UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

OR

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

Commission File Number 001-38199

 

Tremont Mortgage Trust

 

 

Two Newton Place, 255 Washington Street, Suite 300, Newton, MA 02458-1634

TREMONT MORTGAGE TRUST

FORM 10-Q

TREMONT MORTGAGE TRUST

CONDENSED CONSOLIDATED BALANCE SHEETSHEETS

(amountsDollars in thousands, except share data)

(unaudited)

TREMONT MORTGAGE TRUST

STATEMENTSCONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(amountsAmounts in thousands, except per share data)

(unaudited)

TREMONT MORTGAGE TRUST

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWFLOWS

(dollarsDollars in thousands)

(unaudited)

The accompanying condensed consolidated financial statements of Tremont Mortgage Trust and its subsidiaries, or TRMT, we, us or our, are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2017, or our Annual Report.

In the opinion of our management, all adjustments which include only(consisting of normal recurring adjustmentsaccruals) considered necessary for a fair presentation,statement of results for the interim period have been included. Our operatingAll 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 these financial statements in conformity with U.S. generally accepted accounting principles, or GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the condensed consolidated financial statements include the fair value of financial instruments.

We were organized as a real estate investment trust, or REIT, under Maryland law on June 1, 2017. On September 18, 2017, we sold 2,500,000 of our common shares of beneficial interest, par value $0.01 per share, or our common shares, at a price of $20.00 per share in our initial public offering, or our IPO. Concurrently with our IPO, we sold an additional 600,000 of our common shares at a price of $20.00 per share to Tremont Realty Advisors LLC, or our Manager, in a private placement. The aggregate proceeds from these sales were $62,000.

Note 4. Recent Accounting Pronouncements

On September 18, 2017,March 9, 2018, in accordance with our Trustee compensation arrangements, we sold 2,500,000granted 1,500 of our common shares, valued at a price of $20.00$13.31 per share, in our IPO. Concurrently with our IPO, we sold an additional 600,000the closing price of our common shares at a price of $20.00 per shareon The Nasdaq Stock Market LLC, or Nasdaq, on that day, to our Manager inManaging Trustee who was elected as a private placement. The aggregate proceeds from these sales were $62,000. We did not declare or pay any cash dividends onManaging Trustee that day.

On April 25, 2018, we granted 3,000 of our common shares, duringvalued at $12.61 per share, the period fromclosing price of our inception (June 1, 2017) through September 30, 2017.common shares on Nasdaq on that day, to each of our five Trustees as part of their annual compensation.

We have no employees. The personnel and various services we require to operate our business are provided to us by our Manager. In connection with our IPO, we entered intoManager pursuant to a management agreement, with our Manager, 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 pay our Manager an annual base management fee that is equal to 1.5% of our “equity,” as defined. We pay this business management fee in cash quarterly in arrears. In addition, beginning in the fourth quarter of 2018, we may pay our Manager an incentive fee if it is earned under our management agreement. The incentive fee, if any, will be payable in cash quarterly in arrears. We also will be obligated to pay our Manager a termination fee in the event our management agreement is terminated by us without cause or by our Manager for a material breach by us. Pursuant to our management agreement, we recognized management fees of $32$225 for the period beginning on September 18, 2017, the date on which we entered into the agreement, through September 30, 2017. Our management fees are included in general and administrative expenses in our statements of operations.three months ended March 31, 2018.

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 generally 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 The RMR Group LLC, or RMR LLC pursuant to a shared services agreement between our Manager and RMR LLC. We will reimburse our Manager for shared services costs our Manager pays to RMR LLC and its affiliates, and these reimbursements may include an allocation of the cost of personnel employed by RMR LLC, with such shared services costs subject to approval by a majority of our Independent Trustees at least annually. In addition, we will also pay our pro rata portion of internal audit costs incurred by RMR LLC on behalf of us and other public companies to which RMR LLC or its affiliatessubsidiaries provide management services. For the period beginning on September 18, 2017, the date we entered into our management agreement, through September 30, 2017,three months ended March 31, 2018, we incurred shared serviceservices costs of $53$375 payable to our Manager as reimbursement for shared serviceservices costs it paid to RMR LLC, which amounts are included in general and administrative expenses in our statements of operations.

Note 7.8. 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 providesor its subsidiaries provide management services and which have trustees, directors and officers who are also our Trustees or officers.

We were formerly a 100% owned subsidiary of our Manager. Our Manager is our largest shareholder and, our Manager entered into a private placement purchase agreement concurrent with our IPO, pursuant to which our Manager acquired 600,000as of March 31, 2018, owned 600,100 of our common shares, at a priceor approximately 19.2% of $20.00 per share, which wasour outstanding common shares. Our Manager paid the same price at which we soldinitial organizational costs related to our common shares information and the other costs of our IPO. Under theIPO and concurrent private placement, purchase agreement, we granted toincluding underwriting discounts and commissions, totaling $6,823. Each of our Managing Trustees and officers is also a director or officer of our Manager certain demand and piggyback registration rights, subject to certain limitations, covering our common shares owned by our Manager.of RMR LLC.

