Tremont Mortgage Trust (TRMT) 10-Q 2019 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549 

FORM 10-Q

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

For the quarterly period ended September 30, 2019

OR

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

Commission File Number 001-38199

Tremont Mortgage Trust

(Exact Name of Registrant as Specified in Its Charter)

Maryland	82-1719041
(State of Organization)	(IRS Employer Identification No.)

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

(Address of Principal Executive Offices)                            (Zip Code)

Registrant’s Telephone Number, Including Area Code 617-796-8317

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol	Name of each exchange on which registered
Common Shares of Beneficial Interest	TRMT	The Nasdaq Stock Market LLC

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

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

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

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

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

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

Number of registrant's common shares of beneficial interest, $0.01 par value per share, outstanding as of November 5, 2019: 8,240,057

TREMONT MORTGAGE TRUST

FORM 10-Q

September 30, 2019

INDEX

		Page
PART I	Financial Information
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets — September 30, 2019 and December 31, 2018	1
	Condensed Consolidated Statements of Operations — Three and Nine Months Ended September 30, 2019 and 2018	2
	Condensed Consolidated Statements of Shareholders’ Equity — Three and Nine Months Ended September 30, 2019 and 2018	3
	Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2019 and 2018	4
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	26
	Warning Concerning Forward-Looking Statements	27
PART II	Other Information	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 6.	Exhibits	31
	Signatures	32

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.

PART I. Financial Information

Item 1. Financial Statements

TREMONT MORTGAGE TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

(unaudited)

	September 30,			December 31,
	2019			2018
ASSETS
Cash and cash equivalents	$	9,244		$	27,024
Restricted cash	110			311
Loans held for investment, net	207,464			135,844
Accrued interest receivable	711			344
Prepaid expenses and other assets	254			390
Total assets	$	217,783		$	163,913
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, accrued liabilities and deposits	$	759		$	935
Master repurchase facility, net	130,312			71,691
Note payable, net	—			31,485
Due to related persons	33			134
Total liabilities	131,104			104,245
Commitments and contingencies
Shareholders' equity:
Common shares of beneficial interest, $0.01 par value per share; 25,000,000 shares authorized; 8,240,057 and 3,178,817 shares issued and outstanding, respectively	82			32
Additional paid in capital	88,827			62,540
Cumulative net income (loss)	624			(2,904		)
Cumulative distributions	(2,854		)	—
Total shareholders’ equity	86,679			59,668
Total liabilities and shareholders' equity	$	217,783		$	163,913

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

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TREMONT MORTGAGE TRUST

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except per share data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
INCOME FROM INVESTMENTS:
Interest income from investments	$	4,959		$	1,385		$	11,872		$	2,113
Less: interest and related expenses	(1,992		)	(563		)	(5,572		)	(666		)
Income from investments, net	2,967			822			6,300			1,447
OTHER EXPENSES:
Management fees	—			—			—			447
General and administrative expenses	541			510			1,662			1,668
Reimbursement of shared services expenses	370			375			1,110			1,125
Total expenses	911			885			2,772			3,240
Net income (loss)	$	2,056		$	(63	)	$	3,528		$	(1,793	)
Weighted average common shares outstanding - basic and diluted	8,156			3,129			5,583			3,121
Net income (loss) per common share - basic and diluted	$	0.25		$	(0.02	)	$	0.63		$	(0.57	)

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

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TREMONT MORTGAGE TRUST

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(amounts in thousands)

(unaudited)

	Number of				Additional
	Common		Common		Paid In			Cumulative			Cumulative
	Shares		Shares		Capital			Net Income (Loss)			Distributions			Total
Balance at December 31, 2018	3,179		$	32	$	62,540		$	(2,904	)	$	—		$	59,668
Share grants	—		—		35			—			—			35
Net income	—		—		—			578			—			578
Distributions	—		—		—			—			(350		)	(350		)
Balance at March 31, 2019	3,179		32		62,575			(2,326		)	(350		)	59,931
Share grants	15		—		185			—			—			185
Share repurchases	(1	)	—		(6		)	—			—			(6		)
Net income	—		—		—			894			—			894
Distributions	—		—		—			—			(702		)	(702		)
Public offering	5,000		50		26,024			—			—			26,074
Balance at June 30, 2019	8,193		82		88,778			(1,432		)	(1,052		)	86,376
Share grants	53		—		80			—			—			80
Share repurchases	(6	)	—		(31		)	—			—			(31		)
Net income	—		—		—			2,056			—			2,056
Distributions	—		—		—			—			(1,802		)	(1,802		)
Balance at September 30, 2019	8,240		$	82	$	88,827		$	624		$	(2,854	)	$	86,679
Balance at December 31, 2017	3,126		$	31	$	62,135		$	(1,296	)	$	—		$	60,870
Share grants	2		—		20			—			—			20
Net loss	—		—		—			(949		)	—			(949		)
Balance at March 31, 2018	3,128		31		62,155			(2,245		)	—			59,941
Share grants	15		—		189			—			—			189
Net loss	—		—		—			(781		)	—			(781		)
Balance at June 30, 2018	3,143		31		62,344			(3,026		)	—			59,349
Share grants	46		1		109			—			—			110
Share repurchases	(2	)	—		(25		)	—			—			(25		)
Share grant forfeitures	(8	)	—		15			—			—			15
Net loss	—		—		—			(63		)	—			(63		)
Balance at September 30, 2018	3,179		$	32	$	62,443		$	(3,089	)	$	—		$	59,386

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

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

	Nine Months Ended September 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	3,528		$	(1,793	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Share based compensation	300			349
Amortization of deferred financing costs	502			184
Amortization of loan origination and exit fees	(1,333		)	(145		)
Changes in operating assets and liabilities:
Accrued interest receivable	(367		)	(293		)
Prepaid expenses and other assets	136			5
Accounts payable, accrued liabilities and deposits	(176		)	275
Due to related persons	(101		)	(731		)
Net cash provided by (used in) operating activities	2,489			(2,149		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Origination of loans held for investment	(119,062		)	(81,519		)
Additional funding of loans held for investment	(4,835		)	—
Repayment of loans held for investment	53,610			—
Net cash used in investing activities	(70,287		)	(81,519		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from master repurchase facility	92,983			21,583
Repayment of master repurchase facility	(34,312		)	—
Proceeds from RMR credit agreement	14,220			—
Repayment of RMR credit agreement	(14,220		)	—
Proceeds from note payable	—			31,690
Repayment of note payable	(31,690		)	—
Payments of deferred financing costs	(347		)	(1,045		)
Proceeds from issuance of common shares, net	26,074			—
Repurchase of common shares	(37		)	(25		)
Distributions	(2,854		)	—
Net cash provided by financing activities	49,817			52,203
Decrease in cash, cash equivalents and restricted cash	(17,981		)	(31,465		)
Cash, cash equivalents and restricted cash at beginning of period	27,335			61,666
Cash, cash equivalents and restricted cash at end of period	$	9,354		$	30,201
SUPPLEMENTAL DISCLOSURES:
Interest paid	$	4,974		$	382

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TREMONT MORTGAGE TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

SUPPLEMENTAL DISCLOSURE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH:

The table below provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows:

	As of September 30,
	2019		2018
Cash and cash equivalents	$	9,244	$	30,101
Restricted cash	110		100
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows	$	9,354	$	30,201

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

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TREMONT MORTGAGE TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Note 1. Organization

Tremont Mortgage Trust, or, collectively with its consolidated subsidiaries, we, us or our, was organized as a real estate investment trust, or REIT, under Maryland law on June 1, 2017.

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

Note 2. Summary of Significant Accounting Policies

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, 2018, or our 2018 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.

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.

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 will be held at the lower of cost or fair value less cost to sell.

