Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
References in this Quarterly Report on Form 10-Q to the Company, we, us or our include Tremont Mortgage Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
TREMONT MORTGAGE TRUST
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, 2019,2020, 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.
Note 2. SummaryOn April 26, 2021, we and RMR Mortgage Trust, or RMRM, entered into an Agreement and Plan of Significant Accounting Policies
Consolidation. For each investment we make, we evaluate whether consolidationMerger, or the Merger Agreement, pursuant to which, on the terms and subject to the satisfaction or waiver of the borrower's financial statements is required under GAAP. GAAP addressesconditions thereof, we have agreed to merge with and into RMRM, with RMRM continuing as the application of consolidation principlessurviving entity in the merger, or the Merger. Pursuant to an investor with a controlling financial interest. Variable interest entities, or VIEs, arethe terms and subject to consolidation under GAAP if their equity investors do not have sufficient equitythe conditions set forth in the Merger Agreement, at risk for the entity to finance its activities without additional subordinated financial support from other parties, are not able to direct the entity’s most significant activities or are not exposed to the entity’s losses or entitled to its residual returns. VIEs are required to be consolidated by their primary beneficiaries, which are the entities with the power to direct the activities which are most significant to the economic performanceeffective time of the VIE. These determinations often involve complex and subjective analyses. As of June 30, 2020, we concluded that our investments were not VIEs.Merger, or the Effective
Cash, Cash Equivalents and Restricted Cash. We consider highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents.
Restricted cash primarily consists of deposit proceeds from potential borrowers when originating loans, which may be returned to the applicable borrower upon the closing of the loan, after deducting any transaction costs paid by us for the benefit of such borrower.
Repurchase Agreements. Loans financed through repurchase agreements are treated as collateralized financing transactions, unless they meet sales treatment under GAAP. Pursuant to GAAP treatment of collateralized financing transactions, loans financed through repurchase agreements remain on our consolidated balance sheet as assets, and cash received from the purchasers is recorded on our consolidated balance sheet as liabilities. Interest paid in accordance with repurchase agreements is recorded as interest expense.
Loans Held for Investment. Generally, our loans are classified as held for investment based upon our intent and ability to hold them until maturity. Loans that are held for investment are carried at cost, net of unamortized loan origination and accreted exit fees that are required to be recognized in the carrying value of the loans in accordance with GAAP, unless the loans are deemed to be impaired. Loans that we have a plan to sell or liquidate are held at the lower of cost or fair value less cost to sell.
We evaluateTime, each of our loanscommon 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 impairment at least quarterlythe six months ended June 30, 2021.
Following the consummation of the Merger, the combined company will continue to be managed by assessingour 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 varietyletter 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 risk factors in relationthe Merger, we shall have terminated our management agreement with TRA, and TRA shall have waived its right to each loanreceive 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 assigning a risk ratingthe termination of our management agreement with TRA, certain of the expenses TRA had paid on our behalf pursuant to each loan based on those factors. Factors considered in these evaluations include, but are not limited to, property type, geographic and local market dynamics, physical condition, leasing and tenant profile, projected cash flow, risk of loss, current loan to value ratio, or LTV, debt yield, collateral performance, structure, exit plan and sponsorship. Loans are rated “1” (less risk) through “5” (greater risk) as defined below:
"1" lower risk—Criteria reflects a sponsor having a strong financial condition and low credit risk and our evaluation of management's experience; collateral performance exceeding performance metricssuch management agreement will be included in the business plan“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 creditsuperior 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)
underwriting;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 property demonstrating stabilized occupancy and/or market rates, resulting in strong current cash flow and net operating income and/or havingother Transactions to which we are a very low LTV.
"2" average risk—Criteria reflects a sponsor having a stable financial condition andparty at the special meeting of our evaluation of management's experience; collateral performance meeting or exceeding substantially all performance metrics included in the business plan or credit underwriting; and the property demonstrating improved occupancy at market rents, resulting in sufficient current cash flow and/or having a low LTV.
"3" acceptable risk—Criteria reflects a sponsor having a history of repaying loans at maturity and meeting its credit obligations and our evaluation of management's experience; collateral performance expected to meet performance metrics included in the business plan or credit underwriting; and the property having a moderate LTV. New loans and loans with a limited history will typically be assigned this rating and will be adjusted to other levels from time to time as appropriate.
"4" higher risk—Criteria reflects a sponsor having a history of unresolved missed or late payments, maturity extensions and difficulty timely fulfilling its credit obligations and our evaluation of management's experience; collateral performance failing to meet the business plan or credit underwriting; the existence of a risk of default possibly leading to a loss and/or potential weaknesses that deserve management’s attention; and/or the property having a high LTV.
"5" impaired/loss likely—Criteria reflects a very high risk of realizing a principal loss or having incurred a principal loss; a sponsor having a history of default payments, trouble fulfilling its credit obligations, deeds in lieu of foreclosures, and/or bankruptcies; collateral performance is significantly worse than performance metrics included in the business plan; loan covenants or performance milestones having been breached or not attained; timely exit via sale or refinancing being uncertain; and/or the property having a very high LTV.
See Note 4 for further information regarding our current loan portfolio’s assessment under our internal risk rating policy.
Impairment occurs when it is deemed probable that we will not be able to collect all amounts due under a loan according to its contractual terms. Impairment will then be measured based on the estimated fair value of the underlying collateral, net of any costs we expect to incur to realize that value. The determination of this estimated fair value involves judgments and assumptions based on objective and subjective factors. Consideration will be given to various factors, such as business plans, property occupancies, tenant profiles, rental rates, operating expenses and borrowers’ repayment plans, among others, and will require significant judgments regarding certain circumstances, such as guarantees, if any. Upon measurement of an impairment, we will record an allowance to reduce the carrying value of the loan accordingly, and record a corresponding charge to net income in our condensed consolidated statements of operations.
Fair Value of Financial Instruments. Financial Accounting Standards Board, or FASB, Accounting Standards CodificationTM, or ASC, Topic 820-10, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands the required disclosure regarding fair value measurements. ASC Topic 820-10 defines fair value as the price that would be received for a financial instrument in a current sale, which assumes an orderly transaction between market participants on the measurement date. We determine the estimated fair value of financial assets and liabilities using the three-tier fair value hierarchy established by GAAP, which prioritizes the inputs used in measuring fair value. GAAP establishes market based or observable inputs as the preferred source of values followed by valuation models using management assumptions in the absence of market inputs. The three levels of inputs that may be used to measure fair value are as follows:
Level I—Inputs include quoted prices in active markets for identical assets or liabilities that we have the ability to access.
Level II—Inputs include quoted prices in markets that are less active or inactive or for which all significant inputs are observable, either directly or indirectly.
Level III—Inputs include unobservable prices and are supported by little or no market activity and are significant to the overall fair value measurement.
TREMONT MORTGAGE TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
Loan Deferred Fees. Loan origination and exit fees are reflected in loans held for investment, net, in our condensed consolidated balance sheets and include fees charged to borrowers. These fees are amortized and accreted, respectively, into interest income over the life of the related loans held for investment.
Deferred Financing Costs. Costs incurred in connection with financings are capitalized and recorded as an offset to the related liability and amortized over the respective financing terms and are recorded in our consolidated statements of operations as a component of interest and related expenses. At June 30, 2020, we had approximately $673 of capitalized financing costs, net of amortization.
Net Earnings Per Common Share. We calculate basic earnings per common share, or EPS, by dividing net income by the weighted average number of common shares outstanding during the period. We calculate diluted net EPS using the more dilutive of the two-class method or the treasury stock method.
Revenue Recognition. Interest income related to our first mortgage whole loans secured by commercial real estate, or CRE, will generally be accrued based on the coupon rates applied to the outstanding principal balance of such loans. Fees, premiums and discounts, if any, will be amortized or accreted into interest income over the remaining lives of the loans using the effective interest method, as adjusted for any prepayments.
If a loan's interest or principal payments are not paid when due and there is uncertainty that such payments will be collected, the loan may be categorized as non-accrual and no interest will be recorded unless it is collected. When all overdue payments are collected and, in our judgment, a loan is likely to remain current, it may be re-categorized as accrual.
For loans purchased at a discount, GAAP limits the yield that may be accreted (accretable yield) to the excess of the investor’s estimate of undiscounted expected principal, interest and other cash flows (cash flows expected at acquisitionshareholders, scheduled to be collected) over the investor’s initial investment in the loan. GAAP also requiresheld on September 17, 2021 for that the excess of contractual cash flows over cash flows expected to be collected (non-accretable difference) not be recognized as an adjustment of yield, loss accrual or valuation allowance. Subsequent increases in cash flows expected to be collected from such loans generally will be recognized prospectively through adjustment of the loan’s yield over its remaining life. Decreases in cash flows expected to be collected will be recorded as an impairment.purpose, and against any competing acquisition proposal.
Note 3.2. 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 4.3. Loans Held for Investment
We originate first mortgage whole loans secured by middle market and transitional commercial real estate, or CRE, which arewe generally to be held as long term investments.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 54 for further information regarding our Master Repurchase Facility.
| | | | | | | | | | | | | | |
| | 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 details overall statistics for our loan portfolio as of June 30, 2020 and December 31, 2019: |
| | | | | | | | |
| | | Balance at June 30, 2020 | | Balance at December 31, 2019 |
| Number of loans | | 14 |
| | 12 |
|
| Total loan commitments | | $ | 296,050 |
| | $ | 260,167 |
|
Unfunded loan commitments (1) | | $ | 17,566 |
| | $ | 17,268 |
|
| Principal balance | | $ | 278,484 |
| | $ | 242,899 |
|
| Unamortized net deferred origination fees | | $ | (259 | ) | | $ | (821 | ) |
| Carrying value | | $ | 278,225 |
| | $ | 242,078 |
|
| Weighted average coupon rate | | 5.70 | % | | 5.76 | % |
Weighted average all in yield (2) | | 6.39 | % | | 6.41 | % |
Weighted average maximum maturity (years) (3) | | 3.1 |
| | 3.6 |
|
Weighted average LTV (4) | | 68 | % | | 70 | % |
| |
(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 at closing. |
The table below detailsrepresents our loan activities during the three months ended June 30, 2020:2021:
|
| | | | | | | | | | | | |
| | | Principal Balance | | Deferred Fees | | Carrying Value |
| Balance at March 31, 2020 | | $ | 272,234 |
| | $ | (747 | ) | | $ | 271,487 |
|
| Additional funding | | 6,250 |
| | — |
| | 6,250 |
|
| Net amortization of deferred fees | | — |
| | 488 |
| | 488 |
|
| Balance at June 30, 2020 | | $ | 278,484 |
| | $ | (259 | ) | | $ | 278,225 |
|
| | | | | | | | | | | | | | | | | | | | |
| | 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 detailsrepresents our loan activities during the six months ended June 30, 2020:2021:
| | | | | | | | | | | | | | | | | | | | |
| | 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 2, 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.
|
| | | | | | | | | | | | |
| | | Principal Balance | | Deferred Fees | | Carrying Value |
| Balance at December 31, 2019 | | $ | 242,899 |
| | $ | (821 | ) | | $ | 242,078 |
|
| Additional funding | | 9,459 |
| | — |
| | 9,459 |
|
| Originations | | 26,126 |
| | (388 | ) | | 25,738 |
|
| Net amortization of deferred fees | | — |
| | 950 |
| | 950 |
|
| Balance at June 30, 2020 | | $ | 278,484 |
| | $ | (259 | ) | | $ | 278,225 |
|
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 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, 20202021 and December 31, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2020 | | December 31, 2019 |
| Property Type | | Number of Loans | | Carrying Value | | Percentage of Value | | Number of Loans | | Carrying Value | | Percentage of Value |
| Office | | 5 |
| | $ | 90,427 |
| | 32 | % | | 4 |
| | $ | 71,446 |
| | 30 | % |
| Hotel | | 1 |
| | 23,848 |
| | 9 | % | | 1 |
| | 23,101 |
| | 10 | % |
| Retail | | 3 |
| | 45,676 |
| | 16 | % | | 3 |
| | 43,782 |
| | 18 | % |
| Multifamily | | 3 |
| | 69,391 |
| | 25 | % | | 3 |
| | 68,911 |
| | 28 | % |
| Industrial | | 2 |
| | 48,883 |
| | 18 | % | | 1 |
| | 34,838 |
| | 14 | % |
| | 14 |
| | $ | 278,225 |
| | 100 | % | | 12 |
| | $ | 242,078 |
| | 100 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2020 | | December 31, 2019 |
| Geographic Location | | Number of Loans | | Carrying Value | | Percentage of Value | | Number of Loans | | Carrying Value | | Percentage of Value |
| East | | 5 |
| | $ | 104,461 |
| | 37 | % | | 4 |
| | $ | 90,047 |
| | 37 | % |
| South | | 5 |
| | 105,385 |
| | 38 | % | | 5 |
| | 103,295 |
| | 43 | % |
| West | | 1 |
| | 10,503 |
| | 4 | % | | 1 |
| | 9,014 |
| | 4 | % |
| Midwest | | 3 |
| | 57,876 |
| | 21 | % | | 2 |
| | 39,722 |
| | 16 | % |
| | 14 |
| | $ | 278,225 |
| | 100 | % | | 12 |
| | $ | 242,078 |
| | 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
As further described in Note 2, weWe 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, 20202021 and December 31, 20192020 based on our internal risk rating policy:
|
| | | | | | | | | | | | |
| | | June 30, 2020 | | December 31, 2019 |
| Risk Rating | | Number of Loans | | Carrying Value | | Number of Loans | | Carrying Value |
| 1 | | — | | $ | — |
| | — | | $ | — |
|
| 2 | | 1 | | 24,547 |
| | 1 | | 24,462 |
|
| 3 | | 7 | | 137,789 |
| | 11 | | 217,616 |
|
| 4 | | 6 | | 115,889 |
| | — | | — |
|
| 5 | | — | | — |
| | — | | — |
|
| | | 14 | | $ | 278,225 |
| | 12 | | $ | 242,078 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2021 | | December 31, 2020 |
| Risk Rating | | Number of Loans | | Carrying Value | | Number of Loans | | Carrying Value |
| 1 | | 0 | | $ | 0 | | | 0 | | $ | 0 | |
| 2 | | 3 | | 67,567 | | | 3 | | 77,553 | |
| 3 | | 6 | | 98,921 | | | 4 | | 76,343 | |
| 4 | | 4 | | 71,209 | | | 7 | | 128,350 | |
| 5 | | 0 | | 0 | | | 0 | | 0 | |
| | 13 | | $ | 237,697 | | | 14 | | $ | 282,246 | |
The weighted average risk rating of our loans by carrying value was 3.53.0 and 2.93.2 as of June 30, 20202021 and December 31, 2019,2020, 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 significantlymost 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
TREMONT MORTGAGE TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
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 a result, atof June 30, 2020,2021, we had 64 loans representing 42%30% of the carrying value of our loan portfolio with a loan risk rating of “4” or “higher risk." These sixrisk", compared to 7 loans were downgraded from a risk ratingrepresenting 45% of "3" or "acceptable risk" during the three months ended Marchcarrying value of our loan portfolio as of December 31, 2020, and we did not downgrade any loans during the three months ended June 30, 2020. We did not have any impaired loans or nonaccrual loans as of June 30, 20202021 or December 31, 2019.