For further information about these and other such relationships and certain other related person relationships and transactions, please refer to our IPO Prospectus, including the sections captioned “Our Manager and our Management Agreement” and “Certain relationships and related person transactions - Our relationship with our Manager, RMR and other entities managed by RMR”.Annual Report.

We intend to elect and qualify for taxation as a REIT under the Internal Revenue Code of 1986, as amended, for U.S. federal income tax purposes commencing with our taxable year endingended December 31, 2017, and to maintain thatsuch qualification thereafter. We therefore expect toAccordingly, we generally are not, and will not be, subject to U.S. federal and most state income taxation on our operating incometaxes provided that we distribute our taxable income to our shareholders and meet certain other requirements to qualify for taxation as a REIT for U.S. federal income tax purposes. However, we expect to beREIT. We are subject to income tax in certain statesstate and local jurisdictions despitetaxes, certain of which amounts are reported as income taxes in our qualificationcondensed consolidated statement of income. We do not currently expect recent amendments to the IRC to have a significant impact on us; however, we will monitor future interpretations of such amendments as they develop, and accordingly, our estimates and disclosures may change.

We calculated earnings per share, or EPS, for taxation asthe period ended March 31, 2018 using the weighted average number of common shares outstanding during the period. When applicable, diluted EPS reflects the more dilutive earnings per common share amount calculated using the two class method or the treasury stock method. The period ended March 31, 2018 had 856 of restricted unvested common shares that were not included in the calculation of diluted EPS because to do so would have been antidilutive.

In April 2018, we announced the closing of a REIT$18,100 first mortgage bridge loan, of which $15,800 was funded by us at closing, to finance the acquisition of a 184,000 square foot, 14-story office tower located in Metairie, LA. This loan bears interest at a variable rate of one month LIBOR plus a premium of 500 basis points payable monthly and an as-is loan to value ratio, or LTV ratio, of approximately 80%. This loan also includes a future funding allowance of up to $2,300 for U.S. federal income tax purposes.tenant improvements, leasing commissions, marketing and capital expenditures. The loan has a three year initial term and two one year borrower extension options.

We intend to operate our business in a manner consistent with our intention to qualify for taxation as a REIT for U.S. federal income tax purposes, and to maintain our exemption from registration under the Investment Company Act of 1940, as amended.amended, or the Investment Company Act.

Factors Affecting Operating Results

We expect that theOur results of our operations will be affectedare impacted by a number of factors and will primarily depend on the interest income from our investments and the financing and other costs associated with our business. Our operating results may also be impacted by general CRE market conditions and unanticipated defaults by our borrowers.

Although we generally expect to hold our investments generally as long term investments,for their contractual terms, 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 consolidated balance sheet,sheets, with changes in fair value recorded through earnings. Fees received from our borrowers on any loans held for sale will be deferred and recognized as part of the gain or loss on sale. We do not currently expect to hold any of our investments for trading purposes.

Alternative CRE lenders, like us, generally are able to set their investment goals with significantly less regulatory constraints than historical CRE debt providers, such as banks and insurance companies. This allows alternative CRE lenders to create customized solutions to fit borrowers' specific business plans for the collateral properties. We believe that this flexibility affords alternative lenders, like us, a significant competitive advantage over regulated historical CRE debt providers, especially with regard to middle market and transitional CRE debt financing.

Although a large amount of capital has been raised recently by alternative CRE debt providers, most of this capital has been raised by a small number of firms. We believe that firms raising large amounts of capital generally target large loan investments in order to deploy the capital efficiently, and that most of the capital recently raised for CRE debt financing, including capital raised by many other commercial mortgage REITs, will be used for loan investments of greater than $50.0 million.$50,000. We also believe that, since the 2008 global financial crisis, financial institutions and other historical CRE debt providers, such as banks and insurance companies, have increased their focus on investments in lower loan to value, or LTV loans and in stabilized properties.

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) coupons on our variable rate investments, if any, to reset, perhaps on a delayed basis, to lower interest rates; and (d) our borrowers' ability to refinance to become easier and more affordable, positively impacting our borrowers' ability to repay our investments.