We evaluate each of our loans for impairment at least quarterly by assessing a variety of risk factors in relation to each loan and assigning a risk rating to each loan based on those factors. 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 metrics included in the business plan or credit underwriting; and the property demonstrating stabilized occupancy and/or market rates, resulting in strong current cash flow and net operating income and/or having a very low LTV.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(dollars in thousands, except per share data)

"2" average risk—Criteria reflects a sponsor having a stable financial condition and 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 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 the property having a very high LTV.

See Note 4 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Our Portfolio” included in Part I, Item 2 of this Quarterly Report on Form 10-Q for a discussion 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 present value of expected future cash flows discounted at the loan’s contractual effective rate and the fair value of any available collateral, net of any costs we expect to incur to realize that value. The determination of whether loans are impaired 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, including assumptions regarding the values of loans, the values of underlying collateral and other 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.

As of September 30, 2019, we have not recorded any allowance for losses as we believe it is probable that we will collect all amounts due pursuant to the contractual terms of our loans.

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 condensed consolidated balance sheet as assets, and cash received from the purchasers is recorded on our condensed consolidated balance sheet as liabilities. Interest paid in accordance with repurchase agreements is recorded as interest expense.

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.

Note 3. Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board 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

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(dollars in thousands, except per share data)

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, 2022. We are currently assessing the potential impact the adoption of ASU No. 2016-13 will have in our condensed consolidated financial statements.

Note 4. Loans Held for Investment

We originate first mortgage whole loans secured by middle market and transitional CRE and related instruments which are generally to be held as long term investments. To fund our loan originations to date, we used cash on hand, advancements under our master repurchase facility with Citibank, N.A., or Citibank, or our Master Repurchase Facility, and borrowings under our former term loan facility, in the form of a note payable, with Texas Capital Bank, National Association, or Texas Capital Bank, or the TCB note payable. See Note 5 for further information regarding our debt agreements.

The table below details overall statistics for our loan portfolio:    

	Balance at September 30, 2019			Balance at December 31, 2018
Number of loans	10			7
Total loan commitments	$	227,157		$	154,802
Unfunded loan commitments (1)	$	18,813		$	17,673
Principal balance	$	208,344		$	137,129
Unamortized net deferred origination fees	$	(880	)	$	(1,285	)
Carrying value	$	207,464		$	135,844
Weighted average coupon rate	5.85		%	6.14		%
Weighted average all in yield (2)	6.51		%	6.82		%
Weighted average maximum maturity (years) (3)	3.6			4.7
Weighted average LTV	70		%	70		%

(1) Unfunded commitments will primarily be funded to finance property and building improvements and leasing capital. These commitments will generally be funded over the term of each loan.

(2) All in yield includes the amortization of deferred fees over the initial term of the loan.

(3) Maximum maturity assumes all extension options are exercised, which options are subject to the borrower meeting certain conditions.

The table below details our loan activities for the three months ended September 30, 2019:

	Principal Balance			Deferred Fees			Carrying Value
Balance at beginning of period	$	260,488		$	(1,531	)	$	258,957
Additional funding	1,466			—			1,466
Repayments	(53,610		)	449			(53,161		)
Net amortization of deferred fees	—			202			202
Balance at end of period	$	208,344		$	(880	)	$	207,464

The table below details our loan activities for the nine months ended September 30, 2019:

	Principal Balance			Deferred Fees			Carrying Value
Balance at beginning of period	$	137,129		$	(1,285	)	$	135,844
Additional funding	4,835			—			4,835
Originations	119,990			(928		)	119,062
Repayments	(53,610		)	449			(53,161		)
Net amortization of deferred fees	—			884			884
Balance at end of period	$	208,344		$	(880	)	$	207,464

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(dollars in thousands, except per share data)

The tables below detail the property type and geographic distribution of the properties securing the loans included in our portfolio at September 30, 2019:

Property Type	Number of Loans	Carrying Value		Percentage of Value
Office	3	$	56,816	27	%
Hotel	1	23,068		11	%
Retail	3	40,882		20	%
Multifamily	2	51,911		25	%
Industrial	1	34,787		17	%
	10	$	207,464	100	%

Geographic Location	Number of Loans	Carrying Value		Percentage of Value
East	2	$	59,205	29	%
South	5	102,548		49	%
West	1	6,376		3	%
Midwest	2	39,335		19	%
	10	$	207,464	100	%

Loan Risk Ratings

We evaluate each of our loans for impairment at least quarterly by assessing a variety of risk factors in relation to each loan and assigning a risk rating to each loan based on those factors. 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 LTV, debt yield, collateral performance, structure, exit plan and sponsorship.

At September 30, 2019, we had 10 first mortgage whole loans with an aggregate carrying value of $207,464. Based on our internal risk rating policy, each of these loans was assigned a "3" acceptable risk rating at September 30, 2019. We did not have any impaired loans, non-accrual loans or loans in maturity default as of September 30, 2019; thus, we did not record a reserve for loan loss. See Note 2 for a discussion regarding the risk rating system that we use in evaluating our portfolio.

Note 5. Debt Agreements

At September 30, 2019, our debt agreements included our Master Repurchase Facility.

	Debt Obligation
							Weighted Average		Collateral
	Maximum Facility Size		Principal Balance		Carrying Value		Coupon Rate	Remaining Maturity (1) (years)	Principal Balance		Fair Value (2)
September 30, 2019:
Master repurchase facility	$	213,482	$	131,253	$	130,312	L + 2.00%	1.8	$	208,344	$	208,647
December 31, 2018:
Master repurchase facility	$	135,000	$	72,582	$	71,691	L + 2.08%	2.6	$	97,516	$	98,232
Note payable	32,290		31,690		31,485		L + 2.15%	2.6	39,613		39,640

(1) The weighted average remaining maturity is determined using the current maturity date of the corresponding loans, excluding extension options.

(2) See Note 6 for further discussion of our financial assets and liabilities not carried at fair value.

Until May 23, 2019, we were a party to a credit agreement with our Manager as lender, or the RMR Credit Agreement. Following our repayment of the approximate $14,220 balance then outstanding under the RMR Credit Agreement, the RMR Credit Agreement was terminated. See below in this Note 5 for information regarding the RMR Credit Agreement.

Until August 9, 2019, we were a party to the TCB note payable. Following our repayment of the $31,790 outstanding principal and accrued interest under the TCB note payable, the TCB note payable terminated in accordance with its terms. See below in this Note 5 for information regarding the TCB Note Payable.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(dollars in thousands, except per share data)

For the three months ended September 30, 2019, we recorded interest expense of $1,563 and $155 in connection with our Master Repurchase Facility and the TCB note payable, respectively. For the nine months ended September 30, 2019, we recorded interest expense of $4,126, $891 and $39 in connection with our Master Repurchase Facility, the TCB note payable and the RMR Credit Agreement, respectively.

At September 30, 2019, our outstanding borrowings had the following remaining maturities:

Year	Principal payments on Master Repurchase Facility (1)
2019	$	—
2020	26,395
2021	104,858
2022	—
2023	—
	$	131,253

(1) The allocation of our outstanding borrowings under our Master Repurchase Facility is based on the current maturity date of each loan investment with respect to which the individual borrowing relates.

Master Repurchase Facility

On February 9, 2018, one of our wholly owned subsidiaries entered into agreements to govern our Master Repurchase Facility, or collectively, as amended, our Master Repurchase Agreement, pursuant to which we may sell to, and later repurchase from, Citibank, floating rate mortgage loans and other related assets, or purchased assets. At that time, our Master Repurchase Facility provided up to $100,000 for advancements. On November 6, 2018, we amended our Master Repurchase Agreement to increase the maximum amount available for advancement under the facility from $100,000 to $135,000 and to change its stated expiration date from February 9, 2021 to November 6, 2021, subject to earlier termination as provided for in our Master Repurchase Agreement.

