i false i --12-31 i Q2 i 2020 i 0001708405 i 0.025 i 0.02 i 0.02 i 0 i 36000 i 0.0199 i 0.0200 i 0.01 i 0.01 i 25000000 i 25000000 i 8239610 i 8253836 i 8239610 i 8253836 i 39000
0001708405
2020-01-01
2020-06-30
0001708405
2020-08-03
0001708405
2019-12-31
0001708405
2020-06-30
0001708405
2019-01-01
2019-06-30
0001708405
2020-04-01
2020-06-30
0001708405
2019-04-01
2019-06-30
0001708405
us-gaap:RetainedEarningsMember
2019-06-30
0001708405
2020-03-31
0001708405
2019-01-01
2019-03-31
0001708405
us-gaap:CommonStockMember
2019-06-30
0001708405
us-gaap:AdditionalPaidInCapitalMember
2019-06-30
0001708405
us-gaap:AdditionalPaidInCapitalMember
2020-03-31
0001708405
us-gaap:AccumulatedDistributionsInExcessOfNetIncomeMember
2020-06-30
0001708405
us-gaap:RetainedEarningsMember
2020-03-31
0001708405
us-gaap:AdditionalPaidInCapitalMember
2020-01-01
2020-03-31
0001708405
us-gaap:CommonStockMember
2020-03-31
0001708405
us-gaap:CommonStockMember
2020-06-30
0001708405
us-gaap:AccumulatedDistributionsInExcessOfNetIncomeMember
2019-04-01
2019-06-30
0001708405
2018-12-31
0001708405
us-gaap:RetainedEarningsMember
2020-06-30
0001708405
us-gaap:AccumulatedDistributionsInExcessOfNetIncomeMember
2020-01-01
2020-03-31
0001708405
us-gaap:AccumulatedDistributionsInExcessOfNetIncomeMember
2019-03-31
0001708405
us-gaap:RetainedEarningsMember
2019-03-31
0001708405
us-gaap:CommonStockMember
2019-04-01
2019-06-30
0001708405
us-gaap:AdditionalPaidInCapitalMember
2019-01-01
2019-03-31
0001708405
us-gaap:AdditionalPaidInCapitalMember
2018-12-31
0001708405
us-gaap:AdditionalPaidInCapitalMember
2020-04-01
2020-06-30
0001708405
us-gaap:CommonStockMember
2018-12-31
0001708405
us-gaap:AdditionalPaidInCapitalMember
2019-04-01
2019-06-30
0001708405
us-gaap:AccumulatedDistributionsInExcessOfNetIncomeMember
2020-03-31
0001708405
2019-06-30
0001708405
us-gaap:RetainedEarningsMember
2019-04-01
2019-06-30
0001708405
us-gaap:RetainedEarningsMember
2019-01-01
2019-03-31
0001708405
us-gaap:AccumulatedDistributionsInExcessOfNetIncomeMember
2019-12-31
0001708405
us-gaap:AdditionalPaidInCapitalMember
2019-12-31
0001708405
2020-01-01
2020-03-31
0001708405
us-gaap:CommonStockMember
2019-12-31
0001708405
us-gaap:AccumulatedDistributionsInExcessOfNetIncomeMember
2019-01-01
2019-03-31
0001708405
us-gaap:RetainedEarningsMember
2018-12-31
0001708405
us-gaap:CommonStockMember
2020-01-01
2020-03-31
0001708405
us-gaap:CommonStockMember
2019-03-31
0001708405
us-gaap:CommonStockMember
2020-04-01
2020-06-30
0001708405
us-gaap:AdditionalPaidInCapitalMember
2019-03-31
0001708405
us-gaap:RetainedEarningsMember
2019-12-31
0001708405
us-gaap:AccumulatedDistributionsInExcessOfNetIncomeMember
2018-12-31
0001708405
us-gaap:RetainedEarningsMember
2020-01-01
2020-03-31
0001708405
us-gaap:AccumulatedDistributionsInExcessOfNetIncomeMember
2019-06-30
0001708405
us-gaap:AdditionalPaidInCapitalMember
2020-06-30
0001708405
us-gaap:RetainedEarningsMember
2020-04-01
2020-06-30
0001708405
2019-03-31
0001708405
trmt:SouthMember
2020-06-30
0001708405
trmt:MidwestMember
2019-01-01
2019-12-31
0001708405
trmt:EastMember
2019-01-01
2019-12-31
0001708405
trmt:WestMember
2020-01-01
2020-06-30
0001708405
trmt:SouthMember
2019-12-31
0001708405
trmt:WestMember
2019-01-01
2019-12-31
0001708405
trmt:MidwestMember
2020-06-30
0001708405
trmt:EastMember
2019-12-31
0001708405
trmt:EastMember
2020-06-30
0001708405
trmt:WestMember
2020-06-30
0001708405
2019-01-01
2019-12-31
0001708405
trmt:SouthMember
2019-01-01
2019-12-31
0001708405
trmt:EastMember
2020-01-01
2020-06-30
0001708405
trmt:MidwestMember
2020-01-01
2020-06-30
0001708405
trmt:WestMember
2019-12-31
0001708405
trmt:MidwestMember
2019-12-31
0001708405
trmt:SouthMember
2020-01-01
2020-06-30
0001708405
trmt:RiskLevelOneMember
2019-01-01
2019-12-31
0001708405
trmt:RiskLevelFourMember
2020-01-01
2020-06-30
0001708405
trmt:RiskLevelFourMember
2020-06-30
0001708405
trmt:RiskLevelFourMember
2019-01-01
2019-12-31
0001708405
trmt:RiskLevelFiveMember
2020-01-01
2020-06-30
0001708405
trmt:RiskLevelOneMember
2020-06-30
0001708405
trmt:RiskLevelThreeMember
2020-01-01
2020-06-30
0001708405
trmt:RiskLevelTwoMember
2019-12-31
0001708405
trmt:RiskLevelTwoMember
2020-06-30
0001708405
trmt:RiskLevelThreeMember
2020-06-30
0001708405
trmt:RiskLevelFiveMember
2019-12-31
0001708405
trmt:RiskLevelThreeMember
2019-01-01
2019-12-31
0001708405
trmt:RiskLevelTwoMember
2019-01-01
2019-12-31
0001708405
trmt:RiskLevelFiveMember
2019-01-01
2019-12-31
0001708405
trmt:RiskLevelFourMember
2019-12-31
0001708405
trmt:RiskLevelThreeMember
2019-12-31
0001708405
trmt:RiskLevelOneMember
2020-01-01
2020-06-30
0001708405
trmt:RiskLevelOneMember
2019-12-31
0001708405
trmt:RiskLevelTwoMember