As of August 3, 2020,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.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
Note 5.4. Debt Agreements
The table below is an overview ofsummarizes our debt agreements that provided financing for ouras 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, held for investment:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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, 2020: | | | | | | | | | | | | | | |
| Master repurchase facility | | $ | 213,482 |
| | $ | 201,138 |
| | $ | 200,465 |
| | L + 2.00% | | 1.1 | | $ | 278,484 |
| | $ | 273,860 |
|
| | | | | | | | | | | | | | | |
| December 31, 2019: | | | | | | | | | | | | | | |
| Master repurchase facility | | $ | 213,482 |
| | $ | 165,536 |
| | $ | 164,694 |
| | L + 1.99% | | 1.6 | | $ | 242,899 |
| | $ | 242,763 |
|
| |
(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. |
| |
(2) | See Note 6 for further discussion of our financial assets and liabilities not carried at fair value. |
Under the agreements that govern ourassuming no borrower loan extension options have been exercised. Our Master Repurchase Facility or collectively, as amended,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% and 4.49% forfor the three months ended June 30, 20202021, and 2019,2020, respectively, and 2.97%2.18% and 4.52%2.97% for the six months ended June 30, 2021 and 2020, and 2019, respectively. For the three months endedAt June 30, 2020 and 2019,2021, we recorded interest expensehad approximately $605 of $1,245 and $1,479, respectively, and $2,883 and $2,563 for the six months ended June 30, 2020 and 2019, respectively, in connection with our Master Repurchase Facility.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, 2020, 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 Tremont Realty Advisors LLC, or 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, 2020, we were in compliance with all of the covenants and other terms under our Master Repurchase Agreement and the Guaranty.
From July 2018 until August 2019, we were a party to a term loan facility, in the form of a note payable, with Texas Capital Bank, National Association, or the TCB note payable. Following our repayment of the $31,790 then outstanding principal and accrued interest under the TCB note payable, the TCB note payable terminated in accordance with its terms. We recorded $368 and $736 of interest expense for the three and six months ended June 30, 2019, respectively, in connection with the TCB note payable.
From February 2019 until May 2019, we were a party to a credit agreement with our Manager as lender, or the RMR Credit Agreement. Following our repayment of the $14,220 balance then outstanding under the RMR Credit Agreement, the
TREMONT MORTGAGE TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
The RMR Credit Agreement was terminated. We recorded $39Group LLC, or RMR LLC. As of interest expense for both the three and six months ended June 30, 2019,2021, we were in connectioncompliance with all of the RMR Credit Agreement.
At June 30, 2020, our outstanding advancementscovenants and other terms under our Master Repurchase Facility hadAgreement and the following remaining maturities:Guaranty.
|
| | | | |
| Year | | Principal Payments (1) |
| 2020 | | $ | 29,680 |
|
| 2021 | | 171,458 |
|
| 2022 | | — |
|
| 2023 | | — |
|
| 2024 | | — |
|
| | | $ | 201,138 |
|
| |
(1) | The allocation of our 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 assuming no borrower loan extension options have been exercised. |
Note 6.5. 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.
As of June 30, 2020 and December 31, 2019, theThe carrying values of cash and cash equivalents, restricted cash and accounts payable approximatedapproximate their fair values due to the short term nature of these financial instruments. As of December 31, 2019, theThe outstanding principal balances under our Master Repurchase Facility approximatedapproximate their fair values, as interest wasis based on floating rates based on LIBOR plus a spread, and the spread wasis 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 | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | June 30, 2020 | | December 31, 2019 |
| | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Financial assets | | | | | | | | |
| Loans held for investment | | $ | 278,225 |
| | $ | 273,860 |
| | $ | 242,078 |
| | $ | 242,763 |
|
| Financial liabilities | | | | | | | | |
| Master Repurchase Facility | | $ | 200,465 |
| | $ | 197,102 |
| | $ | 164,694 |
| | $ | 165,536 |
|
There were no transfers of financial assets or liabilities within the fair value hierarchy during the three or six months ended June 30, 2020.2021.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
Note 7.6. Shareholders' Equity
Common Share IssuancesAwards and Repurchases
On January 9, 2020, we purchased an aggregate of 384We have common shares available for issuance under the terms of our common shares, valued at $5.33 per common2017 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 5 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 1 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 5 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 officersTrustee and employeesofficer 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.
On May 13, 2020, in accordance with our Trustee compensation arrangements, we awarded to each of our five Trustees 3,000 of our common shares, valued at $1.92 per common share, the closing price of our common shares on Nasdaq that day.
On June 30, 2020, we purchased 390 of our common shares, valued at $3.08 per common share, the closing price of our common shares on Nasdaq on that day, from a former officer of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.
Distributions
DuringFor the six months ended June 30, 2020,2021, we declared and paid a quarterly distribution to common shareholders as follows:
|
| | | | | | | | | | |
| Record Date | | Payment Date | | Distribution Per Share | | Total Distribution |
| January 27, 2020 | | February 20, 2020 | | $ | 0.22 |
| | $ | 1,813 |
|
| April 10, 2020 | | May 21, 2020 | | 0.01 |
| | 82 |
|
| | | | | $ | 0.23 |
| | $ | 1,895 |
|
| | | | | | | | | | | | | | | | | | | | |
| 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 16, 2020,15, 2021, we declared a quarterly distribution of $0.01$0.10 per common share, for the second quarter of 2020, or approximately $83,$831 in aggregate, to shareholders of record onas of July 27, 2020.26, 2021. We expect to pay this distribution on or about August 20, 2020.19, 2021.
Note 8.7. Management Agreement with our Manager
We have 0 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 did not recognize anyrecognized base management orfees of $341 and 0 management incentive fees for the three ormonths ended June 30, 2021, and base management fees of $682 and management incentive fees of $620 for the six months ended June 30, 2020 or 2019.2021. Our Manager haspreviously waived any base management or management incentive fees otherwise due and payable by us under our management agreement for and through the periods endingperiod 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 $267$643 of base management fees for the three months ended June 30, 2020 and 2019, respectively, $643 and $490 of base management fees for the six months ended June 30, 2020 and 2019, respectively, and $36 of incentive fees for the three and six months ended June 30, 2020. NaN2020 and $36, respectively, of management incentive fees would have been paid or payable for either ofboth the three orand six months ended June 30, 2019.2020.
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 and its affiliates.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 $280$241 and $409$280 payable to our Manager for the three months ended June 30, 20202021 and 2019,2020, respectively, and $638$417 and $811$638 for the six months ended June 30, 20202021 and 2019,2020, 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 9.8. 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 whichthat 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, also servesand 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 and othercompanies. Other officers of RMR LLC, including Mr. BlackmanJordan and certain of our other officers and officers of our Manager, serve as managing trustees, managing directors or officers of certain of these companies. In addition, officers of our Manager, RMR LLC and RMR Inc. serve as our officers and officers of other companies to which RMR LLC or its subsidiaries provide management services.
Our Manager, Tremont Realty Advisors LLC. We have a management agreement with our Manager to provide management services to us. See Note 87 for further information regarding our management agreement with our Manager.
Our Manager is our largest shareholder and, as of June 30, 2020,2021, owned 1,600,100 of our common shares, or approximately 19.4%19.2% of our outstanding common shares.
Until May 23, 2019,RMR Mortgage Trust. As described further in Note 1, on April 26, 2021, we were a party toand RMRM entered into the RMR CreditMerger 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.Report and to our Current Report on Form 8-K dated April 26, 2021.
Note 10.9. Income Taxes
We have elected to be taxed as a 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 11.10. Weighted Average Common Shares
We calculate basic EPS by dividing net income by the weighted average number of common shares outstanding during the relevant period. We calculate diluted EPS using the more dilutive of the two class method or the treasury stock method. Unvested share awards and other potentially dilutive common share issuances, and the related impact on earnings, are considered when calculating diluted earningsnet 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 | | | 0 | | | 38 | | | 0 | |
| Weighted average common shares for diluted net income per share | | 8,266 | | | 8,177 | | | 8,253 | | | 8,173 | |
(1) For the three months ended June 30, 2020 and 2019, 105,126 and 12,351 unvested common shares, respectively, and for the six months ended June 30, 2020, 105 and 2019, 63,739 and 3,05164 unvested common shares, respectively, were excluded fromnot included in the calculation of diluted earnings per share because to do so would have been antidilutive.
Note 12.11. Commitments and Contingencies
Unfunded Loan Commitments
As of June 30, 2020,2021, we had unfunded loan commitments of $17,566$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 1.50.8 years as of June 30, 2020.2021. See Note 43 for further information related to our loans held for investment.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
Secured Borrowings
As of June 30, 2020,2021, we had an aggregate of $201,138$156,167 in principal amount outstanding under our Master Repurchase Facility with a weighted average life to maturity of 1.10.6 years. See Note 54 for further information regarding our secured debt agreements.
Note 13. Subsequent Events12. Legal Proceedings and Claims
InAs of July 2020,26, 2021, 3 lawsuits have been filed by purported shareholders of ours in connection with the borrowerproposed 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 our loan related to a property located in Coppell, TX sold a parcel of land that was a partSection 14(a) and Section 20(a) of the property securingSecurities Exchange Act of 1934, as amended, or the loan.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 borrower used $2,089complaints 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 sale proceeds to repay partBishins 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 outstanding balance underExchange Act and an order directing the loandefendants 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 allowedhave violated any laws or breached any duties to our shareholders and believe the borrower to useclaims asserted in the remaining $100complaints 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 whole loans secured by middle market and transitional CRE. We define middle market CRE as commercial properties that have values up to $75,000$100,000 and transitional CRE as commercial properties subject to redevelopment or repositioning activities that are expected to increase the value of the properties. TheseWe classify our assets are classified 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 Securities and Exchange Commission, or 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
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, the United States declared a national emergency concerning this pandemic, and several states and municipalities have declared public health emergencies. 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 severely negatively impactedhad a significant impact on the global economy, including the U.S. economy. As a result, most market observers believe the global economy is currently in the midst of a recession. States and municipalities across the United States have been allowing certain businesses to re-open and easing certain restrictions they had previously implemented in response to the COVID-19 pandemic, often in stages that are phased in over time. Recently, economic data have indicated that the U.S. economy has improved since the lowest periods experienced in March and April 2020. However, certain areasMany of the United States have experienced increased numbers of COVID-19 infections following the re-openings of their economies and easing of restrictions and, in some cases, certain states havethat had been imposed or re-imposed closings of certain business activities and other restrictions in response. It is unclear whether the increases in the number of COVID-19 infections will continue and/or amplify or whether any “second wave” of COVID-19 infection outbreaks will occur in the United States or elsewhereduring the pandemic have been lifted and if so, whatcommercial 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 of that would be on human health and safety, the economy or our business.
The current economic conditions are adversely impacting some of our borrowers’ tenants, which in turn, has negatively impacted our borrowers’ businesses and liquidity and their ability to pay interest owed under our loans. See elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations for further information about the impact these conditions have had on our borrowers, our loans and Master Repurchase Agreement, as well as on the broader market conditions, including for the CRE lending industry, and certain actions we have taken in response.
We and our Manager are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, including:
our borrowers and their ability to withstand the current economic conditions and continue to fund their debt service obligations owed and due to us,
our operations, liquidity and capital needs and resources,
conducting financial modeling and sensitivity analysis,
actively communicating with our borrowers, Citibank and other key constituents and stakeholders in order to help assess market conditions, opportunities, best practices and mitigate risks and potential adverse impacts, and
monitoring, with the assistance of counsel and other specialists, possible government relief funding sources and other programs that may be available to us or our borrowers to enable us and them to operate through the current economic conditions and enhance their ability to fund their debt service obligations owed and due to us.
In order to preserve our near term capital due to the economic downturn andThere remains uncertainty as to future economic conditions as a result of the COVID-19 pandemic, beginning with the first quarter of 2020, we reduced our quarterly distribution rate payable to our common shareholders to $0.01 per share and on July 16, 2020, declared a quarterly distribution payable to our common shareholders of $0.01 per share for the second quarter of 2020. In addition, our Manager extended its waiver of the management and incentive fees under our management agreement, which waiver was set to expire June 30, 2020, for and through the periods ending December 31, 2020.
We believe that some of our impacted borrowers or their tenants have benefited, and/or may in the future benefit, from provisions of the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, passed by Congress in March 2020, or other Federal or state assistance allowing them to continue or resume business activity.