On February 4, 2019, we increased the maximum amount available for advancement under our Master Repurchase Facility from $135,000 to $210,000 and on May 1, 2019, in connection with an increase in commitment under the RMR Credit Agreement, we further increased the maximum amount available for advancement under our Master Repurchase Facility from $210,000 to $250,000, in each case with the additional advancements being available for borrowing under our Master Repurchase Facility if and as we borrowed under the RMR Credit Agreement or if and as we received proceeds from any public offering of our common shares or preferred equity, as further provided in our Master Repurchase Agreement. In connection with the February 2019 increase, certain other provisions of our Master Repurchase Agreement were amended to accommodate the RMR Credit Agreement. In May 2019, we completed an underwritten public offering, or the Offering, as further described in Note 7, we repaid the outstanding borrowings under the RMR Credit Agreement and the RMR Credit Agreement was terminated and the maximum amount available for advancement under our Master Repurchase Facility was reduced to $213,482.

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 advance at higher margins than 75% and at premiums of less than 200 basis points. The weighted average interest rate for borrowings under our Master Purchase Facility was 4.27% and 4.35% for the three months ended September 30, 2019 and 2018, respectively, and 4.42% and 4.34% for the nine months ended September 30, 2019 and 2018, respectively.

In connection with our Master Repurchase Agreement, we entered into a guaranty which requires us to pay the purchase price, purchase price differential and any costs and expenses of Citibank related to our Master Repurchase Agreement. This 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

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TREMONT MORTGAGE TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(dollars in thousands, except per share data)

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.

Our Master Repurchase Agreement also provides for acceleration of the date of repurchase of the purchased assets and Citibank’s liquidation of the purchased assets upon the occurrence and continuation of certain events of default, including a change of control of us, which includes our Manager ceasing to act as our sole manager or to be a wholly owned subsidiary of The RMR Group LLC, or RMR LLC. As of September 30, 2019, we believe we were in compliance with the terms and conditions of the covenants of our Master Repurchase Agreement and the related guaranty.

On August 23, 2019, we received $14,635 of repayment proceeds from the borrower on its loan held for investment that was used to refinance an office building located in Scarsdale, NY, which included the $13,997 of principal outstanding under the loan, as well as the accrued interest, an exit fee, prepayment premium and our associated legal expenses. We were required to use $10,422 of these repayment proceeds to repay the outstanding balance and accrued interest under our Master Repurchase Facility associated with this loan, and we used the remaining proceeds to pay down additional outstanding balances under our Master Repurchase Facility. Further, on August 13, 2019, we used $8,000 of proceeds from the repayment of the JFK loan by the borrower, as described below, to pay down additional outstanding balances under our Master Repurchase Facility.

As of September 30, 2019, we had $24,203 available for immediate advancement under our Master Repurchase Facility from loans currently pledged under our Master Repurchase Facility, and $58,026 of unused capacity under our Master Repurchase Facility subject to our identifying suitable first mortgage whole loans for investment.

Note Payable

In July 2018, we closed a $40,363 loan, of which $39,613 was funded by us at closing to finance the acquisition of the Hampton Inn JFK, a 216 key, 13 story hotel located adjacent to the John F. Kennedy International Airport in Queens, NY, or the JFK loan. On August 9, 2019, the borrower repaid the $39,613 principal amount outstanding under the JFK loan, together with accrued interest, an exit fee and our associated legal expenses, for a total payoff amount of $39,922.

In connection with the JFK loan, one of our wholly owned subsidiaries entered into the TCB note payable, which advanced up to 80% of the JFK loan amount from time to time and was scheduled to mature in July 2021. Upon repayment of the JFK loan by the borrower in August 2019, we were required to repay the $31,690 principal amount outstanding under the TCB note payable, together with accrued interest, for a total payoff amount of $31,790. Following such repayment, the TCB note payable terminated in accordance with its terms. Interest payable on amounts advanced under the TCB note payable was calculated at a floating rate based on LIBOR plus a premium of 215 basis points. In connection with the TCB note payable, we entered into a guaranty with Texas Capital Bank pursuant to which we guaranteed 25% of the TCB note payable amount plus all related interest and costs, which guaranty was released upon repayment of the TCB note payable.

The remaining proceeds from the repayment of the JFK loan by the borrower, after our repayment of the TCB note payable, were used to pay down outstanding balances under our Master Repurchase Facility.

RMR Credit Agreement

On February 4, 2019, we entered into the RMR Credit Agreement, pursuant to which, from time to time until August 4, 2019, the scheduled expiration date of the RMR Credit Agreement, we were able to borrow up to $25,000 and, beginning May 3, 2019, $50,000 in subordinated unsecured loans at a rate of 6.50% per annum. In May 2019, we borrowed $14,220 under the RMR Credit Agreement to fund additional investments in first mortgage whole loans. Also in May 2019, we completed the Offering. Subsequently, in May 2019, we repaid the approximate $14,220 balance then outstanding under the RMR Credit Agreement with a portion of the Offering proceeds and the RMR Credit Agreement was terminated. In connection with this repayment and termination, we paid our Manager approximately $39 of interest and $7 of fees. See Note 7 for further information regarding the Offering. We have historical and continuing relationships with our Manager. See Notes 8 and 9 for further information regarding these relationships and related party transactions.

Note 6. Fair Value of Financial Instruments

ASC 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

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(dollars in thousands, except per share data)

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 September 30, 2019 and December 31, 2018, the carrying values of cash and cash equivalents, restricted cash and accounts payable approximated their fair values due to the short term nature of these financial instruments. At September 30, 2019 and December 31, 2018, the outstanding principal balances under our Master Repurchase Facility, and at December 31, 2018, the outstanding principal balance under the TCB note payable approximated their fair values, as interest was based on floating rates based on LIBOR plus a spread, and the spread was consistent with those demanded by the market.

We estimate the fair values of our loans held for investment 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:

	September 30, 2019				December 31, 2018
	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets
Loans held for investment	$	207,464	$	208,647	$	135,844	$	137,872
Financial liabilities
Master Repurchase Facility	130,312		131,253		71,691		72,582
Note payable	—		—		31,485		31,690

There were no transfers of financial assets or liabilities within the fair value hierarchy during the three or nine months ended September 30, 2019.

Note 7. Shareholders' Equity

May 2019 Offering

On May 21, 2019, we completed the Offering. In the Offering, we issued and sold 5,000,000 of our common shares at a price of $5.65 per share for total net proceeds of $26,074, after deducting the underwriting discounts and commissions and other expenses. Our Manager purchased 1,000,000 of our common shares in the Offering at the public offering price, without the payment of any underwriting discounts. We used the net proceeds of the Offering to repay the approximate $14,220 balance then outstanding under the RMR Credit Agreement and to reduce borrowings under our Master Repurchase Facility by approximately $11,900. After repayment of the outstanding balance under the RMR Credit Agreement, the RMR Credit Agreement was terminated. See Note 5 for further information regarding the RMR Credit Agreement.

Common Share Issuances and Repurchases

On April 5, 2019, we purchased an aggregate of 644 of our common shares, valued at $9.39 per common share, the closing price of our common shares on The Nasdaq Stock Market LLC, or 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.

On April 24, 2019, we granted 3,000 of our common shares, valued at $10.36 per share, the closing price of our common shares on Nasdaq on that day, to each of our 5 Trustees as part of their annual compensation.

On July 3, 2019, we purchased an aggregate of 704 of our common shares, valued at $4.03 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.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(dollars in thousands, except per share data)

On September 18, 2019, we granted an aggregate of 53,300 shares, valued at $4.55 per share, the closing price of our common shares on Nasdaq on that day to our officers and certain other employees of our Manager and of RMR LLC under our equity compensation plan.

On September 25, 2019, we purchased an aggregate of 5,712 of our common shares valued at $4.82 per common share, the closing price of our common shares on Nasdaq on that day from our officers and certain other employees of our Manager and of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.