2020-01-01
2020-06-30
0001708405
trmt:RiskLevelFiveMember
2020-06-30
0001708405
us-gaap:FirstMortgageMember
2019-12-31
0001708405
us-gaap:FirstMortgageMember
2020-06-30
0001708405
us-gaap:UnfundedLoanCommitmentMember
2020-01-01
2020-06-30
0001708405
us-gaap:UnfundedLoanCommitmentMember
2019-01-01
2019-12-31
0001708405
srt:RetailSiteMember
2020-06-30
0001708405
srt:MultifamilyMember
2019-01-01
2019-12-31
0001708405
srt:IndustrialPropertyMember
2019-12-31
0001708405
srt:HotelMember
2019-12-31
0001708405
srt:MultifamilyMember
2020-06-30
0001708405
srt:HotelMember
2020-06-30
0001708405
srt:IndustrialPropertyMember
2020-06-30
0001708405
srt:MultifamilyMember
2019-12-31
0001708405
srt:OfficeBuildingMember
2019-12-31
0001708405
srt:HotelMember
2019-01-01
2019-12-31
0001708405
srt:OfficeBuildingMember
2020-06-30
0001708405
srt:RetailSiteMember
2019-12-31
0001708405
srt:OfficeBuildingMember
2019-01-01
2019-12-31
0001708405
srt:RetailSiteMember
2019-01-01
2019-12-31
0001708405
srt:RetailSiteMember
2020-01-01
2020-06-30
0001708405
srt:IndustrialPropertyMember
2020-01-01
2020-06-30
0001708405
srt:MultifamilyMember
2020-01-01
2020-06-30
0001708405
srt:OfficeBuildingMember
2020-01-01
2020-06-30
0001708405
srt:IndustrialPropertyMember
2019-01-01
2019-12-31
0001708405
srt:HotelMember
2020-01-01
2020-06-30
0001708405
trmt:MortgagesAndRelatedAssetsMember
2020-06-30
0001708405
trmt:MortgagesAndRelatedAssetsMember
2019-12-31
0001708405
trmt:MortgagesAndRelatedAssetsMember
2019-01-01
2019-12-31
0001708405
trmt:MortgagesAndRelatedAssetsMember
2020-01-01
2020-06-30
0001708405
trmt:CitibankN.A.Member
trmt:MortgagesAndRelatedAssetsMember
2020-06-30
0001708405
trmt:MortgagesAndRelatedAssetsMember
2019-04-01
2019-06-30
0001708405
trmt:TCBLoanMember
us-gaap:NotesPayableToBanksMember
2019-01-01
2019-06-30
0001708405
trmt:TCBLoanMember
us-gaap:NotesPayableToBanksMember
2019-04-01
2019-06-30
0001708405
trmt:RMRCreditAgreementMember
2019-01-01
2019-06-30
0001708405
trmt:TCBLoanMember
us-gaap:NotesPayableToBanksMember
2019-08-01
2019-08-31
0001708405
trmt:MortgagesAndRelatedAssetsMember
2019-01-01
2019-06-30
0001708405
trmt:MortgagesAndRelatedAssetsMember
2020-04-01
2020-06-30
0001708405
trmt:RMRCreditAgreementMember
2019-02-01
2019-05-31
0001708405
trmt:CitibankN.A.Member
srt:MinimumMember
trmt:MortgagesAndRelatedAssetsMember
us-gaap:LondonInterbankOfferedRateLIBORMember
2020-01-01
2020-06-30
0001708405
trmt:CitibankN.A.Member
srt:MaximumMember
trmt:MortgagesAndRelatedAssetsMember
us-gaap:LondonInterbankOfferedRateLIBORMember
2020-01-01
2020-06-30
0001708405
trmt:CitibankN.A.Member
trmt:MortgagesAndRelatedAssetsMember
us-gaap:LondonInterbankOfferedRateLIBORMember
2020-01-01
2020-06-30
0001708405
trmt:RMRCreditAgreementMember
2019-04-01
2019-06-30
0001708405
trmt:MortgagesAndRelatedAssetsMember
us-gaap:LondonInterbankOfferedRateLIBORMember
2020-06-30
0001708405
trmt:MortgagesAndRelatedAssetsMember
us-gaap:LondonInterbankOfferedRateLIBORMember
2019-12-31
0001708405
us-gaap:FairValueInputsLevel3Member
us-gaap:CarryingReportedAmountFairValueDisclosureMember
2019-12-31
0001708405
us-gaap:FairValueInputsLevel3Member
us-gaap:SecuritiesLoanedOrSoldUnderAgreementsToRepurchaseMember
us-gaap:CarryingReportedAmountFairValueDisclosureMember
2019-12-31
0001708405
us-gaap:FairValueInputsLevel3Member
us-gaap:EstimateOfFairValueFairValueDisclosureMember
2019-12-31
0001708405
us-gaap:FairValueInputsLevel3Member
us-gaap:EstimateOfFairValueFairValueDisclosureMember
2020-06-30
0001708405
us-gaap:FairValueInputsLevel3Member
us-gaap:SecuritiesLoanedOrSoldUnderAgreementsToRepurchaseMember
us-gaap:EstimateOfFairValueFairValueDisclosureMember
2019-12-31
0001708405
us-gaap:FairValueInputsLevel3Member
us-gaap:CarryingReportedAmountFairValueDisclosureMember
2020-06-30
0001708405
us-gaap:FairValueInputsLevel3Member
us-gaap:SecuritiesLoanedOrSoldUnderAgreementsToRepurchaseMember
us-gaap:EstimateOfFairValueFairValueDisclosureMember
2020-06-30
0001708405
us-gaap:FairValueInputsLevel3Member
us-gaap:SecuritiesLoanedOrSoldUnderAgreementsToRepurchaseMember
us-gaap:CarryingReportedAmountFairValueDisclosureMember
2020-06-30
0001708405
2020-05-13
2020-05-13
0001708405
2020-06-30
2020-06-30
0001708405
us-gaap:SubsequentEventMember
2020-07-27
2020-07-27
0001708405
2020-01-09
2020-01-09
0001708405
2020-05-21
2020-05-21
0001708405
2020-02-20
2020-02-20
0001708405
trmt:SharedServiceCostsMember
us-gaap:PrincipalOwnerMember
2020-04-01
2020-06-30
0001708405
trmt:SharedServiceCostsMember
us-gaap:PrincipalOwnerMember
2019-04-01
2019-06-30
0001708405
trmt:SharedServiceCostsMember
us-gaap:PrincipalOwnerMember
2019-01-01
2019-06-30
0001708405
trmt:SharedServiceCostsMember
