable Earnings may not be comparable to the distributable earnings and adjusted distributable earnings as
reported by other companies.
In order to maintain our qualification for taxation
as a REIT, we are generally required to distribute substantially all of our taxable income, subject to certain adjustments, to our shareholders.
We believe that one of the factors that investors consider important in deciding whether to buy or sell securities of a REIT is its distribution
rate. Over time, Distributable Earnings has been a useful indicator of distributions to our shareholders and is a measure that is considered
by our Board of Trustees when determining the amount of such distributions. We believe that Distributable Earnings and Adjusted Distributable
Earnings provide meaningful information to consider in addition to net income and cash flows from operating activities determined in accordance
with GAAP. These measures help us to evaluate our performance excluding the effects of certain transactions, the variability of any management
incentive fees that may be paid or payable and GAAP adjustments that we believe are not necessarily indicative of our current loan portfolio
and operations. In addition, Distributable Earnings is used in determining the amount of base management and management incentive fees
payable by us to our Manager under our management agreement.
Distributable Earnings and Adjusted Distributable Earnings
We calculate Distributable Earnings as net income,
computed in accordance with GAAP, including realized losses not otherwise included in net income determined in accordance with GAAP, and
excluding: (a) the management incentive fees earned by our Manager, if any; (b) depreciation and amortization, if any; (c) non-cash equity
compensation expense; (d) unrealized gains, losses and other similar non-cash items that are included in net income for the period of
the calculation (regardless of whether such items are included in or deducted from net income or in other comprehensive income under GAAP),
if any; and (e) one-time events pursuant to changes in GAAP and certain non-cash items, if any. Distributable Earnings are reduced for
realized losses on loan investments when amounts are deemed uncollectable.
We define Adjusted Distributable Earnings as Distributable
Earnings excluding certain non-recurring expenses, such as transaction expenses related to the Merger and the other Transactions.
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Reconciliation of net income to Distributable Earnings and Adjusted Distributable Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
98
|
|
|
$
|
2,362
|
|
|
$
|
1,673
|
|
|
$
|
4,028
|
|
Management incentive fees
|
|
|
—
|
|
|
|
—
|
|
|
|
620
|
|
|
|
—
|
|
Non-cash equity compensation expense
|
|
|
128
|
|
|
|
71
|
|
|
|
179
|
|
|
|
113
|
|
Distributable Earnings
|
|
|
226
|
|
|
|
2,433
|
|
|
|
2,472
|
|
|
|
4,141
|
|
Transaction related expenses
|
|
|
1,822
|
|
|
|
—
|
|
|
|
1,849
|
|
|
|
—
|
|
Adjusted Distributable Earnings
|
|
$
|
2,048
|
|
|
$
|
2,433
|
|
|
$
|
4,321
|
|
|
$
|
4,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
8,218
|
|
|
|
8,177
|
|
|
|
8,215
|
|
|
|
8,173
|
|
Weighted average common shares outstanding - diluted
|
|
|
8,266
|
|
|
|
8,177
|
|
|
|
8,253
|
|
|
|
8,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Distributable Earnings per common share - basic
|
|
$
|
0.25
|
|
|
$
|
0.30
|
|
|
$
|
0.53
|
|
|
$
|
0.51
|
|
Adjusted Distributable Earnings per common share - diluted
|
|
$
|
0.25
|
|
|
$
|
0.30
|
|
|
$
|
0.52
|
|
|
$
|
0.51
|
|
Factors Affecting Operating Results
Our results of our operations are impacted by
a number of factors and primarily depend on the interest income from our investments and the financing and other costs associated with
our business. Our operating results are also impacted by general CRE market conditions and unanticipated defaults by our borrowers. For
further information regarding the risks associated with our loan portfolio, see the risk factors identified in Part I, Item IA, "Risk
Factors" of our Annual Report.
Credit Risk. We are subject to the credit
risk of our borrowers in connection with our investments. We seek to mitigate this risk by utilizing a comprehensive underwriting, diligence
and investment selection process and by ongoing monitoring of our investments. Nevertheless, unanticipated credit losses could occur that
could adversely impact our operating results.
Changes in Fair Value of our Assets. We
generally hold our investments for their contractual terms, unless repaid earlier by the borrower. We evaluate our investments for impairment
quarterly. Impairments occur when it is probable that we will not be able to collect all amounts due according to the applicable contractual
terms. If we determine that a loan is impaired, we will record an allowance to reduce the carrying value of the loan to an amount that
takes into account both the present value of expected future cash flows discounted at the loan's contractual effective interest rate and
the fair value of any available collateral, net of any costs we expect to incur to realize that value.