Distributions

During the nine months ended September 30, 2019, we declared and paid regular quarterly distributions to common shareholders as follows:

Record Date	Payment Date	Distribution Per Share	Total Distribution
January 28, 2019	February 21, 2019	$0.11	$350
April 29, 2019	May 16, 2019	$0.22	$702
July 29, 2019	August 15, 2019	$0.22	$1,802

On October 17, 2019, we declared a regular quarterly distribution to common shareholders of record on October 28, 2019 of $0.22 per common share, or approximately $1,813. We expect to pay this distribution on or about November 14, 2019.

Note 8. 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.

In June 2018, our Manager agreed to waive any base management fees otherwise due and payable pursuant to our management agreement for the period beginning July 1, 2018 until June 30, 2020. In addition, our Manager also agreed that no incentive fee will be paid or payable by us for the 2018 or 2019 calendar years. As a result, we did not recognize any base management fees or incentive fees for the three or nine months ended September 30, 2019 and the three months ended September 30, 2018. If our Manager had not agreed to waive these fees, we would have recognized $322 and $812 of base management fees for the three and nine months ended September 30, 2019, respectively, and no incentive fees for the three and nine months ended September 30, 2019. Pursuant to our management agreement, we recognized $0 and $447 of base management fees for the three and nine months ended September 30, 2018, respectively, and no incentive fees for the three or nine months ended September 30, 2018. If our Manager had not agreed to waive these fees, we would have recognized $222 of base management fees for the three months ended September 30, 2018, which would have resulted in us recognizing $669 of total base management fees for the nine months ended September 30, 2018 (including the $447 of business management fees actually recognized) and no incentive fees for the three and nine months ended September 30, 2018.

Our Manager, and not us, is responsible for the costs of its employees who provide services to us, including the cost of our Manager’s personnel who originate our loans, unless any such payment or reimbursement is specifically approved by a majority of our Independent Trustees, is a shared services cost or relates to awards made under any equity compensation plan adopted by us. We are generally required to pay or to reimburse our Manager and its affiliates for all other costs and expenses of our operations. Some of these overhead, professional and other services are provided by 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, and these reimbursements may 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, with such shared services costs subject to approval by a majority of our Independent Trustees at least annually. We incurred shared services costs of $370 and $375 payable to our Manager as reimbursement for shared services costs it paid to RMR LLC for the three months ended September 30, 2019 and 2018, respectively, and $1,110 and $1,125 for the nine months ended September 30, 2019 and 2018, 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.

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TREMONT MORTGAGE TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(dollars in thousands, except per share data)

Note 9. 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 which have trustees, directors and officers who are also our Trustees or officers.

Our Manager, Tremont Realty Advisors LLC. We have a management agreement with our Manager to provide management services to us. See Note 8 for further information regarding our management agreement with our Manager.

We were formerly a 100% owned subsidiary of our Manager. Our Manager is our largest shareholder and, as of September 30, 2019, owned 1,600,100 of our common shares, or approximately 19.4% of our outstanding common shares. Included in those shares are the 1,000,000 of our common shares that our Manager purchased in the Offering. See Note 7 for further information regarding the Offering.

Each of our Managing Trustees and officers is also a director or officer of our Manager and of RMR LLC.

Until May 23, 2019, we were a party to the RMR Credit Agreement with our Manager. See Note 5 for information regarding the RMR Credit Agreement.

RMR Inc. and RMR LLC. 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. The controlling shareholder of RMR Inc. is ABP Trust. Adam D. Portnoy, one of our Managing Trustees, is the sole trustee, an officer and the controlling shareholder of ABP Trust, a managing director, president and chief executive officer of RMR Inc., a director of our Manager 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. RMR LLC provides certain shared services to our Manager that are applicable to us, and we reimburse our Manager for the amount it pays for those services. See Note 8 for further information regarding this shared services arrangement.

For further information about these and other such relationships and certain other related person transactions, refer to our 2018 Annual Report.

Note 10. Income Taxes

We have elected to be taxed as a 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. Weighted Average Common Shares

We calculate basic earnings per share, or EPS, by dividing net income (loss) 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 (loss), are considered when calculating diluted earnings (loss) per share. For the three and nine months ended September 30, 2019, 39,024 and 15,037 unvested common shares, respectively, were excluded from the calculation of diluted earnings (loss) per share because to do so would have been antidilutive. Due to net losses incurred during the three and nine months ended September 30, 2018, basic weighted average shares is equal to diluted weighted average shares for such periods. As a result, 2,204 and 1,071 restricted unvested common shares were excluded from the computation of diluted EPS for the three and nine months ended September 30, 2018, respectively.

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TREMONT MORTGAGE TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(dollars in thousands, except per share data)

Note 12. Commitments and Contingencies

Unfunded Commitments

As of September 30, 2019, we had unfunded commitments of $18,813 related to our loans held for investment. Unfunded commitments will generally be funded to finance property and building improvements and leasing capital over the term of the applicable loan. Unfunded commitments are not reflected in our condensed consolidated balance sheets. Loans held for investment related to our unfunded commitments had a weighted average initial maturity of 2 years. See Note 4 for further information regarding loans held for investment.

Borrowings

As of September 30, 2019, we had an aggregate of $131,253 in principal amount outstanding under our Master Repurchase Facility with a weighted average life to maturity of 1.8 years. See Note 5 for further information regarding our secured debt agreements.

15

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 2018 Annual Report.

OVERVIEW (dollars in thousands, except per share data)

We are a REIT that was organized under Maryland law in 2017. We focus 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 and transitional CRE as commercial properties subject to redevelopment or repositioning activities that are expected to increase the value of the properties. These assets are classified as loans held for investment in our 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 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.

Book Value per Common Share

The table below calculates our book value per common share (amounts in thousands, except per share data):

	September 30, 2019		December 31, 2018
Shareholders' equity	$	86,679	$	59,668
Total outstanding common shares	8,240		3,179
Book value per common share	$	10.52	$	18.77

Our Portfolio

As of September 30, 2019, our portfolio of investments consisted of 10 first mortgage whole loans with an aggregate carrying value of $207,464. Based on our internal risk rating policy, each of these loans was assigned a "3" acceptable risk rating at September 30, 2019. We did not have any impaired loans, non-accrual loans or loans in maturity default as of September 30, 2019; thus, we did not record a reserve for loan loss. 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 for a discussion regarding the risk rating system that we use in evaluating our loans held for investment.

The table below details overall statistics for our loan portfolio as of September 30, 2019:

	Balance at September 30, 2019
Number of loans	10
Total loan commitments	$	227,157
Unfunded loan commitments (1)	$	18,813
Principal balance	$	208,344
Unamortized net deferred origination fees	$	(880	)
Carrying value	$	207,464
Weighted average coupon rate	5.85		%
Weighted average all in yield (2)	6.51		%
Weighted average maximum maturity (years) (3)	3.6
Weighted average LTV	70		%

(1)   Unfunded commitments will primarily be funded to finance property and building improvements and leasing capital. These commitments will generally be funded over the term of each loan.

(2) All in yield includes the amortization of deferred fees over the initial term of the loan.

(3) Maximum maturity assumes all extension options are exercised, which options are subject to the borrower meeting certain conditions.

16

Loan Portfolio Details

The table below details our loan portfolio as of September 30, 2019:

Location	Property Type	Origination Date	Committed Principal Amount		Principal Balance		Coupon Rate	All in Yield (1)	Maximum Maturity(2) (date)	LTV(3)	Risk Rating
First mortgage whole loans
Metairie, LA	Office	04/11/2018	$	18,102	$	16,679	L + 5.00%	L + 5.66%	04/11/2023	79%	3
Houston, TX	Office	06/26/2018	15,200		13,719		L + 4.00%	L + 4.61%	06/26/2023	69%	3
Paradise Valley, AZ	Retail	11/30/2018	12,790		6,400		L + 4.25%	L + 6.16%	11/30/2022	48%	3
St. Louis, MO	Office	12/19/2018	29,500		26,637		L + 3.25%	L + 3.76%	12/19/2023	72%	3
Atlanta, GA	Hotel	12/21/2018	24,000		23,218		L + 3.25%	L + 3.73%	12/21/2023	62%	3
Rochester, NY	Multifamily	01/22/2019	24,550		24,550		L + 3.25%	L + 3.86%	01/22/2024	74%	3
Coppell, TX	Retail	02/05/2019	22,915		21,751		L + 3.50%	L + 4.26%	02/05/2021	73%	3
Barrington, NJ	Industrial	05/06/2019	37,600		34,900		L + 3.50%	L + 4.05%	05/06/2023	79%	3
Houston, TX	Multifamily	05/10/2019	28,000		27,475		L + 3.50%	L + 4.37%	11/10/2022	56%	3
Omaha, NE	Retail	06/14/2019	14,500		13,015		L + 3.65%	L + 4.05%	06/14/2024	77%	3
Total/weighted average			$	227,157	$	208,344	L + 3.60%	L + 4.25%		70%	3

(1) All in yield includes the amortization of deferred fees.