us-gaap:PrincipalOwnerMember
2020-01-01
2020-06-30
0001708405
trmt:TremontRealtyAdvisorsLLCMember
trmt:TremontMortgageTrustMember
2020-06-30
0001708405
trmt:CoppellTXMember
us-gaap:SubsequentEventMember
2020-07-01
2020-07-31
trmt:loan
iso4217:USD
xbrli:shares
trmt:employee
xbrli:shares
iso4217:USD
xbrli:pure
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM i 10-Q
|
| |
i ☒ | QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
|
| |
i ☐ | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
i Tremont Mortgage Trust
(Exact Name of Registrant as Specified in Its Charter)
|
| |
i Maryland | i 82-1719041 |
(State
of Organization) | (IRS Employer Identification No.) |
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number, Including Area Code i 617- i 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 |
i Common Shares of Beneficial Interest | | i TRMT | | i 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. i 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). i 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 | ☐
|
i Non-accelerated filer | ☒ | | Smaller reporting company | i ☒ |
Emerging
growth company | i ☒ | | | |
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. i ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i ☐ No
☒ Number of registrant's common shares of beneficial interest, $0.01 par value per share, outstanding as of August 3, 2020: i 8,253,836
TREMONT MORTGAGE TRUST
FORM 10-Q
INDEX
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)
|
| | | | | | | | |
| | June 30, | | |
| | 2020 | | 2019 |
ASSETS | | | | |
Cash and cash equivalents | | $ | i 10,632 |
|
| $ | i 8,732 |
|
Restricted
cash | | i 1 |
|
| i 143 |
|
Loans
held for investment, net | | i 278,225 |
|
| i 242,078 |
|
Accrued
interest receivable | | i 938 |
|
| i 755 |
|
Prepaid
expenses and other assets | | i 193 |
|
| i 221 |
|
Total
assets | | $ | i 289,989 |
|
| $ | i 251,929 |
|
| | | | |
LIABILITIES
AND SHAREHOLDERS' EQUITY | | | | |
Accounts payable, accrued liabilities and deposits | | $ | i 777 |
|
| $ | i 1,011 |
|
Master
repurchase facility, net | | i 200,465 |
|
| i 164,694 |
|
Due
to related persons | | i 282 |
|
| i 3 |
|
Total
liabilities | | i 201,524 |
|
| i 165,708 |
|
| | | | |
Commitments
and contingencies | | i
|
| | i
|
|
| | | | |
Shareholders'
equity: | | | | |
Common shares of beneficial interest, $0.01 par value per share; 25,000,000 shares authorized; 8,253,836 and 8,239,610 shares issued and outstanding, respectively | | i 83 |
|
| i 82 |
|
Additional
paid in capital | | i 88,979 |
|
| i 88,869 |
|
Cumulative
net income | | i 5,965 |
|
| i 1,937 |
|
Cumulative
distributions | | ( i 6,562 | ) |
| ( i 4,667 | ) |
Total
shareholders' equity | | i 88,465 |
|
| i 86,221 |
|
Total
liabilities and shareholders' equity | | $ | i 289,989 |
|
| $ | i 251,929 |
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
TREMONT MORTGAGE TRUST
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
(unaudited)
|
| | | | | | | | | | | | | | | | |
| | Three
Months Ended June 30, | | |
| | 2020 | | 2019 | | 2020 | | 2019 |
INCOME FROM INVESTMENTS: | | | | | | | | |
Interest
income from investments | | $ | i 4,496 |
| | $ | i 3,913 |
| | $ | i 8,780 |
| | $ | i 6,913 |
|
Less:
interest and related expenses | | ( i 1,368 | ) | | ( i 2,031 | ) | | ( i 3,125 | ) | | ( i 3,580 | ) |
Income
from investments, net | | i 3,128 |
| | i 1,882 |
| | i 5,655 |
| | i 3,333 |
|
| | | | | | | | |
OTHER
EXPENSES: | | | | | | | | |
General and administrative expenses | | i 524 |
| | i 618 |
| | i 1,064 |
| | i 1,121 |
|
Reimbursement
of shared services expenses | | i 242 |
| | i 370 |
| | i 563 |
| | i 740 |
|
Total
expenses | | i 766 |
| | i 988 |
| | i 1,627 |
| | i 1,861 |
|
| | | | | | | | |
Net
income | | $ | i 2,362 |
| | $ | i 894 |
| | $ | i 4,028 |
| | $ | i 1,472 |
|
| | | | | | | | |
Weighted
average common shares outstanding - basic and diluted | | i 8,177 |
| | i 5,401 |
| | i 8,173 |
| | i 4,275 |
|
| | | | | | | | |
Net
income per common share - basic and diluted | | $ | i 0.29 |
| | $ | i 0.16 |
| | $ | i 0.49 |
| | $ | i 0.34 |
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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 |
| | i 8,240 |
| | $ | i 82 |
| | $ | i 88,869 |
| | $ | i 1,937 |
| | $ | ( i 4,667 | ) | | $ | i 86,221 |
|
Share
grants | | — |
| | — |
| | i 42 |
| | — |
| | — |
| | i 42 |
|
Share
repurchases | | ( i 1 | ) | | — |
| | ( i 2 | ) | | — |
| | — |
| | ( i 2 | ) |
Net
income | | — |
| | — |
| | — |
| | i 1,666 |
| | — |
| | i 1,666 |
|
Distributions | | — |
| | — |
| | — |
| | — |
| | ( i 1,895 | ) | | ( i 1,895 | ) |
| | i 8,239 |
| | i 82 |
| | i 88,909 |