We do not have any employees and the personnel and various services we require to operate our business are provided to us by our Manager or by RMR LLC, pursuant to our management agreement with our Manager and our Manager’s shared services agreement with RMR LLC. RMR LLC has implemented enhanced cleaning protocols and social distancing guidelines at its corporate headquarters and its regional offices, as well as business continuity plans to ensure that employees of our Manager and of RMR LLC remain safe and able to support us and RMR LLC’s other managed companies, including providing appropriate information technology such as notebook computers, smart phones, computer applications, information technology security applications and technology support. RMR LLC has also taken measures to reduce the possibility of persons gathering in groups and in close proximity to each other, for the purpose of mitigating the potential for spreading of COVID-19 infections.
There are extensive uncertainties surrounding the COVID-19 pandemic and its aftermath. These uncertainties include among others:
theultimate duration and severity of the negative economic impact;
the strength and sustainability of any economic recovery;
the timing and process for how the federal, state and local governments and other market participants may oversee and conduct the return of economic activity when the COVID-19 pandemic, abates, such as what continuing restrictions and protective measuresincluding risks that may remain in place, be re-imposedarise from mutations or be added and what restrictions and protective measures may be liftedrelated strains of the virus, the ability to successfully administer vaccinations to a sufficient number of persons or reduced in orderattain immunity to foster a return of increased economic activity in the United States; and
whether, following a recommencing of more normal levels of economic activities, the United Statesvirus by natural or other countries experience any “second wave” of COVID-19 infection outbreaks and, if so, the responses of governments, businessesmeans to achieve herd immunity, and the general publicimpact on the U.S. economy that may result from the inability of other countries to those events.
administer vaccinations to their citizens or their citizens’ ability to otherwise achieve immunity to the virus. As a result, of these uncertainties, 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 and its aftermath on us and our business, and the related actions our Manager has taken in response to the pandemic, see elsewhere"COVID-19 Pandemic" in this Management’s DiscussionPart I, Item 1 and Analysis of Financial Condition and Results of Operations and"Risk Factors" in Part II,I, Item 1A Risk Factors, in this Quarterly Report on Form 10-Q.of our Annual Report.
Book Value per Common Share
The table below calculates our book value per common share (amounts in thousands, except per share data):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 | |
|
| | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
| Shareholders' equity | $ | 88,465 |
| | $ | 86,221 |
|
| Total outstanding common shares | 8,254 |
| | 8,240 |
|
| Book value per common share | $ | 10.72 |
| | $ | 10.46 |
|
Our Loan Portfolio
The table below detailsprovides overall statistics for our loan portfolio as of June 30, 20202021 and December 31, 2019:2020:
| | | | | | | | | | | | | | |
| | 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.
|
| | | | | | | | |
| | | Balance at June 30, 2020 | | Balance at December 31, 2019 |
| Number of loans | | 14 |
| | 12 |
|
| Total loan commitments | | $ | 296,050 |
| | $ | 260,167 |
|
Unfunded loan commitments (1) | | $ | 17,566 |
| | $ | 17,268 |
|
| Principal balance | | $ | 278,484 |
| | $ | 242,899 |
|
| Unamortized net deferred origination fees | | $ | (259 | ) | | $ | (821 | ) |
| Carrying value | | $ | 278,225 |
| | $ | 242,078 |
|
| Weighted average coupon rate | | 5.70 | % | | 5.76 | % |
Weighted average all in yield (2) | | 6.39 | % | | 6.41 | % |
Weighted average maximum maturity (years) (3) | | 3.1 |
| | 3.6 |
|
Weighted average LTV (4) | | 68 | % | | 70 | % |
| |
(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 at closing. |
Loan Portfolio Details
The table below provides details of our loan portfolioinvestments as of June 30, 2020:2021: | | | Location | | Property Type | | Origination Date | | Committed Principal Amount | | Principal
Balance | | Coupon Rate | | All in Yield (1) | | Maximum Maturity(2)
(date) | | LTV(3) | | Risk Rating | 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 whole loans | | | | | | |
| First mortgage loans | | First mortgage loans | | | | | | | | | | | | | | | | | |
| Houston, TX | | 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 | | $ | 22,915 |
| | $ | 22,204 |
| | L + 3.50% | | L + 4.25% | | 02/05/2021 | | 73% | | 4 | 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 | | 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 | | 28,000 |
| | 27,695 |
| | L + 3.50% | | L + 4.37% | | 11/10/2022 | | 56% | | 4 | 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(4) | | Retail | | 11/30/2018 | | 11,853 |
| | 10,441 |
| | L + 4.25% | | L + 5.72% | | 11/30/2022 | | 48% | | 4 | |
| Dublin, OH | | Office | | 02/18/2020 | | 22,820 |
| | 17,534 |
| | L + 3.75% | | L + 5.08% | | 02/18/2023 | | 33% | | 3 | |
| Metairie, LA | | Office | | 04/11/2018 | | 18,102 |
| | 17,115 |
| | L + 5.00% | | L + 5.65% | | 04/11/2023 | | 79% | | 4 | |
| Barrington, NJ | | Industrial | | 05/06/2019 | | 37,600 |
| | 34,962 |
| | L + 3.50% | | L + 4.05% | | 05/06/2023 | | 79% | | 3 | |
| Houston, TX | | Office | | 06/26/2018 | | 15,200 |
| | 14,199 |
| | L + 4.00% | | L + 4.60% | | 06/26/2023 | | 69% | | 4 | |
| Paradise Valley, AZ | | 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 |
| | 27,611 |
| | L + 3.25% | | L + 3.75% | | 12/19/2023 | | 72% | | 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% | | 12/21/2023 | | 62% | | 4 | Atlanta, GA | | Hotel | | 12/21/2018 | | 24,000 | | | 23,904 | | | | L + 3.25% | | L + 3.72% | | 12/21/2021 | | 12/21/2023 | | 62 | % | | 4 |
| Rochester, NY | | Multifamily | | 01/22/2019 | | 24,550 |
| | 24,550 |
| | L + 3.25% | | L + 3.86% | | 01/22/2024 | | 74% | | 2 | |
| Dublin, OH | | 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% | | 06/14/2024 | | 77% | | 3 | 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 |
| | 14,178 |
| | L + 3.75% | | L + 4.47% | | 12/19/2024 | | 75% | | 3 | 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 |
| | 17,037 |
| | L + 3.25% | | L + 3.89% | | 12/20/2024 | | 72% | | 3 | 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% | | 01/24/2025 | | 67% | | 3 | 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 | | 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 | Total/weighted average | | $ | 296,050 |
| | $ | 278,484 |
| | L + 3.60% | | L + 4.29% | |
| | 68% | | 3.5 | 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 at closing. |
| |
(4) | The borrower under this loan exercised its option to reduce the unfunded loan commitment allowance by $937, pursuant to the terms of the loan agreement. |
(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, 2020,2021, we had $296,050$246,029 in aggregate loan commitments, consisting of a diverse portfolio, geographically and by property type, of 1413 first mortgage whole 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 significantlymost 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 a result, atof June 30, 2020,2021, we had sixfour loans representing 42%30% of the carrying value of our loan portfolio towith a loan risk rating of “4” or “higher risk”. These sixOne of these loans werewas downgraded from a risk rating of "3" or "acceptable risk" during the three months ended March 31, 2020 and we did not downgrade any loans during the threesix months ended June 30, 2020.2021. 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 planplans for the underlying collateral, among other things.
As of August 3, 2020,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.
In July 2020, the borrower under our loan related to a property located in Coppell, TX sold a parcel of land that was a part of the property securing the loan. The borrower used $2,089 of the sale proceeds to repay part of the outstanding balance under the loan and we allowed the borrower to use the remaining $100 of sale proceeds to increase the reserve for future debt service obligation payments owed to us under the loan. We used $1,358 of these repayment proceeds to repay a part of the outstanding balance under our Master Repurchase Facility.
We did not have any impaired loans, non-accrual loans or loans in default as of June 30, 2020;2021; thus, we did not record a reserve for loan loss as of that date. For further information regarding our risk rating policy, see Notes 2 and 4 to the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. However, depending on the duration and severity of the COVID-19 pandemic, and the current economic downturn, 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 the risk factors identified in Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q and the risk factors identified in Part I, Item IA, "Risk Factors" of 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, 20202021 and December 31, 2019:2020:
|
| | | | | | | | | | | | | | | | | | |
| | | Initial Maturity Date | | Principal Balance | | Unused Capacity | | Maximum Facility Size | | Collateral Principal Balance |
| June 30, 2020: | | | | | | | | | | |
| Master repurchase facility | | 11/06/2021 | | $ | 201,138 |
| | $ | 12,344 |
| | $ | 213,482 |
| | $ | 278,484 |
|
| December 31, 2019: | | | | | | | | | | |
| Master repurchase facility | | 11/06/2021 | | $ | 165,536 |
| | $ | 47,946 |
| | $ | 213,482 |
| | $ | 242,899 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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,
2020:2021: |
| | | | |
| | | Total |
| Balance at March 31, 2020 | | $ | 195,566 |
|
| Advancements | | 4,796 |
|
| Deferred Fees | | (19 | ) |
| Amortization of Deferred Fees | | 122 |
|
| Balance at June 30, 2020 | | $ | 200,465 |
|
| | | | | | | | | | | | |
| | | | | | 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, 2020:2021: | | | | | | | | | | | | |
| | | | |
| | Total |
Balance at December 31, 20192020 | | 164,694 |
| | | $ | 200,233 | |
| Advancements | | 35,602 |
| | | 17,112 | |
Deferred FeesRepayments | | (72 | ) | | | (61,997) | |
| | | | | | |
Amortization of Deferred Feesdeferred fees | | 241 |
| | | 214 | |
Balance at June 30, 20202021 | | $ | 200,465 |
| | $ | 155,562 | |
As of June 30, 2020,2021, 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 54 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, 2020,2021, we had a $201,138$156,167 aggregate outstanding principal balance under our Master Repurchase Agreement. In light of the impact of the COVID-19 pandemic, we continue to actively engage with Citibank regarding our liquidity position and the status of the loans in our portfolio that are financed 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 August 3, 2020,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 collateralassets has declined as of the end of that term, or if we default on our obligations under the applicable agreement governing any such arrangement.
We have fully committed the capital available to us. 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, 20202021 Compared to Three Months Ended June 30, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | %) | |
|
| | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, |
| | | 2020 | | 2019 | | Change | | % Change |
| INCOME FROM INVESTMENTS: | |
| |
| | | | |
| Interest income from investments | | $ | 4,496 |
| | $ | 3,913 |
| | $ | 583 |
| | 15 | % |
| Less: interest and related expenses | | (1,368 | ) | | (2,031 | ) | | 663 |
| | (33 | %) |
| Income from investments, net | | 3,128 |
| | 1,882 |
| | 1,246 |
| | 66 | % |
| | | | | | | | | |
| OTHER EXPENSES: | | | | | | | | |
| General and administrative expenses | | 524 |
| | 618 |
| | (94 | ) | | (15 | %) |
| Reimbursement of shared services expenses | | 242 |
| | 370 |
| | (128 | ) | | (35 | %) |
Total expenses (1) | | 766 |
| | 988 |
| | (222 | ) | | (22 | %) |
| |
|
| |
| |
| |
|
|
| Net income | | $ | 2,362 |
| | $ | 894 |
| | $ | 1,468 |
| | 164 | % |
| | | | | | | | | |
| Weighted average common shares outstanding - basic and diluted | | 8,177 |
| | 5,401 |
| | 2,776 |
| | 51 | % |
| | | | | | | | | |
| Net income per common share - basic and diluted | | $ | 0.29 |
| | $ | 0.16 |
| | $ | 0.13 |
| | 81 | % |
| |
(1) | Our Manager has waived any base management or incentive fees otherwise due and payable by us under our management agreement through the period ending December 31, 2020. If our Manager had not waived these base management and incentive fees, we would have recognized $323 and $267 of base management fees for the three months ended June 30, 2020 and 2019, respectively, and $36 of incentive fees for the three months ended June 30, 2020. No incentive fees would have been paid or payable for the three months ended June 30, 2019. |
Interest income from investments. The increasedecrease in interest income from investments forwas primarily the 2020 period reflects interest earned onresult of the 14 loans included in ourrepayment of two loan portfolio atinvestments during the three months ended June 30, 2020, as compared to 12 loans included in our loan portfolio at June 30, 2019,2021, partially offset by a decline in average LIBOR rates for the 2020 period as compared toorigination of one loan investment during the 2019 period.three months ended June 30, 2021.
Interest and related expenses. The decrease in interest and related expenses is awas primarily the result of a decline in average LIBOR rates forsince June 30, 2020 and the 2020 period as compared to the 2019 period, partially offset by higherrepayment of outstanding advancementsbalances under our Master Repurchase Facility.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. GeneralThe increase in general and administrative expenses was primarily include legaldue to increases in professional fees and audit fees, insurance dues and subscriptions, Trustee fees, internal audit costs, share based compensation expense and professional fees. General and administrative expenses decreased for the 2020 period as compared to the 2019 period as a result of decreases in share based compensation.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. ReimbursementThe decrease in reimbursement of shared services expenses forwas primarily the 2020 period declinedresult of our Manager's increased cost effectiveness resulting from the increased sharing of services provided by RMR LLC as compareda 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 2019 period dueMerger 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 our reduced usagestate income taxes.
Net income. The increasedecrease in net income for the 2020 period as compared to the 2019 period iswas due to the changes noted above.