(2) Maximum maturity assumes all extension options are 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.

In September 2019, we entered a loan application with a borrower for a first mortgage bridge whole loan with a total commitment of $22,582 to refinance a three building office portfolio located in Dublin, OH.

In October 2019, we entered into a loan application with a borrower for a first mortgage bridge whole loan with a total commitment of $18,010 to refinance a student housing property located in Orono, ME.

Financing Activities

On May 21, 2019, we issued and sold 5,000,000 of our common shares at a price of $5.65 per share in the Offering for total net proceeds of $26,074, after deducting the underwriting discounts and commissions and other expenses. Our Manager purchased 1,000,000 of our common shares in the Offering at the public offering price, without the payment of any underwriting discounts. We used the net proceeds of the Offering to repay the approximate $14,220 balance then outstanding under the RMR Credit Agreement and to reduce borrowings under our Master Repurchase Facility by approximately $11,900. After repayment of the outstanding balance under the RMR Credit Agreement, the RMR Credit Agreement was terminated. 

During the quarter ended September 30, 2019, we repaid the $31,690 outstanding principal balance, plus accrued interest under the TCB note payable and $22,412 of outstanding principal balances under our Master Repurchase Facility with the repayment proceeds noted above, and the TCB note payable was terminated in accordance with its terms. As of September 30, 2019, we had $24,203 available for immediate advancement under our Master Repurchase Facility from loans currently pledged pursuant to our Master Repurchase Facility and $58,026 of unused capacity Master Repurchase Facility subject to our identifying suitable first mortgage whole loans for investment.

The table below is an overview of our debt agreements that provided financing for our loans held for investment as of September 30, 2019 and December 31, 2018:

	Initial Maturity Date	Principal Balance		Unused Capacity		Maximum Facility Size		Collateral Principal Balance
September 30, 2019:
Master repurchase facility	11/06/2021	$	131,253	$	82,229	$	213,482	$	208,344
December 31, 2018:
Master repurchase facility	11/06/2021	$	72,582	$	62,418	$	135,000	$	97,516
Note payable	07/19/2021	31,690		600		32,290		39,613

17

The table below details our debt activities for the three months ended September 30, 2019:

	Master Repurchase Agreement			Note Payable			Total
Balance at beginning of period	$	152,620		$	31,523		$	184,143
Borrowings	—			—			—
Repayments	(22,412		)	(31,690		)	(54,102		)
Deferred Fees	(7		)	1			(6		)
Amortization of Deferred Fees	111			166			277
Balance at end of period	$	130,312		$	—		$	130,312

The table below details our debt activities for the nine months ended September 30, 2019:

	Master Repurchase Agreement			Note Payable			RMR Credit Agreement			Total
Balance at beginning of period	71,691			31,485			$	—		103,176
Borrowings	92,983			—			14,220			107,203
Repayments	(34,312		)	(31,690		)	(14,220		)	(80,222		)
Deferred Fees	(342		)	(5		)	—			(347		)
Amortization of Deferred Fees	292			210			—			502
Balance at end of period	$	130,312		$	—		$	—		$	130,312

As of September 30, 2019, outstanding borrowings 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 more information regarding our Master Repurchase Agreement, see Note 5 to the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

We could experience a loss on repurchase transactions under our Master Repurchase Facility if a counterparty to these transactions defaults on its obligation to resell the underlying assets back to us at the end of the transaction term, or if the value of the underlying assets has declined as of the end of that term, or if we default on our obligations under the applicable agreement governing any such arrangement.

18

RESULTS OF OPERATIONS (dollars in thousands, except share data)

Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018:

	Three Months Ended September 30,
	2019			2018			Change			% Change
INCOME FROM INVESTMENTS:
Interest income from investments	$	4,959		$	1,385		$	3,574		258	%
Less: interest and related expenses	(1,992		)	(563		)	(1,429		)	254	%
Income from investments, net	2,967			822			2,145			261	%
OTHER EXPENSES:
Management fees (1)	—			—			—			—	%
General and administrative expenses	541			510			31			6	%
Reimbursement of shared services expenses	370			375			(5		)	(1	%)
Total expenses	911			885			26			3	%
Net income (loss)	$	2,056		$	(63	)	$	2,119		3,363	%
Weighted average common shares outstanding - basic and diluted	8,156			3,129			5,027			161	%
Net income (loss) per common share - basic and diluted	$	0.25		$	(0.02	)	$	0.27		1,352	%

(1) In June 2018, our Manager agreed to waive any base management fees otherwise due and payable pursuant to our management agreement for the period beginning July 1, 2018 until June 30, 2020. If our Manager had not agreed to waive these base management fees, we would have recognized $322 and $222 of base management fees for the three months ended September 30, 2019 and September 30, 2018, respectively.

Interest income from investments. The interest income from investments of $4,959 for the three months ended September 30, 2019 reflects interest earned on the 10 loans included in our loan portfolio. Also contributing to the increase interest income from investments for the three months ended September 30, 2019 was $877 of deferred fees that we recognized on the two loans that were repaid by borrowers during the quarter as well as a prepayment premium earned on one of these repaid loans. Interest income from investments of $1,385 for the three months ended September 30, 2018 primarily consists of interest earned on the four loans that were included in our loan portfolio during the three months ended September 30, 2018 and on the proceeds of our IPO and concurrent private placement.

Interest and related expenses. The increase in interest and related expenses is a result of higher outstanding borrowings under our Master Repurchase Facility and the TCB note payable during the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. Also contributing to the increase in interest expense for the three months ended September 30, 2019 were $157 of deferred fees that we recognized with respect to the prepayment and termination of the TCB note payable as a result of the early repayment of the JFK loan by the borrower.

Management fees. There were no management fees recognized for the three months ended September 31, 2019 or 2018 as our Manager agreed to waive any base management fee otherwise due and payable pursuant to our management agreement for the period beginning July 1, 2018 until June 30, 2020.

General and administrative expenses. General and administrative expenses primarily include legal and audit fees, insurance, dues and subscriptions, Trustee fees, internal audit costs, share based compensation expense and other professional fees.

Reimbursement of shared services expenses. Reimbursement of shared services expenses represents reimbursements for the costs our Manager arranges on our behalf from RMR LLC.

Net income (loss). The realization of net income for the 2019 period as compared to net loss for the 2018 period is due to the changes noted above.

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Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018:

	Nine Months Ended September 30,
	2019			2018			Change			% Change
INCOME FROM INVESTMENTS:
Interest income from investments	$	11,872		$	2,113		$	9,759		462	%
Less: interest and related expenses	(5,572		)	(666		)	(4,906		)	737	%
Income from investments, net	6,300			1,447			4,853			335	%
OTHER EXPENSES:
Management fees (1)	—			447			(447		)	(100	%)
General and administrative expenses	1,662			1,668			(6		)	—	%
Reimbursement of shared services expenses	1,110			1,125			(15		)	(1	%)
Total expenses	2,772			3,240			(468		)	(14	%)
Net income (loss)	$	3,528		$	(1,793	)	$	5,321		297	%
Weighted average common shares outstanding - basic and diluted	5,583			3,121			2,462			79	%
Net income (loss) per common share - basic and diluted	$	0.63		$	(0.57	)	$	1.21		210	%

(1) In June 2018, our Manager agreed to waive any base management fees otherwise due and payable pursuant to our management agreement for the period beginning July 1, 2018 until June 30, 2020. If our Manager had not agreed to waive these base management fees, we would have recognized $812 of base management fees for the nine months ended September 30, 2019 and $222 for the three months ended September 30, 2018, which would have resulted in us recognizing $669 of total base management fees for the nine months ended September 30, 2018 (including the $447 of business management fees actually recognized).