Although we generally hold our investments for
their contractual terms or until repaid earlier by the borrower, we may occasionally classify some of our investments as held for sale.
Investments held for sale will be carried at the lower of their amortized cost or fair value within loans held for sale on our condensed
consolidated balance sheets, with changes in fair value recorded through earnings. Fees received from our borrowers on any loans held
for sale will be recognized as part of the gain or loss on sale. We do not currently expect to hold any of our investments for trading
purposes.
Availability of Leverage and Equity. We
use leverage to make additional investments that may increase our returns. We may not be able to obtain the expected amount of leverage
we desire, or its cost may exceed our expectation and, consequently, the returns generated from our investments may be reduced. In order
to grow our loan portfolio, we will need to obtain additional cost-effective capital. However, our access to additional cost-effective
capital depends on many factors including the price at which our common shares trade relative to their book value and market lending conditions.
See " —Market Conditions" below. We have experienced, and may continue to experience in the future, challenges raising
equity capital.
Market Conditions. The outbreak of
the COVID-19 pandemic in the first quarter of 2020 led to a sharp decline in economic activity over the first half of 2020. The
closing of non-essential businesses, "shelter-in-place" orders, restrictions on travel, cancellations of events and
gatherings and limitations on building occupancies implemented to stop or slow the spread of the virus had a substantial negative
impact on the CRE market. Many property owners granted lease forbearance to tenants unable or, in some cases, unwilling to make rent
payments which, in turn, increased the number of loan forbearance requests by property owners. In addition, volatility in the
capital markets resulted in a substantial widening of credit spreads of commercial mortgage-backed securities, or CMBS, contributing
to increased overall borrowing costs for banks and alternative lenders. Further, uncertainty surrounding the depth and duration of
the economic downturn resulted in a severe decline in overall CRE transaction volume, and the financial burdens resulting from
margin calls imposed on lenders, as a result of increased borrowing costs and declining collateral values, and many lenders’
shift in focus to manage large volumes of forbearance requests from borrowers caused new loan originations to significantly
decline.
The CRE debt markets began to rebound in the third
quarter of 2020 and are continuing to stabilize. CMBS credit spreads have declined such that newly issued AAA rated, investment grade
bonds for conservatively underwritten loan pools with high quality collateral are trading at credit spreads less than those seen prior
to the COVID-19 pandemic. In addition, issuance of CRE collateralized loan obligations, or CLOs (financial instruments secured by a pool
of loans and used by lenders as a source of funding), has increased while CLO credit spreads have declined, providing additional liquidity
to alternative lenders, like us.
While CRE transaction volume has improved recently,
it has not returned to the average levels experienced prior to the COVID-19 pandemic. The decline in property transaction volume and increased
liquidity available to lenders has caused greater competition among lenders, including banks and alternative lenders, like us, to fund
new loans. We believe that this increased competition amongst lenders, along with significant declines in the LIBOR and U.S. treasury
index rates, has benefited borrowers seeking loans to refinance high quality properties, particularly multifamily, industrial, life science
or research and development/laboratory properties, that are either stabilized or near stabilization. Alternative lenders, like us, can
provide flexible, shorter term financing to borrowers that may not be seeking longer term financing options because of economic uncertainty
caused by the COVID-19 pandemic. However, despite the improvement of the securitization markets and the increase in lending activity,
we believe challenges remain.
The hospitality and retail sectors are among those
that have been most negatively impacted by the economic downturn related to the COVID-19 pandemic. However, with reduced restrictions
and increased vaccination rates in the United States, retail sales and leisure travel have experienced improvement during the second quarter
of 2021, while business travel remains at levels significantly lower than prior to the COVID-19 pandemic. It is unclear how consumer and
travel habits will be impacted over the long term during and after the COVID-19 pandemic; if consumer and travel activity does not substantially
rebound, we believe that this uncertainty will continue to burden these sectors and lenders with significant exposure to these property
types will continue to face challenges. It is still unclear how the shift to flexible work-from-home schedules will impact the office
sector and demand for office space going forward. As such, lenders will continue to face underwriting challenges with respect to assumptions
related to new leasing, tenant renewal probabilities and occupancy rates for office properties, especially assets located in downtown
or central business district markets. As vaccination rates increase and companies re-evaluate their work-from-home policies, there should
be increased clarity on the demand for office properties. Multifamily properties are expected to continue to be a preferred asset class
by most lenders and investors for the near term due to the stability of cash flows and the liquidity available from government sponsored
enterprises, such as Fannie Mae or Freddie Mac; however, it is unclear what the impact of the U.S. Centers for Disease Control and Prevention
moratorium on tenant evictions will have on the sector and how rent collections will be impacted. Industrial properties continue to perform
well and benefit from the shift in consumers’ behavior to increased levels of e-commerce, which accelerated during the COVID-19
pandemic. Lastly, competition among lenders has caused alternative lenders, like us, to expand their loan portfolios to include certain
asset types within these asset classes, such as data centers, manufactured housing, cold storage and self-storage, to achieve favorable
yields on high quality properties that have been and may continue to be less susceptible to the impact of the COVID-19 pandemic.