Six Months Ended June 30, 20202021 Compared to Six Months Ended June 30, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | %) |
|
| | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, |
| | | 2020 | | 2019 | | Change | | % Change |
| INCOME FROM INVESTMENTS: | | | | | | | | |
| Interest income from investments | | $ | 8,780 |
| | $ | 6,913 |
| | $ | 1,867 |
| | 27 | % |
| Less: interest and related expenses | | (3,125 | ) | | (3,580 | ) | | 455 |
| | (13 | %) |
| Income from investments, net | | 5,655 |
| | 3,333 |
| | 2,322 |
| | 70 | % |
| | | | | | | | | |
| OTHER EXPENSES: | | | | | | | | |
| General and administrative expenses | | 1,064 |
| | 1,121 |
| | (57 | ) | | (5 | %) |
| Reimbursement of shared services expenses | | 563 |
| | 740 |
| | (177 | ) | | (24 | %) |
Total expenses (1) | | 1,627 |
| | 1,861 |
| | (234 | ) | | (13 | %) |
| | | | | | | | |
| Net income | | $ | 4,028 |
| | $ | 1,472 |
| | $ | 2,556 |
| | 174 | % |
| | | | | | | | | |
| Weighted average common shares outstanding - basic and diluted | | 8,173 |
| | 4,275 |
| | 3,898 |
| | 91 | % |
| | | | | | | | | |
| Net income per common share - basic and diluted | | $ | 0.49 |
| | $ | 0.34 |
| | $ | 0.15 |
| | 44 | % |
| |
(1) | Our Manager has waived any base management or incentive fees otherwise due and payable by us under our management agreement through the period ending December 31, 2020. If our Manager had not waived these base management and incentive fees, we would have recognized $643 and $490 of base management fees for the six months ended June 30, 2020 and 2019, respectively, and $36 of incentive fees for
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. No incentive fees would have been paid or payable for the six months ended June 30, 2019. |
Interest income from investments. The increase in interest income from investments for the six months ended June 30, 2020 reflects interest earned on the 14 loans included in our loan portfolio at June 30, 2020, as compared to 12 loans included in our loan portfolio at June 30, 2019, partially offset by a decline in average LIBOR rates for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.
Interest and related expenses. The decrease in interest and related expenses is awas primarily the result of a decline in average LIBOR ratessince 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 as compared to2020.
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, 2019 partially offset by higher outstanding advancements under our Master Repurchase Facility.2020.
General and administrative expenses. GeneralThe increase in general and administrative expenses decreasedwas 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, 2020 as compared to the six months ended June 30, 2019 as a result of decreases in share based compensation.
Reimbursement of shared services expenses. Reimbursement of shared services expenses for the six months ended June 30, 2020 declined as compared to the six months ended June 30, 2019 due to2021 and our reduced usage of shared services resulting fromdue to our loan portfolio being fully invested.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 increasedecrease in net income for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 iswas due to the changes noted above.
Non-GAAP Financial Measures
We present CoreDistributable Earnings and Adjusted Distributable Earnings, which isare considered a “non-GAAP financial measure”measures” within the meaning of the applicable SEC rules. CoreDistributable Earnings doesand Adjusted Distributable Earnings do not represent net income or cash generated from operating activities and should not be considered as an alternativealternatives to net income determined in accordance with GAAP or an indicationindications of our cash flows from operations determined in accordance with GAAP, a measuremeasures of our liquidity or operating performance or an indicationindications of funds available for our cash needs. In addition, our methodologymethodologies for calculating CoreDistributable 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 CoreDistributable Earnings and Adjusted Distributable Earnings may not be comparable to the coredistributable 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 Coreone 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 provideshas 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. This measure helpsThese 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, CoreDistributable Earnings is used in determining the amount of base management and management incentive fees payable by us to our Manager under our management agreement.
CoreDistributable Earnings and Adjusted Distributable Earnings
We calculate CoreDistributable 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);if any; (b) depreciation and amortization, (if any);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);, if any; and (e) one-time events pursuant to changes in GAAP and certain non-cash items, (if any).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, |
| | | 2020 | | 2019 | | 2020 | | 2019 |
| Reconciliation of Net Income to Core Earnings: | | | | | | | | |
| Net income | | $ | 2,362 |
| | $ | 894 |
| | $ | 4,028 |
| | $ | 1,472 |
|
| Non-cash equity compensation expense | | 71 |
| | 185 |
| | 113 |
| | 220 |
|
| Core earnings | | $ | 2,433 |
| | $ | 1,079 |
| | $ | 4,141 |
| | $ | 1,692 |
|
| | | | | | | | | |
| Weighted average common shares outstanding - basic and diluted | | 8,177 |
| | 5,401 |
| | 8,173 |
| | 4,275 |
|
| | | | | | | | | |
| Core earnings per common share - basic and diluted | | $ | 0.30 |
| | $ | 0.20 |
| | $ | 0.51 |
| | $ | 0.40 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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. For further information regarding the risks associated with our loan portfolio, see the risk factors identified in Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q and the risk factors identified in Part I, Item IA, "Risk Factors" of our Annual Report.
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.
For further information regarding the risks associated with our loan portfolio, see the risk factors identified in Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q and the risk factors identified in Part I, Item IA, "Risk Factors" of our Annual Report.
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 in the future.capital.
Market ConditionsConditions.. Prior to The outbreak of the COVID-19 pandemic CRE transaction volumes were increasing, driving demand for CRE loans. In 2019, alternative lenders, like us, had gained considerable market sharein 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 loan pricing had begungatherings and limitations on building occupancies implemented to stabilize. The COVID-19 pandemic hasstop or slow the spread of the virus had a severesubstantial negative impact on the CRE debtmarket. 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 dueresulted 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 the economy and the uncertaintyoverall CRE
transaction volume, and the availabilityfinancial burdens resulting from margin calls imposed on lenders, as a result of liquidity provided by traditional lending sources such as banksincreased borrowing costs and commercial mortgage backed securities, or CMBS. 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 reduced supplyCRE debt markets began to rebound in the third quarter of liquidity has caused an increase in2020 and are continuing to stabilize. CMBS credit spreads on recentlyhave declined such that newly issued 10-year,AAA rated, investment grade CMBS, which not only increased the pricingbonds for investments fundedconservatively underwritten loan pools with debt but also increased pricing on lending sources, such ashigh quality collateral are trading at credit facilities, usedspreads less than those seen prior to leverage such investments. Since late April 2020, market volatility has declined significantly, and CMBS loan spreads have somewhat stabilized, but are still trending substantially wider than before the COVID-19 pandemic. In addition, there have been signs of increased activity in the CMBS securitization market as lenders have begun to aggregate new loans for securitization. However, the continued low levelissuance of CRE sale transactionscollateralized loan obligations, or CLOs (financial instruments secured by a pool of loans and the curtailing of economic activitiesused by lenders as a resultsource of certain states imposing or reinstating restrictions on economic activities in responsefunding), has increased while CLO credit spreads have declined, providing additional liquidity to increased COVID-19 infections poses additional challengesalternative lenders, like us.
While CRE transaction volume has improved recently, it has not returned to the underwriting process, which may continueaverage levels experienced prior to causethe 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 refrain from providingfund new loans in the short term.
Many alternative lenders appear to currently be unable or unwilling to lend due to the decline in the economy and the uncertainty of future economic conditions, as well as additional financial burdens related to margin calls by repurchase and credit facility lenders resulting from decreased collateral value, increased borrowing costs or the loss of repurchase or credit facilities altogether.loans. We believe that most alternativethis increased competition amongst lenders, finance propertiesalong with respect to which the borrowers have value enhancing business plans, which business plans can be challenging to evaluatesignificant declines in the current economic environment.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, with significant exposure to retail and hospitality collateral have seen COVID-19 pandemic related travel and stay-at-home restrictions significantly negatively impact collateral performance and are in active dialogue with borrowers that are most significantly negatively impacted by the economic downturn. Alternative lenders that use mark-to-market repurchase facilities have been forced to cover margin calls due to volatility in pricing, regardless of the credit quality or performance of the loan collateral. Those alternative lenders that are not subject to these additional financial burdens or disproportionately negative impacts are cautiously evaluating new loan opportunities, but a lack of CRE sales volume has resulted in limited financing opportunities for those lenders that are able to deploy capital and increased competition for high quality loan opportunities.
We believe that, compared to 2008 through 2010, the CRE debt markets are better positioned to weather an economic downturn. Lenders with high exposure to hospitality and retail collateral will need to continue to closely monitor loan performance, but overall, lenders' disciplined underwriting standards during the period preceding the outbreak of the COVID-19 pandemic should help mitigate the impact. We believe that the increased government regulations imposed on banks and insurers in response to the last financial crisis generally have them better positioned for the current economic downturn. Furthermore, increased government regulation was a catalyst for the growth of the alternative lender segment of the CRE debt markets. Alternative lenders filled the void left by banks tolike us, can provide flexible, shorter term financing to borrowers securedthat may not be seeking longer term financing options because of economic uncertainty caused by properties with value enhancingthe COVID-19 pandemic. However, despite the improvement of the securitization markets and opportunistic business plans.
Despite the volatility and recent liquidity challenges impacting the CRE debt markets,increase in lending activity, we believe that the alternative lending market is well positioned for future growth, subject to the duration and severity of the current economic downturn. challenges remain.
The hospitality and retail sectors are among those that have been significantlymost negatively impacted by the economic downturn related to the COVID-19 pandemic. However, with reduced restrictions and loans secured by hospitalityincreased vaccination rates in the United States, retail sales and retail collateral are expectedleisure travel have experienced improvement during the second quarter of 2021, while business travel remains at levels significantly lower than prior to continue to be challenges for lenders with significant exposure to such collateral.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 dodoes not substantially rebound, we believe that this uncertainty will continue to burden these sectors. Insectors 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 borrowing costs are likelydue to increasethe stability of cash flows and the liquidity available from government sponsored enterprises, such as banksFannie 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, beginlike us, to increase lending activityexpand their loan portfolios to include certain asset types within these asset classes, such as data centers, manufactured housing, cold storage and determine howself-storage, to quantifyachieve favorable yields on high quality properties that have been and price risk inmay continue to be less susceptible to the midstimpact of an economic recession. Wethe COVID-19 pandemic.
The longer-term impact of the COVID-19 pandemic is still uncertain. However, we believe that onceas the U.S. economy meaningfully improvescontinues 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) couponsthe coupon rates on our variable rate investments, if any, to reset, perhaps on a delayed basis, to higher interest rates; and (d) refinancing by our borrowersit to become more difficult and costly for our borrowers, which may negatively impacting refinancing as a source of repayment forimpact 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 2021.accordance with the terms of our Master Repurchase Agreement. We do not know what standard, if any, will replace LIBOR if it is phased out. Wealso 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. In addition, we currently expect that the interest rates we pay under our Master Repurchase Facility and any other then existing debt financing arrangements would be similarly revised as provided under the agreement or amended as necessary for that same purpose.
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. At this time,Excepting the pending Merger, we are focused on managing our current loan portfolio. We believe our growth is limited by our ability to accessobtain additional cost-effective capital.
LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands, except per share amounts)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 willmay continue to be further challenged in accessing capital.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 II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q and 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, 2020,2021, the maximum amount available for advancement under our Master Repurchase Facility was $213,482, of which we had a $201,138$156,167 aggregate outstanding principal balance, and the weighted average interest rate of advancements under our Master Repurchase Facility was 2.97%2.18% for the six months ended June 30, 2020.2021. Our Master Repurchase Facility is scheduled to expire on November 6, 2021.2022. For further information regarding our Master Repurchase Facility, see Note 54 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, | | Six Months Ended June 30, |
| | | 2020 | | 2019 | | 2021 | | 2020 |
| Cash, cash equivalents and restricted cash at beginning of period | | $ | 8,875 |
| | $ | 27,335 |
| Cash, cash equivalents and restricted cash at beginning of period | | $ | 10,521 | | | $ | 8,875 | |
| Net cash provided by (used in): | | | | | Net cash provided by (used in): | |
| Operating activities | | 2,931 |
| | 805 |
| Operating activities | | 2,727 | | | 2,931 | |
| Investing activities | | (34,805 | ) | | (122,431 | ) | Investing activities | | 45,288 | | | (34,805) | |
| Financing activities | | 33,632 |
| | 105,758 |
| Financing activities | | (50,168) | | | 33,632 | |
| Cash, cash equivalents and restricted cash at end of period | | $ | 10,633 |
| | $ | 11,467 |
| Cash, cash equivalents and restricted cash at end of period | | $ | 8,368 | | | $ | 10,633 | |
Cash ProvidedThe decrease in cash provided by Operating Activities
Duringoperating 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, netpartially offset by favorable changes in working capital. The increase in cash provided by operatinginvesting activities of $2,931 was primarily due to the repayment of two loan investments, a decrease in loan origination activity and additional fundings on our net income for the period and favorable changes in working capital from amounts due to our Manager accrued but not yet paid, partially offset by unfavorable changes in working capital primarily due to interest income accrued and not yet received and expenses paid in the period but accrued in previous periods.
Duringexisting loan investments during the six months ended June 30, 2019, net cash provided by operating activities of $805 was primarily due2021 compared to our net income for the period, partially offset by unfavorable changes in working capital primarily due to interest income accrued and not yet received.
Cash Used in Investing Activities
During the six months ended June 30, 2020, net2020. The increase in cash used in investingfinancing activities consistedwas primarily due to the repayment of $25,738outstanding balances under our Master Repurchase Facility and the payment of loan originations, net of deferred fees, and $9,067 of additional fundings ona one-time cash distribution to our loans held for investment.
Duringcommon shareholders to satisfy our 2020 REIT distribution requirements during the six months ended June 30, 2019, net cash used in investing activities consisted of $119,062 of loan originations, net of deferred fees, and $3,369 of additional fundings on our loans held for investment.2021.
Cash Provided by Financing Activities
During the six months ended June 30, 2020, our cash provided by financing activities primarily consisted of $35,602 of advancements under our Master Repurchase Facility, partially offset by distributions paid to our shareholders.
During the six months ended June 30, 2019, our cash flows provided by financing activities consisted of $92,983 of advancements under our Master Repurchase Facility, $14,220 of borrowings under the RMR Credit Agreement and $26,074 of net proceeds from the issuance and sale of our common shares in an underwritten public offering, or the Offering, partially offset by distributions paid to our shareholders. We used the Offering proceeds to repay the $14,220 balance then outstanding under the RMR Credit Agreement and to reduce borrowings under our Master Repurchase Facility by approximately $11,900.