| | i 3,603 |
| | ( i 6,562 | ) | | i 86,032 |
|
Share
grants | | i 15 |
| | i 1 |
| | i 71 |
| | — |
| | — |
| | i 72 |
|
Share
repurchases | | — |
| | — |
| | ( i 1 | ) | | — |
| | — |
| | ( i 1 | ) |
Net
income | | — |
| | — |
| | — |
| | i 2,362 |
| | — |
| | i 2,362 |
|
| | i 8,254 |
| | $ | i 83 |
| | $ | i 88,979 |
| | $ | i 5,965 |
| | $ | ( i 6,562 | ) | | $ | i 88,465 |
|
| | | | | | | | | | | | |
| | i 3,179 |
| | $ | i 32 |
| | $ | i 62,540 |
| | $ | ( i 2,904 | ) | | $ | i — |
| | $ | i 59,668 |
|
Share
grants | | — |
| | — |
| | i 35 |
| | — |
| | — |
| | i 35 |
|
Net
income | | — |
| | — |
| | — |
| | i 578 |
| | — |
| | i 578 |
|
Distributions | | — |
| | — |
| | — |
| | — |
| | ( i 350 | ) | | ( i 350 | ) |
| | i 3,179 |
| | i 32 |
| | i 62,575 |
| | ( i 2,326 | ) | | ( i 350 | ) | | i 59,931 |
|
Share
grants | | i 15 |
| | — |
| | i 185 |
| | — |
| | — |
| | i 185 |
|
Share
repurchases | | ( i 1 | ) | | — |
| | ( i 6 | ) | | — |
| | — |
| | ( i 6 | ) |
Net
income | | — |
| | — |
| | — |
| | i 894 |
| | — |
| | i 894 |
|
Distributions | | — |
| | — |
| | — |
| | — |
| | ( i 702 | ) | | ( i 702 | ) |
Issuance
of shares, net | | i 5,000 |
| | i 50 |
| | i 26,024 |
| | — |
| | — |
| | i 26,074 |
|
| | i 8,193 |
| | $ | i 82 |
| | $ | i 88,778 |
| | $ | ( i 1,432 | ) | | $ | ( i 1,052 | ) | | $ | i 86,376 |
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
TREMONT MORTGAGE TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
|
| | | | | | | | |
| | |
| | 2020 | | 2019 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | |
Net income | | $ | i 4,028 |
| | $ | i 1,472 |
|
Adjustments
to reconcile net income to net cash provided by operating activities: | | | | |
Share based compensation | | i 114 |
| | i 220 |
|
Amortization
of deferred financing costs | | i 241 |
| | i 225 |
|
Amortization
of loan origination and exit fees | | ( i 950 | ) | | ( i 682 | ) |
Changes
in operating assets and liabilities: | | | | |
Accrued interest receivable | | ( i 575 | ) | | ( i 525 | ) |
Prepaid
expenses and other assets | | i 28 |
| | i 91 |
|
Accounts
payable, accrued liabilities and deposits | | ( i 234 | ) | | i 150 |
|
Due
to related persons | | i 279 |
| | ( i 146 | ) |
Net
cash provided by operating activities | | i 2,931 |
| | i 805 |
|
| | | | |
CASH
FLOWS FROM INVESTING ACTIVITIES: | | | | |
Origination of loans held for investment | | ( i 25,738 | ) | | ( i 119,062 | ) |
Additional
funding of loans held for investment | | ( i 9,067 | ) | | ( i 3,369 | ) |
Net
cash used in investing activities | | ( i 34,805 | ) | | ( i 122,431 | ) |
| | | | |
CASH
FLOWS FROM FINANCING ACTIVITIES: | | | | |
Proceeds from master repurchase facility | | i 35,602 |
| | i 92,983 |
|
Repayments
under master repurchase facility | | i — |
| | ( i 11,900 | ) |
Proceeds
from RMR credit agreement | | i — |
| | i 14,220 |
|
Repayment
of RMR credit agreement | | i — |
| | ( i 14,220 | ) |
Payments
of deferred financing costs | | ( i 72 | ) | | ( i 341 | ) |
Proceeds
from issuance of common shares, net | | i — |
| | i 26,074 |
|
Repurchase
of common shares | | ( i 3 | ) | | ( i 6 | ) |
Distributions | | ( i 1,895 | ) | | ( i 1,052 | ) |
Net
cash provided by financing activities | | i 33,632 |
| | i 105,758 |
|
| | | | |
Increase
(decrease) in cash, cash equivalents and restricted cash | | i 1,758 |
| | ( i 15,868 | ) |
Cash,
cash equivalents and restricted cash at beginning of period | | i 8,875 |
| | i 27,335 |
|
Cash,
cash equivalents and restricted cash at end of period | | $ | i 10,633 |
| | $ | i 11,467 |
|
| | | | |
SUPPLEMENTAL
DISCLOSURES: | | | | |
Interest paid | | $ | i 2,941 |
| | $ | i 3,149 |
|
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:
|
| | | | | | | | |
| | |
| | 2020 | | 2019 |
Cash
and cash equivalents | | $ | i 10,632 |
| | $ | i 11,467 |
|
Restricted
cash | | i 1 |
| | i — |
|
Total
cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows | | $ | i 10,633 |
| | $ | i 11,467 |
|
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
TREMONT MORTGAGE TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Note
1. i Basis of Presentation
The accompanying condensed consolidated financial statements of Tremont Mortgage Trust and its consolidated subsidiaries are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are
adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2019, or our Annual Report. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. The
preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the accompanying condensed consolidated financial statements include the fair value of financial instruments.
Note 2. i Summary of Significant Accounting Policies
i Consolidation.