The longer-term impact of the COVID-19 pandemic
is still uncertain. However, we believe that as the U.S. economy continues to improve and returns to a more stable state, there will be
significant opportunities for alternative lenders, like us, to provide creative, flexible debt capital for a wide array of circumstances
and business plans.
Changes in Market Interest Rates. With
respect to our business operations, increases in interest rates, in general, may cause: (a) the interest expense associated with our variable
rate borrowings, if any, to increase; (b) the value of our fixed rate investments, if any, to decline; (c) the coupon rates on our variable
rate investments, if any, to reset, perhaps on a delayed basis, to higher rates; and (d) it to become more difficult and costly for our
borrowers, which may negatively impact their ability to repay our investments. See " —Market Conditions" above for a discussion
of the current market including interest rates.
Conversely, decreases in interest rates, in general,
may cause: (a) the interest expense associated with our variable rate borrowings, if any, to decrease; (b) the value of our fixed rate
investments, if any, to increase; (c) the coupon rates on our variable rate investments, if any, to reset, perhaps on a delayed basis,
to lower rates; and (d) it to become easier and more affordable for our borrowers to refinance, and as a result repay, our loans, but
may negatively impact our future returns if any such repayment proceeds were to be reinvested in lower yielding investments.
The interest income on our loans and
interest expense on our borrowings float with one month LIBOR. Because we generally leverage approximately 75% of our investments,
as LIBOR increases, our income from investments, net of interest and related expenses, will increase. LIBOR decreases are mitigated
by interest rate floor provisions in our loan agreements with borrowers; therefore, changes to income from investments, net, may not
move proportionately with the increase or decrease in LIBOR. Based on our loan portfolio at June 30, 2021, LIBOR was 0.08% and
would have to exceed the floor established by any of our loans, which currently range from 0.50% to 2.49%, to realize an increase in
interest income from increases in LIBOR.
LIBOR is currently expected to be phased out for
new contracts by December 31, 2021 and for pre-existing contracts by June 30, 2023. On October 30, 2020, we amended our Master Repurchase
Agreement to, among other things, provide that at such time as LIBOR is no longer available as a base rate to calculate interest payable
on amounts outstanding under our Master Repurchase Facility, the replacement base rate shall be the secured overnight financing rate,
or SOFR, or if SOFR is not available, such other rate as may be determined by Citibank in accordance with the terms of our Master Repurchase
Agreement. We also currently expect that, as a result of any phase out of LIBOR, the interest rates under our loan agreements with borrowers
would be revised as provided under the agreements or amended as necessary to provide for an interest rate that approximates the existing
interest rate as calculated in accordance with LIBOR.
Size of Portfolio. The size of our loan
portfolio, as measured both by the aggregate principal balance and the number of our CRE loans and our other investments, is also an important
factor in determining our operating results. Generally, if the size of our loan portfolio grows, the amount of interest income we receive
would increase and we may achieve certain economies of scale and diversify risk within our loan portfolio. A larger portfolio, however,
may result in increased expenses; for example, we may incur additional interest expense or other costs to finance our investments. Also,
if the aggregate principal balance of our loan portfolio grows but the number of our loans or the number of our borrowers does not grow,
we could face increased risk by reason of the concentration of our investments. Excepting the pending Merger, we believe our growth is
limited by our ability to obtain additional cost-effective capital.
LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands, except per
share data)
Under the Merger Agreement, we have agreed to
conduct our business in all material respects in the ordinary course of business consistent with past practice. The Merger Agreement contains
certain operating covenants that could affect our liquidity and capital resources, but we do not expect any material changes to our liquidity
and capital resources prior to consummation of the Merger or, if applicable, the termination of the Merger Agreement, other than those
which may occur in the ordinary course of our business. See Note 1 to the Notes to Unaudited Condensed Consolidated Financial Statements
included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information regarding the Merger Agreement.