As of June 30, 2020, we have fully committed the capital available to us. 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, 2020,2021, we paid quarterly distributions to our common shareholders aggregating $1,895,$5,232, or $0.23$0.63 per common share, using cash on hand. For further information regarding distributions, see Note 76 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
In order to preserve our near term capital due to the economic downturn and uncertainty as to future economic conditions as a result of the COVID-19 pandemic, beginning with the first quarter of 2020,On July 15, 2021, we reduced our quarterly distribution rate payable to our common shareholders to $0.01 per share and on July 16, 2020, declared a quarterly distribution for the second quarter of 2021 payable to our common shareholders of $0.01record as of July 26, 2021 of $0.10 per common share, for the second quarteror approximately $831 in aggregate. We expect to pay this distribution on or about August 19, 2021.
Our Board of Trustees will continue to monitor our financial performance and economic outlook as the year progresses to determine a prudent level for any subsequent quarterly distributions for 2020 or to declare and pay a distribution required to maintain our qualification for taxation as a REIT. We currently expect that we will need to make an increased distribution in the future to maintain our qualification for taxation as a REIT for 2020. However, any future distributions are subject to the approval of our Board of Trustees.
Contractual Obligations and Commitments
Our contractual obligations and commitments as of June 30, 20202021 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 | | | $ | — | | | $ | — | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Payment Due by Period |
| | | Total | | Less than 1 Year | | 1 - 3 Years | | 3 - 5 Years | | More than 5 years |
Unfunded loan commitments (1) | | $ | 17,566 |
| | $ | 3,415 |
| | $ | 14,151 |
| | $ | — |
| | $ | — |
|
Principal payments on master repurchase facility (2) | | 201,138 |
| | 29,680 |
| | 171,458 |
| | — |
| | — |
|
Interest payments (3) | | 5,142 |
| | 3,864 |
| | 1,278 |
| | — |
| | — |
|
| | | $ | 223,846 |
| | $ | 36,959 |
| | $ | 186,887 |
| | $ | — |
| | $ | — |
|
| |
(1) | The allocation of our unfunded loan commitments is based on the current loan maturity date to which the commitments relate. |
| |
(2) | The allocation of outstanding advancements under our Master Repurchase Agreement is based on the current maturity date of each loan investment with respect to which the individual borrowing relates. |
| |
(3) | Projected interest expense is attributable to only our debt service obligations at existing rates as of June 30, 2020 and is not intended to estimate future interest costs which may result from debt prepayments, additional borrowings, new debt issuances or changes in interest rates. |
(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, 2020,2021, 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, 20202021 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, 2020,2021, we had a $201,138$156,167 aggregate outstanding principal balance under our Master Repurchase Facility. In light of the impact of the COVID-19 pandemic, we continue to actively engage with Citibank regarding our liquidity position and the status of the loans in our portfolio that are financed 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, 2020,2021, 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.
Related Person Transactions
We have relationships and historical and continuing transactions with our Manager, RMR LLC, RMR Inc. and others related to them. For example:example, as noted earlier in this Quarterly Report on Form 10-Q, we entered into the Merger Agreement with RMRM pursuant to which we have no employeesagreed, on the terms and subject to the conditions set forth therein, to consummate the Merger and the personnel and various services we requireother Transactions, subject to operate our business are provided to us by our Manager pursuant to our management agreement with our Manager; our Manager is a subsidiarythe satisfaction or waiver of RMR LLC and certain of the services provided to us by our Manager are provided by RMR LLC pursuant to a shared services
agreement between our Manager and RMR LLC; our Manager is our largest shareholder and, at June 30, 2020, owned approximately 19.4% of our outstanding common shares; RMR Inc. is the managing member of RMR LLC; Adam Portnoy, one of our Managing Trustees, 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, our other Managing Trustee and our President and Chief Executive Officer, also serves as the president, chief executive officer and a director of our Manager and is an officer and employee of RMR LLC; and each of our other officers is also an officer and/or employee of our Manager or RMR LLC. In addition, other companies to which RMR LLC or its subsidiaries provide management services have trustees, directors and officers some of whom are also trustees, directors or officers of us, our Manager, RMR LLC or RMR Inc. and some of our Trustees and officers serve as trustees, directors or officers of these companies.
conditions. For further information about these and other such relationships and related person transactions, see Notes 81, 7 and 98 to the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our Current Report on Form 8-K dated April 26, 2021, our Annual Report, our definitive Proxy Statement for our 20202021 Annual Meeting of Shareholders and our other filings with the SEC. In addition, see the section captioned “Risk Factors” of this Quarterly Report on Form 10-Q and our Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships. Our filings with the SEC and copies of certain of our agreements with these related persons, including our management agreement with our Manager, are available as exhibits to our filings with the SEC and accessible at the SEC’s website, www.sec.gov. We may engage in additional transactions with related persons, including businesses to which RMR LLC or its subsidiaries provide management services.
Item 3. Quantitative and Qualitative Disclosures About Market Risk (dollars in thousands, except per share data)
We believe that our business is exposed to two principal market risks: (a) changes in the level of economic activity in the U.S. economy generally or in geographic areas where the properties that are the subject of our real estate investments are located; and (b) changes in market interest rates.
Changes in the general economy may impact the ability and willingness of our borrowers to pay interest on and repay principal of our loans. A U.S. recession or a slowing of economic activity, including as a result of the COVID-19 pandemic, in the markets where the underlying collateral for our loans are located may cause our borrowers to default or may cause the value of the collateral to decrease and be less than the outstanding amount of the loan. To mitigate these market risks, when evaluating a potential investment, we perform thorough diligence on the value of the proposed collateral, including as compared to comparable collateral in the same market, and the historical business practices and credit worthiness of our borrowers and their affiliates, as well as compare our borrowers' proposed business plans for and projected income from the proposed collateral to our expectations regarding the market conditions of the geographic area where the collateral is located and the potential for future income from the collateral. In addition, with respect to our existing loans, we continuously monitor the credit quality and performance of our borrowers and loan collateral, and we structure our loans with risk mitigation mechanisms, such as cash flow sweeps or interest reserves, to help protect us against investment losses. However, despite these risk mitigation efforts and measures, our borrowers may default on our loans and/or the value of the underlying collateral may decrease significantly if market conditions decline or for other reasons. For further information regarding the risks associated with our loan portfolio, see the risk factors identified in Part II, Item 1A, "Risk Factors" of this Quarterly Report on Form 10-Q and the risk factors identified in Part I, Item IA, "Risk Factors" of our Annual Report.
Floating Rate Investments
As of June 30, 2020,2021, our loans held for investment had an aggregate principal balance of $278,484$236,944 and the weighted average maximum maturity of our loan portfolio was 3.12.2 years, assuming all borrower loan extension options have been exercised.exercised, which options are subject to the applicable borrower meeting certain conditions. All our loans held for investment were made in U.S. dollars and earn interest at LIBOR plus a premium. Accordingly, we are exposed to interest rate risk for changes in U.S. dollar based short term rates, specifically LIBOR. As LIBOR decreases, our risk is partially mitigated by interest rate floor provisions in our loan agreements with borrowers. In addition, upon repayment from our borrowers we are vulnerable to decreases in interest rate premiums due to market conditions at the time any such repayment proceeds are reinvested.
Floating Rate Debt
At June 30, 2020,2021, our floating rate debt obligations consisted of $201,138$156,167 in outstanding advancementsborrowings under our Master Repurchase Facility. Our Master Repurchase Facility matures in November 2021,2022, subject to early termination as provided for in our Master Repurchase Agreement.
All of our floating rate debt was borrowed in U.S. dollars and requires interest to be paid at a rate of LIBOR plus a premium. Accordingly, we are exposed to interest rate risk for changes in U.S. dollar based short term rates, specifically LIBOR. In addition, upon selling additional mortgage loans and other assets under our Master Repurchase Facility, we are vulnerable to increases in interest rate premiums due to market conditions or perceived credit characteristics of our borrowers.
The table below details the impact, based on our current loan portfolioassets and debt outstanding atliabilities as of June 30, 2020,2021, on our interest income and interest expense of an immediate increase or decrease of 100 basis points in LIBOR, the applicable interest rate benchmark:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Principal Balance as of June 30, 2021 | | Interest Rate Per Year (1) | | 100 Basis Point Increase | | 8 Basis Point Decrease (2) |
| Assets (Liabilities) Subject to Interest Rate Sensitivity: | | | | | | | | |
| Loans held for investment | | $ | 236,944 | | | 5.61% | | $ | 58 | | | $ | — | |
| Master Repurchase Facility | | (156,167) | | | 2.00% | | (1,562) | | | 120 | |
| Total change in net income from investments | | | | | | $ | (1,504) | | | $ | 120 | |
| | | | | | | | |
Annual earnings per share impact (3) | | | | | | $ | (0.18) | | | $ | 0.02 | |
|
| | | | | | | | | | | | | | |
| | | Principal Balance as of June 30, 2020 | | Interest Rate Per Year (1) | | 100 Basis Point Increase | | 18 Basis Point Decrease (3) |
| Assets (Liabilities) Subject to Interest Rate Sensitivity: | | | | | | | | |
| Loans held for investment | | $ | 278,484 |
| | 5.70% | | $ | — |
| | $ | — |
|
| Master repurchase facility | | (201,138 | ) | | 2.18% | | (2,011 | ) | | 355 |
|
| Total change in net income from investments | |
|
| | | | $ | (2,011 | ) | | $ | 355 |
|
| | | | | | | | | |
Annual earnings per share impact (2) | | | | | | $ | (0.25 | ) | | $ | 0.04 |
|
| |
(1) | Weighted based on interest rates and principal balances as of June 30, 2020. |
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(2) | Based on weighted average number of shares outstanding (diluted) for the three months ended June 30, 2020. |
(2)Our loan agreements with borrowers include interest rate floor provisions which set a minimum LIBOR for each loan. These floors range from 0.50% to 2.49% and the portfolio weighted average was 1.94% as of June 30, 2021. As a result, our interest income will increase if LIBOR exceeds the floor established by any of our investments, and as LIBOR further decreases below the floor established for any of our investments, our interest income will not be impacted. We do not currently have a LIBOR floor provision relating to any of the outstanding balances under our Master Repurchase Facility and as a result our interest expense will increase as LIBOR increases and will decrease as LIBOR decreases. The above table illustrates the incremental impact on our annual income from investments, net, due to hypothetical increases and decreases in LIBOR of 100 basis points, taking into consideration our borrowers' interest rate floors as of June 30, 2021. The hypothetical 100 basis point increase in LIBOR used in the analysis above does not result in any increase in interest we would receive from our loans held for investment because the increased rate would not exceed the current interest rate floor provision. The hypothetical 100 basis point decrease in LIBOR has been limited in the analysis to 8 basis points to result in a LIBOR rate of 0.00%. The results in the table above are based on our current loan portfolio and debt outstanding at June 30, 2021 and a LIBOR rate of 0.08%. Any changes to the mix of our investments of debt outstanding could impact this interest rate sensitivity analysis and this illustration is not meant to forecast future results.
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(3) | Our loan agreements with borrowers include interest rate floor provisions which set a minimum LIBOR for each loan. We do not currently have a LIBOR floor provision relating to any of the outstanding balances under our Master Repurchase Facility. As a result, if LIBOR decreases below the floor established for any of our investments, our income from investments will decrease less than our borrowing costs and the net amount may result in an increase in our net investment income. The above table illustrates the incremental impact on our annual income from investments, net, due to increases and decreases in LIBOR of 100 basis points, taking into consideration our borrowers' interest rate floors as of June 30, 2020. The 100 basis point increase in LIBOR used in the analysis above does not result in any increase in interest we would receive in our loans held for investment because the increased rate would not exceed the current interest rate floor provision. The 100 basis point decrease in LIBOR used in the analysis above has been limited in that analysis to 18 basis points to result in a LIBOR rate of 0.00%. The results are based on our current loan portfolio and debt outstanding at June 30, 2020. Any changes to the mix of our investments of debt outstanding could impact this interest rate sensitivity analysis and this illustration is not meant to forecast future results. |
(3)Based on weighted average number of shares outstanding (diluted) for the three months ended June 30, 2021.
To mitigate the impact of future changes in market interest rates on our business, we require borrowers to pay floating interest rates to us rather than fixed interest rates on our loans held for investment and, to the extent that we use leverage to make investments, we will continue to seek to "match index" certain investments with our debt or leverage obligations so that they create similar movements in interest rates based upon similar indexes and other terms. Furthermore, depending upon our beliefs regarding future market conditions affecting interest rates, we may purchase interest rate hedge instruments that allow us to change the character of interest receipts and debt service obligations owed to us from fixed to floating rates or the reverse.
LIBOR Phase Out
LIBOR is currently expected to be phased out in 2021. All the agreements governingfor new contracts by December 31, 2021 and for pre-existing contracts by June 30, 2023. On October 30, 2020, we amended our loans held for investment require our borrowers, andMaster 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, we are required, to pay interest at floating rates based on LIBOR. Future agreements governing loans that wethe replacement base rate shall be SOFR, or if SOFR is not available, such other rate as may make and debt that we may incur maybe determined by Citibank in accordance with the terms of our amended Master Repurchase Agreement. We also require interest to be paid at floating rates based on LIBOR. We currently expect that, as a result of any phase out of LIBOR, the determination of interest rates under suchour loan agreements with borrowers would be revised as provided under suchthe agreements or amended as necessary to provide for an interest rate that approximates the existing interest rate as calculated in accordance with LIBOR. Despite our current expectations, we cannot be sure that, if LIBOR is phased out or transitioned, the changes to the determination of interest under such agreements would approximate the current calculation in accordance with LIBOR. We do not know what standard, if any, will replace LIBOR if it is phased out or transitioned.