For each investment we make, we evaluate whether consolidation of the borrower's financial statements is required under GAAP. GAAP addresses the application of consolidation principles to an investor with a controlling financial interest. Variable interest entities, or VIEs, are subject to consolidation under GAAP if their equity investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties, are not able to direct the entity’s most significant activities or are not exposed to the entity’s losses or entitled to its residual returns. VIEs are required to be consolidated by their primary beneficiaries, which are the entities with the power to direct the activities which are most significant to the economic performance of the VIE. These determinations often involve complex and subjective analyses. As of June 30,
2020, we concluded that our investments were not VIEs. i 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.
i Repurchase Agreements. Loans financed through repurchase agreements are treated as collateralized financing transactions, unless they meet sales treatment under GAAP. Pursuant to GAAP treatment of collateralized financing transactions, loans financed through repurchase agreements remain on our consolidated balance sheet as assets, and cash received from the purchasers is recorded on our consolidated balance sheet as liabilities. Interest paid in accordance with repurchase agreements is recorded as interest expense.
i Loans
Held for Investment. Generally, our loans are classified as held for investment based upon our intent and ability to hold them until maturity. Loans that are held for investment are carried at cost, net of unamortized loan origination and accreted exit fees that are required to be recognized in the carrying value of the loans in accordance with GAAP, unless the loans are deemed to be impaired. Loans that we have a plan to sell or liquidate are held at the lower of cost or fair value less cost to sell.
We 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
TREMONT MORTGAGE TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
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.
"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/or the property having a high LTV.
"5" impaired/loss likely—Criteria reflects a very high risk of realizing a principal loss or having incurred a principal loss; a sponsor having a history of default payments, trouble fulfilling its credit obligations, deeds in lieu of foreclosures,
and/or bankruptcies; collateral performance is significantly worse than performance metrics included in the business plan; loan covenants or performance milestones having been breached or not attained; timely exit via sale or refinancing being uncertain; and/or the property having a very high LTV.
See Note 4 for further information regarding our current loan portfolio’s assessment under our internal risk rating policy.
Impairment occurs when it is deemed probable that we will not be able to collect all amounts due under a loan according to its contractual terms. Impairment will then be measured based on the estimated fair value of the underlying collateral, net of any costs we expect to incur to realize that value. The determination of this estimated fair value involves judgments and assumptions based on objective and subjective factors. Consideration will be given to various factors,
such as business plans, property occupancies, tenant profiles, rental rates, operating expenses and borrowers’ repayment plans, among others, and will require significant judgments regarding certain circumstances, such as guarantees, if any. Upon measurement of an impairment, we will record an allowance to reduce the carrying value of the loan accordingly, and record a corresponding charge to net income in our condensed consolidated statements of operations.
i Fair Value of Financial Instruments. Financial Accounting Standards
Board, or FASB, Accounting Standards CodificationTM, or ASC, Topic 820-10, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands the required disclosure regarding fair value measurements. ASC Topic 820-10 defines fair value as the price that would be received for a financial instrument in a current sale, which assumes an orderly transaction between market participants on the measurement date. We determine the estimated fair value of financial assets and liabilities using the three-tier fair value hierarchy established by GAAP, which prioritizes the inputs used in measuring fair value. GAAP establishes market based or observable inputs as the preferred source of values followed by valuation models using management assumptions in the absence
of market inputs. The three levels of inputs that may be used to measure fair value are as follows:
Level I—Inputs include quoted prices in active markets for identical assets or liabilities that we have the ability to access.
Level II—Inputs include quoted prices in markets that are less active or inactive or for which all significant inputs are observable, either directly or indirectly.
Level III—Inputs include unobservable prices and are supported by little or no market activity and are significant to the overall fair value measurement.
TREMONT MORTGAGE TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars
in thousands, except per share data)
i Loan Deferred Fees. Loan origination and exit fees are reflected in loans held for investment, net, in our condensed consolidated balance sheets and include fees charged to borrowers. These fees are amortized and accreted, respectively, into interest income over the life of the related loans held for investment.
i Deferred
Financing Costs. Costs incurred in connection with financings are capitalized and recorded as an offset to the related liability and amortized over the respective financing terms and are recorded in our consolidated statements of operations as a component of interest and related expenses. At June 30, 2020, we had approximately $ i 673 of capitalized financing costs, net of amortization. i Net
Earnings Per Common Share. We calculate basic earnings per common share, or EPS, by dividing net income by the weighted average number of common shares outstanding during the period. We calculate diluted net EPS using the more dilutive of the two-class method or the treasury stock method.
i Revenue Recognition. Interest income related to our first mortgage whole loans secured by commercial real estate, or CRE, will generally be accrued based on the coupon rates applied to the outstanding principal balance of
such loans. Fees, premiums and discounts, if any, will be amortized or accreted into interest income over the remaining lives of the loans using the effective interest method, as adjusted for any prepayments.
If a loan's interest or principal payments are not paid when due and there is uncertainty that such payments will be collected, the loan may be categorized as non-accrual and no interest will be recorded unless it is collected. When all overdue payments are collected and, in our judgment, a loan is likely to remain current, it may be re-categorized as accrual.
For loans purchased at a discount, GAAP limits the yield that may be accreted (accretable yield) to the excess of the investor’s estimate of undiscounted expected principal, interest and other cash flows (cash flows expected at acquisition to be collected) over the investor’s initial investment in the loan. GAAP
also requires that the excess of contractual cash flows over cash flows expected to be collected (non-accretable difference) not be recognized as an adjustment of yield, loss accrual or valuation allowance. Subsequent increases in cash flows expected to be collected from such loans generally will be recognized prospectively through adjustment of the loan’s yield over its remaining life. Decreases in cash flows expected to be collected will be recorded as an impairment.
Note 3. i i Recent
Accounting Pronouncements /
In June 2016, FASB issued Accounting Standards Update, or ASU, No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires that entities use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 is effective for fiscal years beginning after December
15, 2019, including interim periods within those fiscal years. As an emerging growth company that has opted to take advantage of the extended transition period, we expect to adopt ASU No. 2016-13 on January 1, 2023. We are currently assessing the potential impact the adoption of ASU No. 2016-13 will have on our condensed consolidated financial statements. Note 4. i Loans Held for Investment
We
originate first mortgage whole loans secured by middle market and transitional CRE, which are generally to be held as long term investments. We funded our existing loan portfolio using cash on hand and advancements under our master repurchase facility with Citibank, N.A., or Citibank, or our Master Repurchase Facility, and other debt financing. See Note 5 for further information regarding our Master Repurchase Facility.