Liquidity is a measure of our ability to meet
potential cash requirements, including ongoing commitments to fund our lending commitments, repay or meet margin calls resulting from
our borrowings, fund and maintain our assets and operations, make distributions to our shareholders and fund other business operating
requirements. We require a significant amount of cash to originate, purchase and invest in our target investments, make additional unfunded
loan commitment payments, repay principal and interest on our borrowings, make distributions to our shareholders and fund other business
operating requirements. We have been limited in our ability to access cost-effective capital and, as a result, we have limited capital
to invest. The long-term impact of the COVID-19 pandemic and its aftermath on financial markets is uncertain. To the extent that impact
is significant, negative and sustained for an extended period, we expect that we may continue to be challenged in accessing capital, and
we may continue to be challenged in accessing capital even if the financial markets are not negatively impacted by the COVID-19 pandemic
for an extended period or otherwise. Our sources of cash flows include payments of principal, interest and fees we receive on our investments,
other cash we may generate from our business and operations and any unused borrowing capacity, including under our Master Repurchase Facility
or other repurchase agreements or financing arrangements, and may also include bank loans or public or private issuances of debt or equity
securities. We believe that these sources of funds will be sufficient to meet our operating and capital expenses and pay our debt service
obligations owed and make any distributions to our shareholders for the next 12 months and for the foreseeable future, subject to the
duration and severity of the COVID-19 pandemic and economic impact on our borrowers and their ability to fund their debt service obligations
owed to us. For further information regarding the risks associated with our loan portfolio, see the risk factors identified in Part I,
Item IA, "Risk Factors" of our Annual Report.
Pursuant to our Master Repurchase Agreement,
we may sell to, and later repurchase from, Citibank floating rate mortgage loans and other related assets, or purchased assets. The
initial purchase price paid by Citibank for each purchased asset is up to 75% of the lesser of the market value of the purchased
asset or the unpaid principal balance of such purchased asset, subject to Citibank’s approval. Upon the repurchase of a
purchased asset, we are required to pay Citibank the outstanding purchase price of the purchased asset, accrued interest and all
accrued and unpaid expenses of Citibank relating to such purchased asset. The price differential (or interest rate) relating to a
purchased asset is equal to one month LIBOR plus a premium of 200 to 250 basis points, determined by the yield of the purchased
asset and the property type of the purchased asset's real estate collateral. Citibank has the discretion under our Master Repurchase
Agreement to make advancements at margins higher than 75% and at premiums of less than 200 basis points. If LIBOR is no longer
available as a base rate, the replacement base rate shall be SOFR, or if SOFR is not available, such other rate as may be determined
by Citibank in accordance with the terms of our Master Repurchase Agreement, plus a premium of basis points that approximates the
existing interest rate as calculated in accordance with LIBOR. As of June 30, 2021, the maximum amount available for
advancement under our Master Repurchase Facility was $213,482, of which we had a $156,167 aggregate outstanding principal balance,
and the weighted average interest rate of advancements under our Master Repurchase Facility was 2.18% for the six months ended June
30, 2021. Our Master Repurchase Facility is scheduled to expire on November 6, 2022. For further information regarding our Master
Repurchase Facility, see Note 4 to the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I Item 1 of
this Quarterly Report on Form 10-Q and "—Overview-Financing Activities" above.
The following is a summary of our sources and
uses of cash flows for the periods presented (dollars in thousands):
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
|
$
|
10,521
|
|
|
$
|
8,875
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
2,727
|
|
|
|
2,931
|
|
Investing activities
|
|
|
45,288
|
|
|
|
(34,805
|
)
|
Financing activities
|
|
|
(50,168
|
)
|
|
|
33,632
|
|
Cash, cash equivalents and restricted cash at end of period
|
|
$
|
8,368
|
|
|
$
|
10,633
|
|
The decrease in cash provided by operating activities
was primarily the result of a decrease in net income for the six months ended June 30, 2021 compared to the six months ended June 30,
2020, partially offset by favorable changes in working capital. The increase in cash provided by investing activities was primarily due
to the repayment of two loan investments, a decrease in loan origination activity and additional fundings on our existing loan investments
during the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The increase in cash used in financing activities
was primarily due to the repayment of outstanding balances under our Master Repurchase Facility and the payment of a one-time cash distribution
to our common shareholders to satisfy our 2020 REIT distribution requirements during the six months ended June 30, 2021.