Item 4. Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, our management carried out an evaluation, under the supervision and with the participation of our Managing Trustees, our President and 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.Act. Based upon that evaluation, our Managing Trustees, our President and Chief Executive Officer and our Chief Financial Officer and Treasurer 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 June 30, 20202021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Warning Concerning Forward-Looking Statements
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 Quarterly Report on Form 10-Q relate to various aspects of our business, including:
•The likelihood that we will complete the Merger;
•Our expectation that our shareholders will benefit from the Merger;
•The risks associated with the ability to consummate the Merger and the other Transactions;
•The risk that the anticipated benefits from the Merger may not be realized or may take longer to realize than expected, including as a result of the failure to obtain the required approvals of our and RMRM's shareholders;
•Unexpected costs or unexpected liabilities that may arise from the Merger or the other Transactions, whether or not completed;
•The occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement or the failure to satisfy the closing conditions;
•The duration and severity of the economic downturn resulting from the COVID-19 pandemic and its impact on us and our borrowers,
The likelihood and extent to which our borrowers will be negatively impacted by the COVID-19 pandemictheir ability and its aftermath and be able and willingwillingness to fund their debt service obligations owed to us,us;
•Our expectations about our borrowers’ business plans and their abilities to successfully execute them,them;
•Our expectations regarding the diversity and other characteristics of our loan investment portfolio,portfolio;
•Our ability to carry out our business strategy and take advantage of opportunities for our business that we believe exist,exist;
•Our expectations of the volume of transactions and opportunities that will exist in the CRE debt market, including the middle market, when the U.S. economy improves and returns to a more stable state for a sustained period,period;
•Our belief that certain financing sources for CRE lending will increase and provide them with increased liquidity;
•Our belief that we are well positioned to lend to private equity sponsors of middle market and transitional CRE assets;
•Our ability to obtain additional cost-effective capital to enable us to make additional investments or to increase our potential returns, including by using available leverage,leverage;
•Our ability to pay distributions to our shareholders and to increase and sustain the amount of such distributions,distributions;
Our expectations as to the amount of capital we may be able to preserve as a result of reducing the distribution rate on our common shares,
•Our operating and investment targets, investment and financing strategies and leverage policies,policies;
•Our expected operating results,results;
•The amount and timing of cash flows we receive from our investments,investments;
Our expectations regarding the impact of the COVID-19 pandemic on our borrowers and our financial condition,
•The ability of our Manager to locate suitable investments for us, to monitor, service and administer our existing investments and to otherwise implement our investment strategy,strategy;
•Our ability to maintain and increase the net interest spread between the interest we earn on our investments and the interest we pay on our borrowings,borrowings;
•The origination, extension, exit, prepayment or other fees we may earn from our investments,investments;
•Yields that may be available to us from mortgages on middle market and transitional CRE,CRE;
•The duration and other terms of our loan agreements with borrowers,borrowers;
•The credit qualities of our borrowers,borrowers;
•The ability and willingness of our borrowers to repay our investments in a timely manner or at all,all;
•Our projected leverage,leverage;
•The cost and availability of additional advancements under our Master Repurchase Facility, or other debt financing under additional repurchase or bank facilities we may obtain from time to time, and our ability to obtain such additional debt financing,financing;
•Our qualification for taxation as a REIT,REIT;
Our expectation that we will need to make an increased distribution in the future to maintain our qualification for taxation as a REIT for 2020,
•Our ability to maintain our exemption from registration under the Investment Company Act,Act;
•Our understanding of the competitive nature of our industry and our ability to successfully compete under such circumstances,circumstances;
•Market trends in our industry or with respect to interest rates, real estate values, the debt securities markets or the economy generally,generally; and
•Regulatory requirements and the effect they may have on us or our competitors, and
Other matters.competitors.
Our actual results may differ materially from those contained in or implied by our forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. Risks, uncertainties and other factors that could have a material adverse effect on our forward-looking statements and upon our business, financial condition, liquidity, results of operations, cash flow,flows, prospects and ability to make distributions include, but are not limited to:
•The impact of conditions in the economy, the CRE industry and the capital markets on us and our borrowers,
•Competition within the CRE lending industry,
•Changes in the availability, sourcing and structuring of CRE lending,
•Defaults by our borrowers,
•Compliance with, and changes to, federal, state or local laws or regulations, accounting rules, tax laws or similar matters,
•Limitations imposed on our business and our ability to satisfy complex rules in order for us to maintain our qualification for taxation as a REIT for U.S. federal income tax purposes,
•Actual and potential conflicts of interest with our related parties, including our Managing Trustees, our Manager, RMR LLC, and others affiliated with them, and
•Acts of terrorism, outbreaks of pandemics, including the COVID-19 pandemic, or other manmade or natural disasters beyond our control, and
Additional factors, including, but not limited to, those set forth in Part II, Item IA, "Risk Factors" of this Quarterly Report on Form 10-Q and the risk factors identified in Part I, Item IA, "Risk Factors" of our Annual Report.control.
For example:
•We have a limited operating history, and we may not be able to operate our business successfully or generate sufficient revenue to make or sustain distributions to our shareholders,
•To make additional investments and continue to grow our business, we will need to obtain additional cost-effective capital. We cannot be sure that we will be successful in obtaining any such additional capital. If we are unable to obtain such additional capital, we may not be able to further grow our business by making additional investments,
Beginning with the first quarter of 2020, we reduced our quarterly distribution rate on our common shares to $0.01 per share. •Our distribution rate is set and reset from time to time by our Board of Trustees. The timing, amount and form of future distributions will be determined at the discretion of our Board of Trustees and will depend upon various factors that our Board of Trustees deems relevant, including our historical and projected income, our CoreDistributable Earnings and Adjusted Distributable Earnings, the then-current and expected needs and availability of cash to pay our obligations and fund our investments, distributions which may be required to be paid by us to maintain our qualification for taxation as a REIT, limitations on distributions contained in our financing arrangements and other factors deemed relevant by our
Board of Trustees in its discretion. Therefore,Accordingly, our future distribution rates may be increased or decreased and we cannotcan provide no assurances as to the rate at which future distributions will be sure that we will resume paying distributions in the future at historic levels or that we will increase distributions in the future,paid,
•Competition may limit our ability to identify and make desirable investments with any additional capital we may obtain or with any proceeds we may receive from repayments of our investments,
•Our belief that there will be strong demand for alternative sources of CRE debt capital whenas the U.S. economy improvescontinues to improve and returns to a more stable state for a sustained period may not be correct,
•The value of our loans depends upon our borrowers’ ability to generate cash flows from operating the underlying collateral for our loans. Our borrowers may not have sufficient cash flows to repay our loans according to their terms, which may result in delinquency and foreclosure on our loans,
•Our investments contain certain risk mitigation mechanisms that may help protect us against investment losses by mitigating the impact from our borrowers being unable to pay their debt service obligations owed to us as scheduled for a temporary period. However, these mechanisms may not adequately cover the debt service amount and will likely not be able to fully fund the debt service obligations owed to us if the tenants’ businesses fail or they default on their debt service obligations owed to us,
The impact•Certain of our borrowers were significantly negatively impacted by the COVID-19 pandemic is affecting all partsand they and other of the economy including our borrowers who are experiencingmay be negatively impacted by the negative impact of current economic conditions.COVID-19 pandemic in the future. As a result, we may not have sufficient capital to meet our required commitments from actions thatto Citibank takes if our borrowers default on their obligations owed to us or the valuevalues of the collateral underlying our collateral declinesloans decline below required levels or otherwise,
•Our actions to actively manage our investments to minimize the impact of the economic challenges imposed by the COVID-19 pandemic may not succeed or any success they may have may not help us avoid realizing negative impacts resulting from economic challenges that may be imposed by the COVID-19 pandemic in the future, including with respect to our liquidity and financial results,
Our engagement with Citibank, the lender under our Master Repurchase Facility, and our borrowers may not enable us to maximize our ability to collect interest and principal on our investments and minimize any actions that Citibank may take if our borrowers default or the value of any of the collateral underlying our loans declines below prescribed levels. These actions may not succeed or, any success they may have, may not prevent us from realizing negative impacts from the current business conditions, including with respect to our liquidity and financial results. Further, despite our active engagement with Citibank, Citibank may ultimately determine to utilize one or more of the risk mitigation mechanisms available to it under our Master Repurchase Agreement,
The risk mitigation mechanisms that apply to our investments may not adequately cover our borrowers' debt service amounts and the borrowers may not be able to fully fund their debt service obligations owed to us,
•Prepayment of our loans may adversely affect the value of our loan portfolio and our ability to make or sustain distributions to our shareholders,
•Loans secured by properties in transition involve a greater risk of loss than loans secured by stabilized properties,
•Our Manager'sManager and RMR LLC's onlyLLC have limited historical experience managing or servicing a mortgage REIT is with respect to us, and we have a limited operating history,REITs,
•We may incur significant debt, and our governing documents contain no limit on the amount of debt we may incur,
•Although, as of August 3, 2020,to date, Citibank has not instituted cash sweeps on our accounts and we have not received a margin call under our Master Repurchase Facility, it may do so in the future in accordance with our Master Repurchase Agreement,
•Continued availability of additional advancements under our Master Repurchase Facility is subject to us identifying suitable loans to invest in and our satisfying certain financial covenants and other conditions, as applicable, that we may be unable to satisfy,
•Financing for floating rate mortgages and other related assets that we may seek to sell pursuant to our Master Repurchase Facility is subject to approval by the lender under our Master Repurchase Facility, whose approval we may not obtain,
•Actual costs under our Master Repurchase Facility will be higher than LIBOR plus a premium because of fees and expenses associated with our debt,
As of June 30, 2020, we have fully committed the capital available to us. •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 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,
•Any phase out of LIBOR may have an impact on our investments and our debt financing arrangements,
•We believe that the market price for our common shares may need to increase to approximately book value for us to practically accessobtain additional capital in the public market. We believe this because of expected negative market reactions, among other reasons, if we were to complete an equity offering at a price that is below approximately book value. However, we are not prohibited from selling our common shares at less than book value and could do so if we determined it to be in our interests,
•We are dependent upon our Manager, its affiliates and their personnel. We may be unable to find suitable replacements if our management agreement is terminated,
•We believe that our relationships with our related parties, including our Managing Trustees, our Manager, RMR LLC and others affiliated with them may benefit us and provide us with competitive advantages in operating and growing our business. However, the advantages we believe we may realize from these relationships may not materialize,
•Our intention to remain exempt from registration under the Investment Company Act imposes limits on our operations, and we may fail to remain exempt from registration under the Investment Company Act, and
•Our failure to remain qualified for taxation as a REIT could have significant adverse consequences.consequences,
•Although we have entered into the Merger Agreement and we expect the Merger to close during the third quarter of 2021, the closing of the Merger is subject to the satisfaction or waiver of conditions, including the receipt of requisite approvals by our and RMRM’s shareholders. We cannot be sure that any or all these conditions will be satisfied or waived. Accordingly, the Merger may not close when expected or at all, or the terms of the Merger and the other Transactions may change,
•This Quarterly Report on Form 10-Q states that the Merger, the Merger Share Issuance and the other Transactions and the terms thereof were evaluated, negotiated and recommended to each of our and RMRM’s board of trustees by special committees of our and RMRM’s board of trustees, respectively, each consisting 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, and that Citigroup Global Markets Inc. and UBS Securities LLC acted as a financial advisor to each of the special committees of our and RMRM’s board of trustees, respectively. Despite this process, we have been subject to, and could be subject to additional, claims challenging the Merger and the other Transactions or our entry into the Merger Agreement and related agreements because of the multiple relationships among us, RMRM, TRA, RMR LLC, RMR Inc. and their related persons and entities or other reasons, and defending even meritless claims could be expensive and distracting to management.
Currently unexpected results could occur due to many different circumstances, some of which are beyond our control, such as acts of terrorism, the COVID-19 pandemic, natural disasters or changes in capital markets or the economy generally.
The information contained elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report or in our other filings with the SEC, including inunder the section captionedcaption “Risk Factors” herein or therein, 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.
Statement Concerning Limited Liability
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 Maryland, provide 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.
Part II. Other Information
Item 1. Legal Proceedings
Information regarding legal proceedings and claims is included in Note 12 to our condensed consolidated financial statements included in Part I, Item I of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
Our business faces manyis subject to a number of risks and uncertainties, a number of which are described inunder the section captionedcaption “Risk Factors” in our Annual Report. The Merger may subject us to additional risks that are described below. The risks described in our Annual Report and below may not be the only risks we face.face but are risks we believe may be material at this time. Other risks of which we are not yet aware, or that we currently believe are not material, may also materially and adversely impact our business operations or financial results. If any of the events or circumstances described in the risk factors contained in our Annual Report or described below occur,occurs, our business, financial condition, or results of operations or ability to make distributions to our shareholders could be adversely impactedaffected and the value of an investment in our securities could decline. Investors and prospective investors should consider the risks described in our Annual Report and below and the information contained inunder the section captionedcaption “Warning Concerning Forward-Looking Statements” and elsewhere in this Quarterly Report on Form 10-Q before deciding whether to invest in our securities.
Our business, operations, financial results and liquidity could be materially adversely impacted by the COVID-19 pandemic, and it is not known what the duration of this pandemic will be or what its ultimate adverse impact on us and our business will be, but we expect it will be substantial.
COVID-19 has been declared a pandemic by the World Health Organization and, in responseRisks Relating to the outbreak, the U.S. HealthMerger
The Exchange Ratio is fixed and Human Services Secretary has declared a public health emergencywill not be adjusted for any changes in the United States. COVID-19 has had a devastating impact on the global economy, including the U.S. economy, and has resulted in a global economic recession.
These conditions could materially and adversely impact our business, results of operations and liquidity. In addition, some of our borrowers and their tenants have experienced substantial declines in their businesses and some of our borrowers have sought relief from us from their debt service obligations owed to us, and we expect these declines and requests to continue or increase in the future. As a result of the COVID-19 pandemic and restrictions implemented in response, there have been construction moratoriums and decreases in available construction workers and construction activity, including required inspectors and governmental personnel for permitting and other requirements. These conditions may prevent our borrowers from completing ongoing and planned construction projects and improving their properties that secure our loans. As a result, borrowers may be unable to generate sufficient cash flow to make payments on or refinance our loans, and we may not recover some or all of our investment. We have, as of August 3, 2020, provided relief to one of our borrowers who was in default during April 2020 but is no longer in default and we continue to actively engage in discussions with our borrowers to maximize our ability to collect interest and principal payments from them. We cannot be sure these efforts will succeed and, if the current economic conditions continue or worsen for a prolonged period, there is a significant risk that some of our other borrowers may default on their debt service obligations owed to us.