TREMONT MORTGAGE TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
The table
below details overall statistics for our loan portfolio as of June 30, 2020 and December 31, 2019: |
| | | | | | | | |
| | | | |
Number of loans | | i 14 |
| | i 12 |
|
Total
loan commitments | | $ | i 296,050 |
| | $ | i 260,167 |
|
Unfunded
loan commitments (1) | | $ | i 17,566 |
| | $ | i 17,268 |
|
Principal
balance | | $ | i 278,484 |
| | $ | i 242,899 |
|
Unamortized
net deferred origination fees | | $ | ( i 259 | ) | | $ | ( i 821 | ) |
Carrying
value | | $ | i 278,225 |
| | $ | i 242,078 |
|
Weighted
average coupon rate | | i 5.70 | % | | i 5.76 | % |
Weighted
average all in yield (2) | | i 6.39 | % | | i 6.41 | % |
Weighted
average maximum maturity (years) (3) | | i 3.1 |
| | i 3.6 |
|
Weighted
average LTV (4) | | i 68 | % | | i 70 | % |
| |
(1) | Unfunded
loan commitments are primarily used to finance property and building improvements and leasing capital and are generally funded over the term of the loan. |
| |
(2) | All in yield represents the yield on a loan, excluding any repurchase debt funding applicable to the loan and including amortization of deferred fees over the initial term of the loan. |
| |
(3) | Maximum maturity assumes all borrower loan extension options have been exercised, which options are subject to the borrower meeting certain conditions. |
| |
(4)
| LTV represents the initial loan amount divided by the underwritten in-place value at closing. |
The table below details our loan activities during the three months ended June 30, 2020: |
| | | | | | | | | | | | |
| | Principal
Balance | | Deferred Fees | | Carrying Value |
| | $ | i 272,234 |
| | $ | ( i 747 | ) | | $ | i 271,487 |
|
Additional
funding | | i 6,250 |
| | — |
| | i 6,250 |
|
Net
amortization of deferred fees | | — |
| | i 488 |
| | i 488 |
|
| | $ | i 278,484 |
| | $ | ( i 259 | ) | | $ | i 278,225 |
|
The
table below details our loan activities during the six months ended June 30, 2020: |
| | | | | | | | | | | | |
| | Principal Balance | | Deferred Fees | | Carrying
Value |
| | $ | i 242,899 |
| | $ | ( i 821 | ) | | $ | i 242,078 |
|
Additional
funding | | i 9,459 |
| | — |
| | i 9,459 |
|
Originations | | i 26,126 |
| | ( i 388 | ) | | i 25,738 |
|
Net
amortization of deferred fees | | — |
| | i 950 |
| | i 950 |
|
| | $ | i 278,484 |
| | $ | ( i 259 | ) | | $ | i 278,225 |
|
TREMONT
MORTGAGE TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
The tables below detail the property type and geographic location of the properties securing the loans in our portfolio as of June 30, 2020 and December 31, 2019: |
| | | | | | | | | | | | | | | | | | | | |
| | | | |
Property Type | | Number of Loans | | Carrying Value | | Percentage of Value | | Number of Loans | | Carrying
Value | | Percentage of Value |
Office | | i 5 |
| | $ | i 90,427 |
| | i 32 | % | | i 4 |
| | $ | i 71,446 |
| | i 30 | % |
Hotel | | i 1 |
| | i 23,848 |
| | i 9 | % | | i 1 |
| | i 23,101 |
| | i 10 | % |
Retail | | i 3 |
| | i 45,676 |
| | i 16 | % | | i 3 |
| | i 43,782 |
| | i 18 | % |
Multifamily | | i 3 |
| | i 69,391 |
| | i 25 | % | | i 3 |
| | i 68,911 |
| | i 28 | % |
Industrial | | i 2 |
| | i 48,883 |
| | i 18 | % | | i 1 |
| | i 34,838 |
| | i 14 | % |
| | i 14 |
| | $ | i 278,225 |
| | i 100 | % | | i 12 |
| | $ | i 242,078 |
| | i 100 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | |
Geographic Location | | Number of Loans | | Carrying Value | | Percentage of Value | | Number of Loans | | Carrying
Value | | Percentage of Value |
East | | i 5 |
| | $ | i 104,461 |
| | i 37 | % | | i 4 |
| | $ | i 90,047 |
| | i 37 | % |
South | | i 5 |
| | i 105,385 |
| | i 38 | % | | i 5 |
| | i 103,295 |
| | i 43 | % |
West | | i 1 |
| | i 10,503 |
| | i 4 | % | | i 1 |
| | i 9,014 |
| | i 4 | % |
Midwest | | i 3 |
| | i 57,876 |
| | i 21 | % | | i 2 |
| | i 39,722 |
| | i 16 | % |
| | i 14 |
| | $ | i 278,225 |
| | i 100 | % | | i 12 |
| | $ | i 242,078 |
| | i 100 | % |
Loan
Risk Ratings
As further described in Note 2, 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. i The following table allocates the carrying value of our loan portfolio at June 30, 2020 and December 31, 2019 based
on our internal risk rating policy: |
| | | | | | | | | | | | |
| | | | |
Risk Rating | | Number
of Loans | | Carrying Value | | Number of Loans | | Carrying Value |
1 | | i — | | $ | i — |
| | i — | | $ | i — |
|
2 | | i 1 | | i 24,547 |
| | i 1 | | i 24,462 |
|
3 | | i 7 | | i 137,789 |
| | i 11 | | i 217,616 |
|
4 | | i 6 | | i 115,889 |
| | i — | | i — |
|
5 | | i — | | i — |
| | i — | | i — |
|
| | i 14 | | $ | i 278,225 |
| | i 12 | | $ | i 242,078 |
|
The
weighted average risk rating of our loans by carrying value was i 3.5 and i 2.9
as of June 30, 2020 and December 31, 2019, respectively. The COVID-19 pandemic has negatively impacted some of our borrowers’ business operations or tenants, particularly in the cases of our retail and hospitality collateral, which are the types of properties that have been significantly negatively impacted by the pandemic. We expect that those negative impacts may continue and may apply to other borrowers and/or their tenants. Therefore, certain of our borrowers’ business plans will likely take longer to execute than initially expected and certain of our borrowers may be unable to pay their debt service obligations owed and due to us as currently scheduled or at all. As a result, at June 30, 2020, we had i six
loans representing i 42% of the carrying value of our loan portfolio with a loan risk rating of “4” or “higher risk." These six loans were downgraded from a risk rating of "3" or "acceptable risk" during the three months ended March 31, 2020, and we did not downgrade any loans during the three months ended June 30,
2020. We did not have any impaired loans or nonaccrual loans as of June 30, 2020 or December 31, 2019.
As of August 3, 2020, all of our borrowers had paid all of their debt service obligations owed and due to us and none of the loans included in our investment portfolio were in default.