Interest income from investments. The interest income from investments of $11,872 for the nine months ended September 30, 2019 reflects interest earned on the 10 loans included in our loan portfolio. Also contributing to the increase in interest income from investments for the nine months ended September 30, 2019 was $877 of deferred fees that we recognized on the two loans that were repaid by borrowers during the quarter as well as a prepayment premium earned on one of these repaid loans. Interest income from investments of $2,113 for the nine months ended September 30, 2018 primarily consists of interest earned on the proceeds of our IPO and concurrent private placement and on the four loans closed for the nine months ended September 30, 2018.

Interest and related expenses. The increase in interest and related expenses is a result of higher outstanding borrowings under our Master Repurchase Facility and the TCB note payable during the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. Also contributing to the increase in interest expense for the nine months ended September 30, 2019 were $157 of deferred fees that we recognized with respect to the repayment and termination of the TCB note payable as a result of the early repayment of the JFK loan by the borrower.

Management fees. The decrease in management fees is a result of our Manager agreeing to waive any base management fee otherwise due and payable pursuant to our management agreement for the period beginning July 1, 2018 until June 30, 2020.

General and administrative expenses. General and administrative expenses primarily include legal and audit fees, insurance, dues and subscriptions, Trustee fees, internal audit costs, share based compensation expense and other professional fees.

Reimbursement of shared services expenses. Reimbursement of shared services expenses represents reimbursements for the costs our Manager arranges on our behalf from RMR LLC.

Net income (loss). The realization of net income for the 2019 period as compared to net loss for the 2018 period is due to the changes noted above.

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Non-GAAP Financial Measures

We present Core Earnings (Loss) which is considered a “non-GAAP financial measure” within the meaning of the applicable SEC rules. Core Earnings (Loss) does not represent net income (loss) or cash generated from operating activities and should not be considered as an alternative to net income (loss) determined in accordance with GAAP, or an indication of our cash flows from operations determined in accordance with GAAP, a measure of our liquidity or operating performance or an indication of funds available for our cash needs. In addition, our methodology for calculating Core Earnings (Loss) may differ from the methodologies employed by other companies to calculate the same or similar supplemental performance measures; therefore, our reported Core Earnings (Loss) may not be comparable to the core earnings (loss) as reported by other companies.

We believe that Core Earnings (Loss) provides meaningful information to consider in addition to net income and cash flows from operating activities determined in accordance with GAAP. This measure helps us to evaluate our performance excluding the effects of certain transactions and GAAP adjustments that we believe are not necessarily indicative of our current loan portfolio and operations. In addition, Core Earnings (Loss) is used in determining the amount of business management and incentive fees payable by us to our Manager under our management agreement.

Core Earnings (Loss)

We calculate Core Earnings (Loss) as net income (loss), computed in accordance with GAAP, including realized losses not otherwise included in net income (loss) determined in accordance with GAAP, and excluding: (a) the incentive fees earned by our Manager (if any); (b) depreciation and amortization (if any); (c) non-cash equity compensation expense; (d) unrealized gains, losses and other similar non-cash items that are included in net income (loss) for the period of the calculation (regardless of whether such items are included in or deducted from net income (loss) or in other comprehensive income (loss) under GAAP) (if any); and (e) one time events pursuant to changes in GAAP and certain non-cash items (if any).

	Three Months Ended September 30,					Nine Months Ended September 30,
	2019		2018			2019		2018
Reconciliation of Net Income (Loss) to Core Earnings (Loss):
Net income (loss)	$	2,056	$	(63	)	$	3,528	$	(1,793	)
Non-cash equity compensation expense	80		118			300		349
Core Earnings (Loss)	$	2,136	$	55		$	3,828	$	(1,444	)
Weighted average common shares outstanding - basic and diluted	8,156		3,129			5,583		3,121
Core Earnings (Loss) per common share - basic and diluted	$	0.26	$	0.02		$	0.69	$	(0.46	)

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.

Credit Risk. We are subject to the credit risk of our borrowers in connection with our investments. We seek to mitigate this risk by utilizing a comprehensive underwriting, diligence and investment selection process and by ongoing monitoring of our investments. Nevertheless, unanticipated credit losses could occur that could adversely impact our operating results.

Changes in Fair Value of our Assets. We generally hold our investments for their contractual terms, unless repaid earlier by the borrower. We evaluate our investments for impairment quarterly. Impairments occur when it is probable that we will not be able to collect all amounts due according to the applicable contractual terms. If we determine that a loan is impaired, we will record an allowance to reduce the carrying value of the loan to an amount that takes into account both the present value of expected future cash flows discounted at the loan's contractual effective interest rate and the fair value of any available collateral, net of any costs we expect to incur to realize that value.

Although we generally hold our investments for their contractual terms, 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.

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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. To continue to grow our portfolio of investments, we may also seek to raise additional equity capital. However, our access to additional equity capital depends on many factors, and we have and may continue to experience challenges raising equity capital in the future.

Market Conditions. Under current market conditions and subject to our having access to capital to invest, we believe that we will be able to identify additional attractive financing opportunities by continuing to focus on middle market and transitional CRE loans. We believe that there continues to be strong demand for alternative sources of CRE debt capital. The decrease in traditional CRE debt providers, such as banks and insurance companies, is a primary reason borrowers are seeking alternative sources of debt, particularly in middle market and transitional situations. Alternative CRE lenders, like us, generally are able to operate with fewer regulatory constraints than traditional CRE debt providers, such as banks and insurance companies. This allows alternative CRE lenders to create customized solutions to fit borrowers’ specific business plans for the collateral properties. We believe that this flexibility affords alternative lenders, like us, a competitive advantage over regulated traditional CRE debt providers, especially with regard to middle market and transitional CRE debt financing.

A significant amount of capital continues to be raised by alternative lenders. As new alternative CRE debt providers enter the marketplace and as existing alternative CRE debt providers increase their presence in the marketplace, borrowers are becoming more familiar with alternative CRE debt products and are choosing to utilize alternative CRE debt financing in a wider array of circumstances. However, increased supply of alternative CRE debt capital has resulted in more competition for loans and applied downward pressure on loan credit spreads. In addition, the LIBOR, the index rate upon which bridge loans are priced, has decreased during the last quarter and we expect that it will continue to decrease in the future, further reducing borrowing costs. To offset the reduction in loan credit spreads, some alternative CRE debt providers are considering construction and higher LTV loans to meet their investors’ return expectations. Because of this credit spread compression, borrowers are more frequently seeking alternative CRE debt financing for stabilized or near stabilized properties to take advantage of the flexibility offered by these loan structures. However, we believe many alternative lenders are targeting loan amounts in excess of $50,000 in major markets. We expect that our primary focus will continue to be originating and investing in floating rate first mortgage whole loans of less than $50,000.

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) coupons on our variable rate investments, if any, to reset, perhaps on a delayed basis, to higher interest rates; and (d) refinancing by our borrowers to become more difficult and costly, negatively impacting refinancing as a source of repayment for our investments.

Conversely, decreases in interest rates, in general, may cause: (a) the interest expense associated with our variable rate borrowings, if any, to decrease; (b) the value of our fixed rate investments, if any, to increase; (c) coupons on our variable rate investments, if any, to reset, perhaps on a delayed basis, to lower interest rates; and (d) our borrowers' ability to refinance to become easier and more affordable, positively impacting our borrowers' ability to repay our investments.