Our ability to obtain additional financing advancements
under our Master Repurchase Facility is contingent upon our making additional fundings to our existing borrowers or our ability to effectively
reinvest any additional capital, including any loan repayment proceeds, that we may obtain or receive. However, we cannot be sure that
we will be able to obtain additional cost-effective capital or additional financing advancements under our Master Repurchase Facility.
It may take an extended period for us to reinvest any additional capital we may receive, and any reinvestments we may be able to make
may not provide us with similar returns or comparable risks as those of our current investments.
Distributions
During the six months ended June 30, 2021, we
paid distributions to our common shareholders aggregating $5,232, or $0.63 per common share, using cash on hand. For further information
regarding distributions, see Note 6 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly
Report on Form 10-Q.
On July 15, 2021, we declared a quarterly distribution
for the second quarter of 2021 payable to our common shareholders of record as of July 26, 2021 of $0.10 per common share, or approximately
$831 in aggregate. We expect to pay this distribution on or about August 19, 2021.
Contractual Obligations and Commitments
Our contractual obligations and commitments as
of June 30, 2021 were as follows:
|
|
Payment Due by Period
|
|
|
|
Total
|
|
|
Less than 1 Year
|
|
|
1 - 3 Years
|
|
|
3 - 5 Years
|
|
|
More than 5 years
|
|
Unfunded loan commitments (1)
|
|
$
|
9,085
|
|
|
$
|
6,660
|
|
|
$
|
2,425
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Principal payments on Master Repurchase Facility (2)
|
|
|
156,167
|
|
|
|
122,383
|
|
|
|
33,784
|
|
|
|
—
|
|
|
|
—
|
|
Interest payments (3)
|
|
|
2,151
|
|
|
|
1,879
|
|
|
|
272
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
167,403
|
|
|
$
|
130,922
|
|
|
$
|
36,481
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(1)
|
The allocation of our unfunded loan commitments is based on the current loan maturity date to which the individual commitments
relate.
|
(2)
|
The allocation of outstanding advancements under our Master Repurchase Facility is based
on the current maturity date of each loan investment with respect to which the individual borrowing relates.
|
(3)
|
Projected interest payments are attributable only to our debt service obligations at existing rates as of June 30, 2021 and are
not intended to estimate future interest costs which may result from debt prepayments, additional borrowings, new debt issuances or changes
in interest rates.
|
Off-Balance Sheet Arrangements
As of June 30, 2021, we had no off-balance
sheet arrangements that have had or that we expect would be reasonably likely to have a material effect on our financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Debt Covenants
Our principal debt obligations at June 30,
2021 were the outstanding balances under our Master Repurchase Facility. Our Master Repurchase Agreement provides for acceleration of
the date of repurchase of any then purchased assets and Citibank’s liquidation of the purchased assets upon the occurrence and continuation
of certain events of default, including a change of control of us, which includes our Manager ceasing to act as our sole manager or to
be a wholly owned subsidiary of RMR LLC. Our Master Repurchase Agreement also provides that upon the repurchase of any then purchased
asset, we are required to pay Citibank the outstanding purchase price of such purchased asset and accrued interest and any and all accrued
and unpaid expenses of Citibank relating to such purchased asset.
In connection with our Master Repurchase Agreement,
we entered into the Guaranty, which requires us to guarantee 25% of our subsidiary's prompt and complete payment of the purchase price,
purchase price differential and any costs and expenses of Citibank related to our Master Repurchase Agreement. The Guaranty also requires
us to comply with customary financial covenants, which include the maintenance of a minimum tangible net worth, minimum cash liquidity,
a total indebtedness to tangible net worth ratio and a minimum interest coverage ratio.
As of June 30, 2021, we had a $156,167 aggregate
outstanding principal balance under our Master Repurchase Facility. Our Master Repurchase Agreement is structured with risk mitigation
mechanisms, including a cash flow sweep, which would allow Citibank to control interest payments from our borrowers under our loans that
are financed under our Master Repurchase Facility, and the ability to accelerate dates of repurchase and institute margin calls, which
may require us to pay down balances associated with one or more of our loans that are financed under our Master Repurchase Facility. As
of June 30, 2021, we believe we were in compliance with all the covenants and other terms under our Master Repurchase Agreement and,
to date, Citibank has not utilized any such risk mitigation mechanisms under our Master Repurchase Agreement.