TREMONT MORTGAGE TRUST
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
Note 5. i Debt Agreements
i The
table below is an overview of our debt agreements that provided financing for our loans held for investment:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Debt Obligation | | | | |
| | | | | | | | Weighted
Average | | Collateral |
| | Maximum Facility Size | | Principal Balance | | Carrying Value | | Coupon Rate | | Remaining Maturity (1)
(years) | | Principal Balance | | Fair Value (2) |
| | | | | | | | | | | | | | |
Master
repurchase facility | | $ | i 213,482 |
| | $ | i 201,138 |
| | $ | i 200,465 |
| | L
+ 2.00% | | i 1.1 | | $ | i 278,484 |
| | $ | i 273,860 |
|
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Master
repurchase facility | | $ | i 213,482 |
| | $ | i 165,536 |
| | $ | i 164,694 |
| | L
+ 1.99% | | i 1.6 | | $ | i 242,899 |
| | $ | i 242,763 |
|
| |
(1) | The
weighted average remaining maturity is determined using the current maturity date of the corresponding loans, assuming no borrower loan extension options have been exercised. |
/ | |
(2) | See Note 6 for further discussion of our financial assets and liabilities not carried at fair value. |
Under the agreements that govern our Master Repurchase Facility, or collectively, as amended, our Master Repurchase Agreement, the initial purchase price paid by Citibank for each purchased asset is up to i 75%
of the lesser of the market value of the purchased asset or the unpaid principal balance of such purchased asset, subject to Citibank’s approval. Upon the repurchase of a purchased asset, we are required to pay Citibank the outstanding purchase price of the purchased asset, accrued interest and all accrued and unpaid expenses of Citibank relating to such purchased asset. The price differential (or interest rate) relating to a purchased asset is equal to LIBOR plus a premium of 200 to 250 basis points, determined by the yield of the purchased asset and the property type of the purchased asset’s real estate collateral. Citibank has the discretion under our Master Repurchase Agreement to make advancements at margins higher than i 75%
and at premiums of less than 200 basis points. The weighted average interest rate for advancements under our Master Repurchase Facility was i 2.47% and i 4.49%
for the three months ended June 30, 2020 and 2019, respectively, and i 2.97% and i 4.52%
for the six months ended June 30, 2020 and 2019, respectively. For the three months ended June 30, 2020 and 2019, we recorded interest expense of $ i 1,245
and $ i 1,479, respectively, and $ i 2,883
and $ i 2,563 for the six months ended June 30, 2020 and 2019, respectively, in connection with our Master Repurchase Facility. In connection with our Master Repurchase Agreement, we entered into a
guaranty, or, as amended, the Guaranty, which requires us to guarantee i 25% of our subsidiary's prompt and complete payment of the purchase price, purchase price differential and any costs and expenses of Citibank related to our Master Repurchase Agreement. The Guaranty also requires us to comply with customary financial covenants, which include the maintenance of a minimum tangible net worth, minimum cash liquidity, a total indebtedness
to tangible net worth ratio and a minimum interest coverage ratio. These maintenance provisions provide Citibank with the right, in certain circumstances related to a credit event, as defined in our Master Repurchase Agreement, to re-determine the value of purchased assets. Where a decline in the value of purchased assets has resulted in a margin deficit, Citibank may require us to eliminate such margin deficit through a combination of purchased asset repurchases and cash transfers to Citibank, subject to Citibank's approval. As of June 30, 2020, we have not received a margin call under our Master Repurchase Agreement. Our Master Repurchase Agreement also provides for acceleration of the date of repurchase of the purchased assets and Citibank’s liquidation of the purchased assets upon the occurrence and continuation of certain events
of default, including a change of control of us, which includes our Tremont Realty Advisors LLC, or our Manager, ceasing to act as our sole manager or to be a wholly owned subsidiary of The RMR Group LLC, or RMR LLC. As of June 30, 2020, we were in compliance with all of the covenants and other terms under our Master Repurchase Agreement and the Guaranty. From July 2018 until August 2019, we were a party to a term loan facility, in the form of a note payable, with Texas Capital Bank, National Association, or the TCB note payable. Following our repayment of the $ i 31,790
then outstanding principal and accrued interest under the TCB note payable, the TCB note payable terminated in accordance with its terms. We recorded $ i 368 and $ i 736
of interest expense for the three and six months ended June 30, 2019, respectively, in connection with the TCB note payable. From February 2019 until May 2019, we were a party to a credit agreement with our Manager as lender, or the RMR Credit Agreement. Following our repayment of the $ i 14,220 balance then outstanding
under the RMR Credit Agreement, the
TREMONT MORTGAGE TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
RMR Credit Agreement was terminated. We recorded $ i 39
of interest expense for both the three and six months ended June 30, 2019, in connection with the RMR Credit Agreement.
i At June 30, 2020, our outstanding advancements under our Master Repurchase Facility had the following remaining maturities: |
| | | | |
Year | | Principal
Payments (1) |
2020 | | $ | i 29,680 |
|
2021 | | i 171,458 |
|
2022 | | i — |
|
2023 | | i — |
|
2024 | | i — |
|
| | $ | i 201,138 |
|
| |
(1) | The
allocation of our outstanding advancements under our Master Repurchase Facility is based on the current maturity date of each loan investment with respect to which the individual borrowing relates assuming no borrower loan extension options have been exercised. |
Note 6. i 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 significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
As of June 30, 2020 and December 31, 2019, 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. As of December 31, 2019, the outstanding principal balances under our Master Repurchase Facility 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 and outstanding principal balances under our Master Repurchase Facility by using Level III inputs, including discounted cash flow analyses and currently prevailing market terms as of the measurement date, determined by significant unobservable market inputs, which include holding periods, discount rates based on LTV, property types and loan pricing expectations which are corroborated by a comparison with other market
participants to determine the appropriate market spread to add to the one month LIBOR (Level III inputs as defined in the fair value hierarchy under GAAP).
i 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:
|
| | | | | | | | | | | | | | | | |
| | | | |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Financial
assets | | | | | | | | |
Loans held for investment | | $ | i 278,225 |
| | $ | i 273,860 |
| | $ | i 242,078 |
| | $ | i 242,763 |
|
Financial
liabilities | | | | | | | | |
Master Repurchase Facility | | $ | i 200,465 |
| | $ | i 197,102 |
| | $ | i 164,694 |
| | $ | i 165,536 |
|
/ There
were no transfers of financial assets or liabilities within the fair value hierarchy during the three or six months ended June 30, 2020.