During economic recessions, real estate values typically decline, sometimes significantly. Declining real estate values may increase the likelihood that our borrowers will default on their debt service obligations owed to us and that we will incur losses as a result because the value of the collateral that secures our loans may then be less than the debt owed to us plus our costs of recovery. Further, if borrowers do not repay our loans or we realize amounts that are less than the amount of the investment plus our costs, our investment portfolio will reduce in size. In addition, if a borrower defaults on our loan and we take actions related to the collateral securing that loan, we may be delayed for an extended period of time on converting that collateral to investable cash, which would impair our ability to redeploy that capital and grow our portfolio.
We have been limited in our ability to access 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 sustained for an extended period, we expect that we will be further challenged in accessing capital. As a result, our ability to grow our business and investment portfolio may be limited for an indefinite period.
In addition, we believe that the risks associated with our investments will increase during periods of economic slowdown or recession, especially if these periods are accompanied by declining real estate values. Consequently, our investment strategy may be adversely affected by a prolonged economic downturn or recession related to the COVID-19 pandemic where declining real estate values would likely reduce the level of new mortgage and other real estate related loan originations since borrowers often use the appreciation in the value of their existing properties to support the purchase or investment in additional properties. Any sustained period of increased payment delinquencies, foreclosures or losses resulting from the impact of the COVID-19 pandemic would adversely affect our ability to originate or acquire loans, which would materially and adversely affect our results of operations, financial condition, liquidity and business and our ability to make or sustain distributions to our shareholders.
We cannot predict the extent and duration of the COVID-19 pandemic or the severity and duration of its economic impact, but we expect it will be substantial. Potential consequences of the current unprecedented measures taken in response to the spread of COVID-19 and the current market disruptions and volatility affecting us include, but are not limited to:
the current low market price of our common shares or the RMRM Common Shares.
At the Effective Time, each of our common shares (other than any shares owned by us or RMRM or our or their respective wholly owned subsidiaries and in each case not held on behalf of third parties) outstanding immediately prior to the Effective Time will be converted into the right to receive 0.52 of one newly issued RMRM Common Share (subject to adjustment pursuant to the Merger Agreement), with cash paid in lieu of fractional shares, or the Merger Consideration. The Exchange Ratio is fixed in the Merger Agreement and will not be adjusted for changes in the market price of our common shares or the RMRM Common Shares. Changes in the market price of the RMRM Common Shares prior to the consummation of the Merger will affect the market value of the Merger Consideration. The market price of our common shares and the RMRM Common Shares may continue for an indefinite periodchange as a result of a variety of factors (many of which are beyond our and RMRM’s control), including the following:
•market reaction to the announcement of the Merger, the Merger Share Issuance and the other Transactions and the prospects of the combined company;
•changes in the respective businesses, operations, assets, liabilities, financial position and prospects of us or RMRM, or in the market’s assessments thereof;
•changes in the operating performance of us or RMRM or similar companies;
•changes in market valuations of similar companies;
•market assessments of the likelihood that the Merger and the other Transactions will be completed;
•the possibility that persons may engage in short sales of our common shares or the RMRM Common Shares;
•interest rates, general market and economic conditions and other factors generally affecting the price of our common shares and the RMRM Common Shares;
•federal, state and local legislation, governmental regulation and legal developments in the businesses in which we and RMRM operate;
•dissident shareholder activity;
•changes that affect the commercial real estate lending market generally;
•changes in the United States or global economy or capital, financial or securities markets generally; and
•other factors beyond our or RMRM’s control, including those described and referred to above under this “Risk Factors” section.
Changes in the market price of the RMRM common shares prior to the consummation of the Merger and the other Transactions will affect the market value of the Merger Consideration. The market price of the RMRM Common Shares at the consummation of the Merger may vary from the price on the date the Merger Agreement was executed, on the date of the joint proxy statement/prospectus and on the date of our special meeting and the RMRM special meeting, each currently scheduled to be held on September 17, 2021. As a result, the market value of the Merger Consideration represented by the Exchange Ratio will also vary. Because the Merger will be completed after the date of the special meetings, at the time of the applicable special meeting, the exact market price of the RMRM Common Shares that our shareholders will receive upon consummation of the Merger will not be known. You should therefore consider that:
•if the market price of the RMRM Common Shares increases between the date the Merger Agreement was signed or the date of our special meeting or the RMRM special meeting and the closing of the Merger, our shareholders will receive RMRM Common Shares that have a market value upon consummation of the Merger that is greater than, as applicable, the market value of such shares calculated pursuant to the Exchange Ratio on the date the Merger Agreement was signed or on the date of our special meeting or the RMRM special meeting, respectively; and
•if the market price of the RMRM Common Shares declines between the date the Merger Agreement was signed or the date of our special meeting or the RMRM special meeting and the closing of the Merger, our shareholders will receive a number of RMRM Common Shares that have a market value upon consummation of the Merger that is less than, as applicable, the market value of such shares calculated pursuant to the Exchange Ratio on the date the Merger Agreement was signed or on the date of our special meeting or the RMRM special meeting, respectively.
The Merger is subject to the satisfaction or waiver of conditions that may not be satisfied or completed on a timely basis, if at all. Failure to complete the Merger and the other Transactions could have material and adverse effects on us and RMRM.
The consummation of the Merger and the other Transactions is subject to the satisfaction or waiver of a number of conditions, including, among others, the receipt of the approval of the Merger by our shareholders and the receipt of the approval of the Merger Share Issuance by RMRM’s shareholders. These conditions make the completion, and the timing of the completion, of the Merger uncertain. In addition, either we or RMRM may terminate the Merger Agreement if the Merger is not completed by December 31, 2021, except that this right to terminate the Merger Agreement will not be available to a party if that party failed to fulfill its obligations under the Merger Agreement and that failure was a principal cause of, or resulted in, the failure of the Merger to be completed on or before such date.
We cannot provide assurance that the Merger will be consummated on the terms or timeline currently contemplated, or at all. If the Merger or certain of the other Transactions are not completed on a timely basis, or at all, we may be adversely affected and subject to a number of risks, including the following:
•we will be required to pay our costs relating to the Merger and the other Transactions, such as legal, accounting, financial advisory and printing fees, whether or not the Merger is completed;
•if the Merger is terminated under certain circumstances, we may be required to pay a termination fee to RMRM;
•the time and resources committed by our management to matters relating to the Merger and the other Transactions could otherwise have been devoted to pursuing other opportunities; and
•the market price of our common shares could decline further;to the extent that the current market price reflects, and is positively affected by, a market assumption that the Merger and the other Transactions will be completed.
possible significant declinesWe or RMRM may waive one or more of the conditions to the Merger without re-soliciting shareholder approval.
We or RMRM may determine to waive, in whole or in part, one or more of the conditions to our or RMRM’s obligations to consummate the Merger (other than the conditions that we and RMRM each receive opinions of counsel (i) that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the IRC and (ii) that we and RMRM will each be a party to that reorganization within the meaning of Section 368(b) of the IRC). Any determination whether to waive any condition to the
Merger and whether to re-solicit shareholder approval or amend the Proxy Statement as a result of a waiver will be made by us or RMRM, as applicable, at the time of such waiver based on the facts and circumstances as they exist at that time.
Failure to consummate the Merger as currently contemplated or at all could adversely affect the price of our common shares and our future business and financial results.
The Merger may be consummated on terms different than those contemplated by the Merger Agreement, or the Merger may not be consummated at all. If the Merger is not completed, or is completed on different terms from those contemplated by the Merger Agreement, RMRM and TRMT could be adversely affected and subject to a variety of risks associated with the failure to consummate the Merger, or to consummate the Merger as contemplated by the Merger Agreement, including the following:
•our shareholders may be prevented from realizing the anticipated benefits of the Merger;
•the market price of our common shares could decline significantly;
•reputational harm due to the adverse perception of any failure to successfully consummate the Merger;
•incurrence of substantial costs relating to the Merger, such as legal, accounting, financial advisor, filing, printing and mailing fees; and
•the attention of our management and employees may be diverted from their day-to-day business and operational matters as a result of efforts relating to attempting to consummate the Merger.
Any delay in the valueconsummation of the Merger or any uncertainty about the consummation of the Merger on terms other than those contemplated by the Merger Agreement, or if the Merger is not completed, could materially adversely affect the business, financial results and market price of our portfolio;common shares.
our inability to accuratelyThe Merger Agreement contains provisions that could discourage a potential competing acquirer of either us or reliably value our portfolio;
our inability to comply with financial covenants thatRMRM, or could result in any competing proposal's being at a lower price than it might otherwise be.
The Merger Agreement contains provisions that, subject to certain exceptions, restrict the ability of us and of RMRM to initiate, solicit, propose, knowingly encourage or knowingly facilitate competing third-party proposals to effect, among other things, a merger, reorganization, share exchange, consolidation or the sale of 20% or more of the shares or consolidated net revenues, net income or total assets of us or RMRM. In addition, we and RMRM generally each has an opportunity to offer to modify the terms of the Merger Agreement in response to any competing "superior proposal" (as defined in the Merger Agreement) that may be made to the other party before our defaultingor RMRM’s board of trustees, as the case may be, may withdraw or modify its recommendation in response to such superior proposal or terminate the Merger Agreement to enter into a definitive agreement with respect to such superior proposal. In addition, we have no right to terminate the Merger Agreement prior to receipt of the approval of the Merger by TRMT shareholders in order to enter into a definitive agreement with respect to a superior proposal. Furthermore, upon termination of the Merger Agreement under certain circumstances relating to an acquisition proposal, we or RMRM may be required to pay the other party a termination fee equal to $2.156 million, plus reasonable fees and expenses.
These provisions could discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of us or RMRM from considering or proposing such an acquisition, even if it were prepared to pay consideration with a higher per share value or implied premium to our Master Repurchase Agreement;shareholders than the value proposed to be received or realized in the Merger, or might result in a potential competing acquirer proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee and expense reimbursement that may become payable in certain circumstances under the Merger Agreement.
Our and RMRM’s management agreement with TRA contain provisions that could discourage a potential competing acquirer of either us or RMRM, or could result in any competing proposal's being at a significantly lower price than it might otherwise be.
The termination of our maintainingor RMRM’s management agreement with TRA may require us or RMRM, as applicable, to pay a substantial termination fee to TRA. TRA has agreed to waive its right to receive payment of the current reduced ratetermination fee due under its management agreement with us upon the termination of distributions onthat agreement when the Merger is consummated. This waiver by TRA applies only in respect of the Merger and does not apply in respect of any competing proposal, superior proposal or other
transaction or arrangement. The termination provisions of our or RMRM’s management agreement with TRA substantially increase the cost to us and RMRM of terminating these agreements, which may discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of us or RMRM from considering or proposing such an acquisition or could result in any competing proposal's being at a significantly lower price than it might otherwise be.
TRA’s ownership of our common shares for an extended periodand its voting agreement could discourage a potential competing acquirer of time or suspending our paymentus.
TRA owned approximately 19.2% of distributions entirely;
our failure to pay interest and principal when due on our outstanding debt, which would result in events of default under our Master Repurchase Facility and our possible loss of our Master Repurchase Facility;
our inability to access debt and equity capital on attractive terms, or at all;
increased risk of default or bankruptcy of our borrowers;
increased risk of our borrowers being unable to weather an extended cessation of normal economic activity and thereby impairing their ability to continue functioning as going concerns and to pay their debt service obligations owed to us;
our and our borrowers’ inability to operate our businesses if the health of our respective management personnel and other employees is affected, particularly if a significant number of individuals are impacted; and
reduced economic demand resulting from mass employee layoffs or furloughs in response to governmental action taken to slow the spread of COVID-19, which could impact the continued viability of our borrowers.
Further, the extent and strength of any economic recovery after the COVID-19 pandemic abates, including following any "second wave" or other intensifying of the pandemic, is uncertain and subject to various factors and conditions. Our business, operations and financial position may continue to be negatively impacted after the COVID-19 pandemic abates and may remain at depressed levels compared to prior to the outbreak of the COVID-19 pandemic and those conditions may continue for an extended period.
We reduced our quarterly distribution rate on our common shares to $0.01 per share; future distributions may remain at this level for an indefinite period, subject to applicable REIT tax requirements, or be eliminated andoutstanding as of July 14, 2021, the form of payment could change.
Beginning with the first quarter of 2020, we reduced our quarterly distribution rate on our common shares to $0.01 per share. We currently intend to continue to make quarterly distributions to our shareholders at this rate, subject to applicable REIT tax requirements. However:
our ability to make or sustain the rate of distributions may continue to be adversely affected by the negative impact of the COVID-19 pandemic and its aftermath on our business, results of operations and liquidity;
our making of distributions is subject to restrictions contained in our Master Repurchase Agreement and may be subject to restrictions in future debt service obligations we may incur; during the continuance of any event of default under our Master Repurchase Agreement, we may be limited or in some cases prohibited from making distributions to our shareholders; and
our distribution rate is set and reset from time to timerecord date established by our Board of Trustees. Trustees for our special meeting of shareholders, or the Record Date, and has significant influence over the outcome of the proposals voted on at our special meeting of shareholders scheduled to be held on September 17, 2021, and pursuant to the voting agreement entered into by TRA and RMRM contemporaneously with the execution of the Merger Agreement, TRA has agreed to vote in favor of the Merger at our special meeting of shareholders. TRA’s significant ownership of us as of the Record Date may discourage a potential competing acquirer of us, including transactions in which our shareholders might otherwise receive a premium for their common shares that may reflect a premium or implied value greater than the value our shareholders would receive in the Merger and the other Transactions.