Results of OperationsLIQUIDITY AND CAPITAL RESOURCES (dollars in thousands)

AsLiquidity is a measure of September 30, 2017,our ability to meet potential cash requirements, including ongoing commitments to 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 will use a significant amount of cash to originate, purchase and invest in our target investments, repay principal and interest on our borrowings, make distributions to our shareholders and fund other business operating requirements. We expect that our sources of cash flows will include payments of principal, interest and fees we had not originated anyreceive on our investments, cash generated from our operating results, unused borrowing capacity, including under our master repurchase facility or other repurchase agreements or financing arrangements, bank loans or investments. Although we were formed on June 1, 2017, we did not commence operations untilpublic or private issuances of debt or equity securities.

We plan to declare and pay our first distribution to common shareholders after successfully deploying the closing ofcapital raised in our IPO. The expenses we have incurred since our inception on June 1, 2017,IPO and duringconcurrent private placement.

Off-Balance Sheet Arrangements

Related Person Transactions

For quantitative and qualitative disclosures about market risk affecting us, see "Quantitative and Qualitative Disclosures About Market Risk" in our IPO Prospectus.Annual Report. Our exposure to market risks has not changed materially from those set forth in our IPO Prospectus.Annual Report.

As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the participation of our Managing Trustees, our Chief Executive Officer and our Chief Financial Officer and Treasurer, of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Managing Trustees, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective.

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2017March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS STATEMENTS THAT CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER SECURITIES LAWS. ALSO, WHENEVER WE USE WORDS SUCH AS “BELIEVE”, “EXPECT”, “ANTICIPATE”, “INTEND”, “PLAN”, “ESTIMATE”, “WILL”, “MAY” AND NEGATIVES OR DERIVATIVES OF THESE OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON OUR PRESENT INTENT, BELIEFS OR EXPECTATIONS, BUT FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR. FORWARD LOOKING STATEMENTS IN THIS REPORT RELATE TO VARIOUS ASPECTS OF OUR BUSINESS, INCLUDING:

OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY OUR FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. FACTORS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FORWARD LOOKING STATEMENTS AND UPON OUR BUSINESS, FINANCIAL CONDITION, LIQUIDITY AND RESULTS OF OPERATIONS INCLUDE, BUT ARE NOT LIMITED TO:

CURRENTLY UNEXPECTED RESULTS COULD OCCUR DUE TO MANY DIFFERENT CIRCUMSTANCES, SOME OF WHICH ARE BEYOND OUR CONTROL, SUCH AS CHANGES IN CAPITAL MARKETS OR THE ECONOMY GENERALLY, ACTS OF TERRORISM OR NATURAL DISASTERS.

THE INFORMATION CONTAINED ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q OR IN OUR OTHER FILINGS WITH THE SEC, INCLUDING UNDER THE CAPTION “RISK FACTORS”, OR INCORPORATED HEREIN OR THEREIN, IDENTIFIES OTHER IMPORTANT FACTORS THAT COULD CAUSE DIFFERENCES FROM OUR FORWARD LOOKING STATEMENTS. OUR FILINGS WITH THE SEC ARE AVAILABLE ON THE SEC’S WEBSITE AT WWW.SEC.GOV.

YOU SHOULD NOT PLACE UNDUE RELIANCE UPON OUR FORWARD LOOKING STATEMENTS.

EXCEPT AS REQUIRED BY LAW, WE DO NOT INTEND TO UPDATE OR CHANGE ANY FORWARD LOOKING STATEMENTS AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

THE ARTICLES OF AMENDMENT AND RESTATEMENT OF TREMONT MORTGAGE TRUST, A COPY OF WHICH, TOGETHER WITH ANY AMENDMENTS OR SUPPLEMENTS THERETO, IS DULY FILED WITH THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDES THAT THE NAME TREMONT MORTGAGE TRUST REFERS TO THE TRUSTEES COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY. NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF TREMONT MORTGAGE TRUST SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, TREMONT MORTGAGE TRUST. ALL PERSONS OR ENTITIES DEALING WITH TREMONT MORTGAGE TRUST, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF TREMONT MORTGAGE TRUST FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds (dollars in thousands, except per share data)

On September 18, 2017, we sold 2,500,000 of our common shares of beneficial interest, par value $0.01 per share, or our common shares, at a price of $20.00 per share in our IPO. Concurrently with our IPO, we sold an additional 600,000 of our common shares at a price of $20.00 per share to our Manager in a private placement. The aggregate proceeds from these sales were $62 million.

There has been no material change in the planned use of proceeds from our IPO as described in the prospectus related to our IPO Prospectus.dated September 13, 2017. As described in our IPO Prospectus,the prospectus, we intend to use the proceeds primarily for originating and investing in floating rate first mortgage loans, subordinated mortgages, mezzanine loans, or preferred equity interests in entities that own middle market and transitional CRE. Prior to the time we have fully used the proceeds to make investments in our target investments, we may fund some or all of our quarterly distributions out of the proceeds.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.