The interest income on our loans and interest expense on our borrowings float with one month LIBOR. Because we generally lever 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 rate floor provisions in our loan agreements with borrowers; therefore, changes to income from investments, net, may not move proportionately with the decrease in LIBOR.

Size of Portfolio. The size of our portfolio of investments, 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 portfolio grows, the amount of interest income we receive would increase and we may achieve certain economies of scale and diversify risk within our portfolio of investments. 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 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, we are focused on managing our current loan portfolio. We believe our growth is limited by our ability to access accretive capital.

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LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands, except per share amounts)

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay or meet margin calls resulting from our borrowings, fund and maintain our assets and operations, make distributions to our shareholders and fund other business operating requirements. We 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. Our sources of cash flows may include payments of principal, interest and fees we receive on our investments, cash generated from our operating results and 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.

Cash Provided by (Used in) Operating Activities

During the nine months ended September 30, 2019, net cash provided by operating activities of $2,489 was primarily due to our net income for the period, partially offset by unfavorable changes in working capital primarily due to non-cash amortization of deferred fees, interest income accrued and not yet received and expenses paid in the period but accrued in previous periods.

Net cash used in operating activities of $2,149 during the nine months ended September 30, 2018 was due to our net loss for the period, partially offset by the non-cash items such as the amortization of deferred fees and share based compensation.

Cash Used in Investing Activities

During the nine months ended September 30, 2019, net cash used in investing activities consisted of $119,062 of loan originations, net of deferred fees, and $4,835 of additional fundings on our loans held for investment, partially offset by loan principal repayments of $53,610 related to the prepayment of two of our loans held for investment.

During the nine months ended September 30, 2018, net cash used in investing activities consisted of $81,519 of loan originations, net of deferred fees received on our loans held for investment.

Cash Provided by Financing Activities

During the nine months ended September 30, 2019, our cash provided by financing activities primarily 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 the Offering. We used the Offering proceeds to repay the approximate $14,220 outstanding under the RMR Credit Agreement and to reduce borrowings under our Master Repurchase Facility by approximately $11,900. Proceeds from the prepayment of two of our loans held for investment were used to repay approximately $31,690 of borrowings outstanding under the TCB note payable and $22,412 of borrowings outstanding under the Master Repurchase Facility.

During the nine months ended September 30, 2018, our cash flows provided by financing activities consisted of $21,583 of advancements under our Master Repurchase Facility and $31,690 of borrowings under the TCB note payable, partially offset by $1,045 of deferred financing cost payments related to our Master Repurchase Facility and TCB note payable.

As of September 30, 2019, we had approximately $73,000 available for investment in new first mortgage whole loans from available borrowing capacity under our Master Repurchase Facility. Any further investments would require us to obtain additional equity or debt capital. We cannot be sure that we would be able to obtain any such additional equity or debt capital.

Distributions

During the nine months ended September 30, 2019, we paid regular quarterly distributions to our shareholders totaling $2,854 using cash on hand. For more information regarding the distributions we paid during 2019, see Note 7 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

On October 17, 2019, we declared a regular quarterly distribution to common shareholders of record on October 28, 2019 of $0.22 per common share, or approximately $1,813. We expect to pay this distribution on or about November 14, 2019 using cash on hand.

The timing and amount 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 Core

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Earnings (Loss), 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, we cannot be sure that we will continue to pay distributions in the future or that the amount of any distributions we do pay will not decrease.

Contractual Obligations and Commitments

Our contractual obligations and commitments as of September 30, 2019 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)	$	18,813	$	—	$	18,813	$	—	$	—
Principal payments on Master Repurchase Facility (2)	131,253		—		131,253		—		—
Interest payments (3)	9,977		5,375		4,602		—		—
	$	160,043	$	5,375	$	154,668	$	—	$	—

(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 borrowings 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 expense is attributable to only our debt obligations at existing rates as of September 30, 2019 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.

Off-Balance Sheet Arrangements

As of September 30, 2019, 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 or capital resources.

Debt Covenants

Our principal debt obligations at September 30, 2019 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 Facility 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 August 2019, in connection with the repayment by the borrower of one of our loans held for investment, we repaid the associated outstanding balance and accrued interest under our Master Repurchase Facility.

In connection with our Master Repurchase Agreement, we entered into a guaranty which requires us to pay the purchase price, purchase price differential and any costs and expenses of Citibank related to our Master Repurchase Agreement. This 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 September 30, 2019, we believe we were in compliance with the terms and conditions of the covenants of our Master Repurchase Agreement and the related guarantee.

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: we have no employees and the personnel and various services we require to operate our business are provided to us by our Manager pursuant to our management agreement with our Manager; our Manager is a subsidiary 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 September 30, 2019, 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 an

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executive officer of RMR Inc., and an executive 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 executive officer and employee of RMR LLC; and each of our other officers is also an officer 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. For further information about these and other such relationships and related person transactions, see Notes 8 and 9 to the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our 2018 Annual Report, our definitive Proxy Statement for our 2019 Annual Meeting of Shareholders and our other filings with the SEC. In addition, see the section captioned “Risk Factors” of our 2018 Annual Report and Part II, Item 1A of this Quarterly Report on Form 10-Q 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 in areas where the collateral for our loans are located may cause our borrowers to default or may cause the value of our loan collateral to be reduced below the amounts we are owed. To mitigate these market risks, we perform thorough diligence on the value of our collateral properties and of properties comparable to our collateral properties in the areas where our collateral properties are located and on the historical business practices of our borrowers and their affiliates. We compare our borrowers' business plans to our expectations for the economy where our collateral properties are located and regarding the future income potential of the specific collateral properties. We also monitor the performance of our borrowers and collateral properties. Nonetheless, no amount of diligence, no matter how extensive, detailed and well informed it may be, can provide complete assurance against borrower defaults or against the deterioration of collateral values in declining market conditions.

Floating Rate Investments

As of September 30, 2019, our loans held for investment had an aggregate principal balance of $208,344 and the weighted average maximum maturity of our loan portfolio was 3.6, assuming full term extensions of all loans. All of 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 on any reinvestment of the proceeds from the repayment.

Floating Rate Debt

At September 30, 2019, our floating rate debt obligations consisted of $131,253 in outstanding borrowings under our Master Repurchase Facility. Our Master Repurchase Facility matures in November 2021, 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.

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The table below details the impact, based on our existing loan portfolio and liabilities, on our interest income and interest expense for the 12 month period following September 30, 2019, assuming an immediate increase or decrease of 100 basis points in LIBOR, the applicable interest rate benchmark:

	Principal Balance as of September 30, 2019			Interest Rate Per Year (1)	100 Basis Point Increase			100 Basis Point Decrease (3)
Assets (Liabilities) Subject to Interest Rate Sensitivity:
Loans held for investment	$	208,344		5.85%	$	1,657		$	(132	)
Master repurchase facility	(131,253		)	4.05%	(1,313		)	1,313
Total change in net income from investments					$	344		$	1,181
Annual earnings per share impact (2)					$	0.06		$	0.21

(1) Weighted based on interest rates and principal balances as of September 30, 2019.

(2) Based on weighted average number of shares outstanding (diluted) for the three months ended September 30, 2019.

(3) Our loan agreements include interest rate floor provisions which set a minimum LIBOR for each loan. We do not have similar provisions in our Master Repurchase Agreement. As a result, if LIBOR decreases below the floor established for any of our investments, our income from investments will decrease 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 in LIBOR taking into consideration our borrowers' interest rate floors as of September 30, 2019. The results are based on our current loan portfolio and debt outstanding at September 30, 2019. Any changes to the mix of investments of debt outstanding could have an impact on the sensitivity analysis above and this illustration is not meant to forecast future results.

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 a significant majority of our loans held for investment and, to the extent that we use leverage to make investments, we will continue 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 obligations from fixed to floating rates or the reverse.