The timing, amountpendency of the Merger could adversely affect our and formRMRM’s business and operations.
During the pendency of future distributionsthe Merger, due to operating covenants in the Merger Agreement, we and RMRM may each be unable to undertake or pursue certain strategic transactions or significant capital projects, financing transactions or other actions that are not in the ordinary course of business, even if such actions may be beneficial to us or RMRM. In addition, some borrowers may delay or defer decisions related to their business dealings with us and RMRM during the pendency of the Merger, which could negatively impact the revenues, earnings, cash flows or expenses of us and/or RMRM, regardless of whether the Merger is completed.
The ownership interests of our and RMRM’s shareholders will be determined atdiluted by the discretionconsummation of the Merger, and our shareholders will exercise less influence over management than they exercised before the Merger.
Our shareholders have the right to vote in the election of our Board of Trustees and on certain other matters affecting us, as specified in our declaration of trust, and RMRM shareholders have the right to vote in the election of the RMRM board of trustees and on certain other matters affecting RMRM, as specified in RMRM's declaration of trust. As a result of the Merger, our shareholders will dependhave an ownership stake in RMRM that is smaller than their current stake in us and the ownership position of existing RMRM shareholders will decrease. Upon consummation of the Merger, based upon various factorsthe number of our common shares and the RMRM Common Shares outstanding as of the date of the Merger Agreement, we estimate that the RMRM shareholders immediately prior to the Merger (in their capacities as such) will own approximately 70% of the RMRM Common Shares outstanding immediately after the Merger and our Boardshareholders immediately prior to the Merger (in their capacities as such) will own approximately 30% of Trustees deems relevant, includingthe RMRM Common Shares outstanding immediately after the Merger, in each case without taking into account whether any of RMRM shareholders or our historicalshareholders were also shareholders or us or RMRM, respectively, at that time. Consequently, our shareholders may have less influence over the management and projected income,policies of the combined company after the Effective Time than they currently exercise over our Coremanagement and policies of us.
Earnings,Our and RMRM’s trustees and executive officers, as well as our and RMRM’s manager, TRA, may have interests in the then-currentMerger that are different from, or in addition to, the interests of our and expected needs and availabilityRMRM’s shareholders generally. This may create potential conflicts of cash to pay our obligations and fund our investments, distributionsinterest or the appearance of such conflicts, which may lead to increased dissident shareholder activity, including litigation, which could result in significant costs for us and RMRM and could materially delay or prevent the completion of the Merger.
The interests of our and RMRM’s trustees and executive officers include, among other things, the continued service as a trustee or executive officer of the combined company following the Merger, and certain rights to continuing indemnification and directors’ and officers’ liability insurance for our Trustees and executive officers. The interests of our and RMRM's manager, TRA, include continuation of RMRM’s management agreement with TRA following the Merger and the potential for increased fees payable to TRA in connection with the Merger. There is a risk that these interests may influence the trustees and executive officers and TRA to support the Merger.
The interests of TRA and our and RMRM’s trustees and executive officers in the Merger may increase the risk of litigation intended to enjoin or prevent the Merger and the risk of other related dissident shareholder activity. In the past, and in particular following the announcement of a significant transaction, periods of volatility in the overall market or declines in the market price of a company’s securities, shareholder litigation and dissident shareholder proposals have often been instituted against companies alleging conflicts of interest in business dealings with affiliated or related persons and entities. The relationships
described above may precipitate such activities by dissident shareholders and, if instituted against us or RMRM or our respective trustees or executive officers, such activities could result in substantial costs, a material delay or prevention of the Merger and a diversion of management’s attention, even if the shareholder action is without merit or unsuccessful.
Lawsuits seeking to enjoin or prevent the Merger or the other Transactions or obtain other relief which may delay or prevent the completion of the Merger or the other Transactions have been, and additional lawsuits may be, requiredcommenced, which may result in us or RMRM incurring substantial costs or the completion of the Merger or the other Transactions being materially delayed or prevented.
Public company merger and acquisition transactions are often subject to lawsuits initiated by plaintiffs seeking to enjoin or prevent the transaction or obtain other relief. As of July 16, 2021, four lawsuits have been filed by purported shareholders of us and RMRM in connection with the Merger and other Transactions. The plaintiffs generally assert claims under Section 14(a) and Section 20(a) of the Exchange Act, contending that the registration statement on Form S-4 filed by RMRM with the SEC on June 9, 2021 containing the preliminary joint proxy statement/prospectus omitted or misrepresented material information regarding the Merger and other Transactions. We, RMRM and our respective trustees, officers and advisors may become subject to additional similar litigation with respect to the Merger or the other Transactions. We are aware that several law firms have indicated that they are investigating the Merger and related matters, including actions taken by their respective boards of trustees, to determine whether they may seek to assert claims. The filed lawsuits generally seek, and other lawsuits could seek, among other things, injunctive or other equitable relief, including a request to rescind parts of the Merger Agreement and to otherwise enjoin the parties from consummating the Merger or the other Transactions, as well as require payment of fees and other costs by the defendants. We, RMRM and any other defendant may incur substantial costs defending such lawsuits, including the distraction of management’s attention, even if such lawsuits are without merit or unsuccessful. No assurance can be paidmade as to maintain ourthe outcome of any such lawsuits. If any plaintiffs are successful in obtaining an injunction prohibiting the parties from completing the Merger or the other Transactions or in obtaining other relief, the completion of the Merger or the other Transactions may be materially delayed or prevented. RMRM's bylaws also provide that a party to such a lawsuit may require that such claims be resolved by arbitration. Plaintiffs may also challenge such arbitration provisions, which may result in additional costs and distractions.
Risks Relating to Taxation
RMRM may incur adverse tax consequences if we have failed or fail to qualify for taxation as a REIT for United States federal income tax purposes.
If we have failed or fail to qualify for taxation as a REIT for United States federal income tax purposes and the Merger is completed, RMRM, as the surviving entity, may inherit significant tax liabilities and could lose its qualification for taxation as a REIT limitationsshould our disqualifying activities continue after the Merger. Even if RMRM retains its qualification for taxation as a REIT, if we do not qualify for taxation as a REIT for a taxable year before the Merger or for the taxable year that includes the Merger and if no relief is available, RMRM will face serious tax consequences that could substantially reduce its cash available for distribution to its shareholders because:
•RMRM, as successor by merger to us, will inherit any of our corporate income tax liabilities, including penalties and interest;
•RMRM would be subject to tax on distributions contained inthe built-in gain on each asset of ours existing at the Effective Time if RMRM were to dispose of an asset of ours during the five-year period following the Effective Time; and
•RMRM, as successor by merger to us, will inherit any of our financing arrangementsearnings and other factors deemed relevant by our Board of Trustees in its discretion. Accordingly, future distribution rates may be increased or decreased and there is no assurance as to the rate at which future distributions will be paid.
For these reasons, among others, our distribution rate may not increase for an indefinite periodprofits and could be eliminated.required to pay a special distribution and/or employ applicable deficiency dividend procedures (including interest payments to the United States Internal Revenue Service, or the IRS) to eliminate any earnings and profits accumulated by us for taxable periods for which we did not qualify for taxation as a REIT.
In order
As a result of these factors, our failure before the Merger to preserve liquidity, we mayqualify for taxation as a REIT could impair RMRM’s ability after the Merger to expand its business and raise capital, and could materially adversely affect the value of the RMRM Common Shares.
Finally, if there is an adjustment to our real estate investment trust taxable income or dividends paid deductions, RMRM could elect to payuse the deficiency dividend procedure in respect of preserving our REIT qualification. That deficiency dividend procedure could require RMRM to make significant distributions to ourits shareholders in part, inand to pay significant interest to the IRS.
REITs are subject to a form other than cash, such as issuing additional common sharesrange of ourscomplex organizational and operational requirements.
As REITs, we and RMRM must distribute to our respective shareholders with respect to each taxable year at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with GAAP), without regard to the deduction for dividends paid and excluding net capital gain. A REIT must also meet certain requirements with respect to the nature of its income and assets and the ownership of its shares. For any taxable year that we or RMRM fail to qualify for taxation as a REIT, we or RMRM, as applicable, will not be allowed a deduction for distributions paid to our or RMRM’s shareholders, as permitted by the applicable, in computing taxable income, and thus would become subject to United States federal income tax rules.
Some of our borrowers have requested relief from their debt service obligations owed to us in response to the current economic conditions resulting from the COVID-19 pandemic and we expect to receive additional similar requests in the future; we may determine to grant relief in response to these requests in the futureas if we determine it prudent or appropriateRMRM were a regular taxable corporation. In such an event, we or RMRM, as the case may be, could be subject to do so.potentially significant tax liabilities. Unless entitled to relief under certain statutory provisions, we or RMRM, as the case may be, would also be disqualified from treatment as a REIT for the four taxable years following the year in which we or RMRM lost our qualification, and dispositions of assets within five years after requalifying as a REIT could give rise to gain that would be subject to corporate income tax. If we or RMRM failed to qualify for taxation as a REIT, the market price of the RMRM Common Shares may decline, and RMRM may need to reduce substantially the amount of distributions to its shareholders because of its potentially increased tax liability.
Risks Relating to an Investment in RMRM Common Shares Following the Merger
The current economic conditions resulting frommarket price of the COVID-19 pandemic have significantly negatively impacted some of our borrowers’ businesses, operations and liquidity. Some of our borrowers have requested relief from their debt service obligations owed to us. As of August 3, 2020, we have provided one borrower with relief in the form of an increase to the interest reserve balance thatRMRM Common Shares may be used to make interest payments. We expect to receive additional similar requests in the future, and we may determine to grant relief in the future if we determine it prudent or appropriate to do so. In addition, if our borrowers are unable to continue as going concernsdecline as a result of the current economic conditions or otherwise, we may incur losses of all or some of our loan investments to them, including if the collateral securing our loans less our costs of recovery are less than the defaulted amounts.Merger.
Our Master Repurchase Agreement requires, and the agreements governing any additional repurchase facilities, bank credit facilities or debt arrangements that we may enter into will likely require, us to provide additional collateral or pay down debt.
Our Master Repurchase Facility, or other repurchase or bank credit facilities (including term loans and revolving facilities) or debt arrangements that we may enter into to finance investments, may involve the risk that the valueThe market price of the investments sold by us or pledged to the provider of such repurchase or other bank credit facilities or debt arrangementsRMRM Common Shares may decline and, in such circumstances, we would likely be required to provide additional collateral or to repay all or a portion of the funds advanced thereunder. With respect to our Master Repurchase Facility, subject to certain conditions, Citibank has sole discretion to determine the market value of the investments that serve as collateral under the facility for purposes of determining whether we are required to pay margin to Citibank. Where a decline in the value of collateral, including as a result of the impactMerger if RMRM does not achieve the perceived benefits of COVID-19 pandemic,the Merger or the effect of the Merger on RMRM’s financial results inis not consistent with the expectations of financial or industry analysts.
In addition, upon consummation of the Merger, our shareholders and RMRM shareholders will own RMRM Common Shares, and RMRM will operate an expanded business with a margin deficit, Citibank may require us to eliminate that margin deficit through a combinationdifferent mix of purchased asset repurchasesrisks and cash transfers to Citibank, subject to Citibank's approval. Weliabilities. Our current shareholders and current RMRM shareholders may not have funds availablewish to eliminate any such margin deficit andcontinue to invest in RMRM as the combined company, or for other reasons may be unablewish to raise funds from alternative sources on favorable termsdispose of some or at all which would likely result in a default under our Master Repurchase Agreement. Inof their RMRM Common Shares. If, following the eventEffective Time, large amounts of any such default, CitibankRMRM Common Shares are sold, the price of RMRM Common Shares could accelerate our outstanding debts and terminate our ability to obtain additional advancements under our Master Repurchase Facility, and our financial condition and prospects would be materially and adversely affected. Any debt arrangements that we may enter into in the future would likely contain similar provisions. In addition, if anydecline.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer purchases of equity securities. The following table provides information about our purchases of our equity securities during the quarter ended June 30, 2020.2021.
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| Calendar Month | | Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
| June 2021 | | 8,589 | | $ | 6.07 | | — | | | $ | — | |
| Total | | 8,589 | | $ | 6.07 | | — | | | $ | — | |
(1)These common share withholdings and purchases were made to satisfy the tax withholding and payment obligations of our former Trustee and officer and from a former officer and employee of RMR LLC in connection with the vesting of awards of our common shares. We withheld and purchased these shares at their fair market value based upon the trading price of our common shares at the close of trading on Nasdaq on the purchase date.
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| Calendar Month | | Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
| June 2020 | | 390 |
| | $ | 3.08 |
| | — |
| | $ | — |
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| Total | | 390 |
| | $ | 3.08 |
| | — |
| | $ | — |
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Item 6. Exhibits
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(1) | This common share withholding and purchase was made to satisfy the tax withholding and payment obligations of a former officer and employee of RMR LLC in connection with the vesting of awards of our common shares. We withheld and purchased these shares at their fair market value based upon the trading price of our common shares at the close of trading on Nasdaq on the purchase date. |
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Exhibit
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101.INS | | | | |
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| 101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document. (Filed herewith.) | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. (Filed herewith.) | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. (Filed herewith.) | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. (Filed herewith.) | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. (Filed herewith.) | | |
| 104 | | Cover Page Interactive Data File. (Formatted as Inline XBRL and contained in Exhibit 101.) | | |
SIGNATURES
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.
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| TREMONT MORTGAGE TRUST |
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| TREMONT MORTGAGE TRUSTBy: | /s/ Thomas J. Lorenzini |
| | Thomas J. Lorenzini
President |
| | Dated: July 27, 2021 |
| By: | /s/ David M. Blackman |
| By: | David M. Blackman
President and Chief Executive Officer
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| | Dated: August 4, 2020 |
| | |
| By: | /s/ G. Douglas Lanois |
| | G. Douglas Lanois
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
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| | Dated: August 4, 2020July 27, 2021 |