LIBOR Phase Out

LIBOR is currently expected to be phased out in 2021. All of the agreements governing our loans held for investment require our borrowers, and under our Master Repurchase Facility we are required, to pay interest at floating rates based on LIBOR. Future agreements governing loans that we may make and debt that we may incur may also require interest to be paid at floating rates based on LIBOR. We currently expect that the determination of interest under such agreements would be revised as provided under such 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 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. Based upon that evaluation, 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 September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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:

• Our ability to carry out our business strategy and the opportunities for our business that we believe exist,

• Our operating and investment targets, guidelines, investment and financing strategies and leverage policies,

• The ability of our Manager to locate suitable investments for us, monitor, service and administer our existing investments and implement our investment strategy,

• Our expected operating results,

• The amount and timing of any cash flows we receive from our investments,

• Our ability to pay distributions to our shareholders and to sustain the amount of any such distributions,

• Our ability to obtain and maintain financing to enable us to use leverage to make additional investments or to increase our potential returns,

• 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,

• The origination, extension, exit, prepayment or other fees we may earn,

• Yields that may be available to us from mortgages on specialized real estate,

• The duration and other terms of our loans,

• The credit qualities of our borrowers,

• The ability and willingness of our borrowers to repay our loans and investments in a timely manner or at all,

• Our projected leverage,

• The cost and availability of financing under our Master Repurchase Facility or other repurchase or bank facilities we may obtain from time to time,

• Our qualification for taxation as a REIT,

• Our ability to maintain our exemption from registration under the Investment Company Act,

• Our understanding of our competition and our ability to compete,

• Market trends in our industry or with respect to interest rates, real estate values, the debt securities markets or the economy generally,

• Regulatory requirements and the affect they may have on us, our competitors and prospective competitors, and

• Other matters.

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, 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,

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• 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,

• Acts of terrorism, outbreaks of so called pandemics or other manmade or natural disasters beyond our control, and

• Additional factors, including, but not limited to, those set forth in the section captioned "Risk Factors" in this Quarterly Report on Form 10-Q and in the section captioned "Risk Factors" in our 2018 Annual Report.

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,

• Our current cash distribution rate to common shareholders is $0.22 per share per quarter, or $0.88 per share per year. 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 Core Earnings (Loss), 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, we cannot be sure that we will continue to pay distributions in the future or that the amount of any distributions we do pay will not decrease,

• In order to continue to grow our investments and business, we will need to obtain additional financing, whether by expanding our existing credit arrangements or obtaining new equity or other financing sources. We cannot be sure that we would be successful in obtaining any such additional financing. If we are unable to obtain additional financing, we may not be able to further grow our investments and business,

• As of September 30, 2019, we had approximately $73,000 available for investment in new first mortgage whole loans from funds immediately available as well as available borrowing capacity under our Master Repurchase Facility. However, our available borrowing capacity under our Master Repurchase Facility is subject to conditions. Therefore, we may have less than the currently expected amount available for additional investments. Further, it may take an extended period of time for us to reinvest any such amount, and any reinvestments we may make may not provide us with returns similar to those on our current investments or at comparable risks,

• Competition may limit our ability to identify and make desirable investments,

• Our belief that there continues to be strong demand for alternative sources of CRE debt capital may not be correct; further, any demand that now exists could be reduced. Reduced demand for alternative sources of CRE debt capital would further increase competition for investments in the CRE debt market,

• Contingencies related to loans that we have entered applications with borrowers for but have not closed may not be satisfied and the closings of pending loans may not occur, may be delayed or the terms may change,

• The value of our loans depends upon our borrowers’ ability to generate cash flow from operating the properties that are our collateral for our loans. Our borrowers may not have sufficient cash flow to repay our loans according to their terms, which may result in delinquency and foreclosure on our loans,

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• 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's and RMR LLC's only experience managing or servicing a mortgage REIT is with respect to us, and we have a limited operating history,

• We may incur significant debt, and our governing documents contain no limit on the amount of debt we may incur,

• Continued availability of financing under our Master Repurchase Facility is subject to 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,

• Our ability to obtain additional financing under our Master Repurchase Facility is contingent upon our ability to effectively originate additional investments. However, we cannot be sure that we will be able to use our Master Repurchase Facility as we expect or effectively originate additional investments in the near future or at all,

• Any phase out of LIBOR may have an impact on our investments and our debt financial arrangements,

• 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.

Currently unexpected results could occur due to many different circumstances, some of which are beyond our control, such as acts of terrorism, 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 2018 Annual Report or in our other filings with the SEC, including under the caption “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.

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Part II. Other Information

Item 1A. Risk Factors

Our business faces many risks, a number of which are described under the caption “Risk Factors” in our 2018 Annual Report. The risks described in our 2018 Annual Report and below may not be the only risks we face. 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 2018 Annual Report or described below occur, our business, financial condition or results of operations could be adversely impacted and the value of an investment in our securities could decline. Investors and prospective investors should consider the risks described in our 2018 Annual Report and below, and the information contained under the caption “Warning Concerning Forward-Looking Statements” and elsewhere in this Quarterly Report before deciding whether to invest in our securities.

We may not have sufficient capital to acquire all of the investments that we determine are attractive.

Our capital resources are limited and we may not have sufficient capital to acquire investments that we determine are attractive. This could limit our ability to grow our loan portfolio, including by pursuing opportunities currently available in our loan origination pipeline, and adversely affect our ability to sustain or increase our distribution rate. Our ability to further grow our portfolio over time will depend, to a significant degree, upon our ability to access additional equity and debt capital. We cannot be sure that we will have access to such equity or debt capital on favorable terms at the desired times, or at all, which may cause us to reduce or suspend our investment activities or dispose of assets at an inopportune time or price, which could negatively affect our financial condition, results of operations and ability to sustain or increase our distribution rate.

We may not be able to sustain or increase distributions to our shareholders in the future.

Our current quarterly distribution is $0.22 per common share ($0.88 per common share per year). Our ability to make future distributions at our current distribution rate will depend, to a significant degree, on our interest income from investments and our expenses (including interest expense). Although our Core Earnings for the quarter ended September 30, 2019 exceeds our current distribution rate, we currently expect that our current distribution rate will exceed our Core Earnings (Loss) in future periods. Accordingly, if we are unable to maintain or increase our Core Earnings, we may have to fund distributions from other sources (such as from selling certain of our assets) or reduce, or eliminate, our distributions. We cannot be sure that we will be able to continue to pay distributions in the future or that the amount of any distributions we do pay will not decrease.

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 September 30, 2019.

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
July 2019	704	$	4.03	—	$	—
September 2019	5,712		4.82	—		—
Total	6,416	$	4.73	—	$	—

(1) These common share withholdings and purchases were made to satisfy the tax withholding and payment obligations of certain of our officers and of certain current and former officers and other employees of our Manager and 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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Item 6. Exhibits

Exhibit Number	Description
3.1	Articles of Amendment and Restatement of the Company effective September 14, 2017. (Incorporated by reference to the Company’s Current Report on Form 8-K dated September 13, 2017.)
3.2	Amended and Restated Bylaws of the Company dated September 14, 2017. (Incorporated by reference to the Company’s Current Report on Form 8-K dated September 13, 2017.)
4.1	Form of Common Share Certificate. (Incorporated by reference to Amendment No. 1 to the Company’s Registration Statement on Form S-11 dated August 3, 2017, File No. 333-219205.)
31.1	Rule 13a-14(a) Certification. (Filed herewith.)
31.2	Rule 13a-14(a) Certification. (Filed herewith.)
32.1	Section 1350 Certification. (Furnished herewith.)
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.)

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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.

TREMONT MORTGAGE TRUST
By:	/s/ David M. Blackman
	David M. Blackman President and Chief Executive Officer
	Dated: November 6, 2019
By:	/s/ G. Douglas Lanois
	G. Douglas Lanois Chief Financial Officer and Treasurer (principal financial and accounting officer)
	Dated: November 6, 2019

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