TREMONT MORTGAGE TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
Note 7. i Shareholders'
Equity
Common Share Issuances and Repurchases
On January 9, 2020, we purchased an aggregate of i 384 of our common shares, valued at $ i 5.33
per common share, the closing price of our common shares on The Nasdaq Stock Market LLC, or Nasdaq, on that day, from former officers and employees of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares. On May 13, 2020, in accordance with our Trustee compensation arrangements, we awarded to each of our five Trustees i 3,000
of our common shares, valued at $ i 1.92 per common share, the closing price of our common shares on Nasdaq that day. On June 30, 2020, we purchased i 390
of our common shares, valued at $ i 3.08 per common share, the closing price of our common shares on Nasdaq on that day, from a former officer of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares. Distributions
i During
the six months ended June 30, 2020, we declared and paid a quarterly distribution to common shareholders as follows: |
| | | | | | | | | | |
Record Date | | Payment Date | | Distribution Per Share | | Total
Distribution |
| | | | $ | i 0.22 |
| | $ | i 1,813 |
|
| | | | i 0.01 |
| | i 82 |
|
| | | | $ | i 0.23 |
| | $ | i 1,895 |
|
/ On
July 16, 2020, we declared a quarterly distribution of $ i 0.01 per common share for the second quarter of 2020, or approximately $ i 83,
to shareholders of record on July 27, 2020. We expect to pay this distribution on or about August 20, 2020. Note 8. i Management Agreement with our Manager
We have i no
employees. The personnel and various services we require to operate our business are provided to us by our Manager pursuant to a management agreement, which provides for the day to day management of our operations by our Manager, subject to the oversight and direction of our Board of Trustees.
We did not recognize any base management or incentive fees for the three or six months ended June 30, 2020 or 2019. Our Manager has waived any base management or incentive fees otherwise due and payable by us under our management agreement for and through the periods ending December 31, 2020. If our Manager had not waived these base management and incentive fees, we would have recognized $ i 323
and $ i 267 of base management fees for the three months ended June 30, 2020 and 2019, respectively, $ i 643
and $ i 490 of base management fees for the six months ended June 30, 2020 and 2019, respectively, and $ i 36
of incentive fees for the three and six months ended June 30, 2020. i No incentive fees would have been paid or payable for either of the three or six months ended June 30, 2019. Our Manager, and not
us, is responsible for the costs of its employees who provide services to us, including the cost of our Manager’s personnel who originate our loans, unless any such payment or reimbursement is specifically approved by a majority of our Independent Trustees, is a shared services cost or relates to awards made under any equity compensation plan adopted by us. We are required to pay or to reimburse our Manager and its affiliates for all other costs and expenses of our operations. Some of these overhead, professional and other services are provided by RMR LLC pursuant to a shared services agreement between our Manager and RMR LLC. We reimburse our Manager for shared services costs our Manager pays to RMR LLC and its affiliates. These reimbursements include an allocation of the cost of personnel employed by RMR LLC and our share of RMR LLC’s costs for providing our internal audit function. These shared services costs are subject to approval by a majority of our Independent
Trustees at least annually. We incurred shared services costs of $ i 280 and $ i 409
payable to our Manager for the three months ended June 30, 2020 and 2019, respectively, and $ i 638 and $ i 811
for the six months ended June 30, 2020 and 2019, 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.
TREMONT MORTGAGE TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
Note
9. i Related Person Transactions
We have relationships and historical and continuing transactions with our Manager, RMR LLC, The RMR Group Inc., or RMR Inc., and others related to them, including other companies to which RMR LLC or its subsidiaries provide management services and some of which have trustees, directors or officers who are also our Trustees or officers. Our Manager is a subsidiary of RMR LLC, which is a majority owned subsidiary
of RMR Inc., and RMR Inc. is the managing member of RMR LLC. RMR LLC provides certain shared services to our Manager which are applicable to us, and we reimburse our Manager for the amounts it pays for those services. One of our Managing Trustees, Adam Portnoy, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., and he is also a director of our Manager, a managing director and the president and chief executive officer of RMR Inc., and an officer and employee of RMR LLC. David M. Blackman, our other Managing Trustee and our President and Chief Executive Officer, also serves as a director and the president, and chief executive officer of our Manager and is an officer and employee of RMR LLC, and each of our other officers is also an officer and/or employee of our Manager or RMR LLC. Our Independent Trustees also
serve as independent directors or independent trustees of other public companies to which RMR LLC or its subsidiaries provide management services. Adam Portnoy serves as the chair of the boards of trustees and boards of directors of several of these public companies and as a managing director or managing trustee of all of these companies and other officers of RMR LLC, including Mr. Blackman and certain of our other officers, serve as managing trustees, managing directors or officers of certain of these companies. In addition, officers of our Manager, RMR LLC and RMR Inc. serve as our officers and officers of other companies to which RMR LLC or its subsidiaries provide management services. Our Manager, Tremont Realty Advisors LLC.
We have a management agreement with our Manager to provide management services to us. See Note 8 for further information regarding our management agreement with our Manager.
Our Manager is our largest shareholder and, as of June 30, 2020, owned i 1,600,100 of our common shares or approximately i 19.4%
of our outstanding common shares. Until May 23, 2019, we were a party to the RMR Credit Agreement. For further information about these and other such relationships and certain other related person transactions, refer to our Annual Report.
Note 10. i Income Taxes
We
have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the IRC. Accordingly, we generally are not, and will not be, subject to U.S. federal income tax, provided that we meet certain distribution and other requirements. We are subject to certain state and local taxes, certain of which amounts are or will be reported as income taxes in our condensed consolidated statements of operations.
Note 11. i Weighted
Average Common Shares
We calculate basic EPS by dividing net income by the weighted average number of common shares outstanding during the relevant period. We calculate diluted EPS using the more dilutive of the two class method or the treasury stock method. Unvested share awards and other potentially dilutive common share issuances, and the related impact on earnings, are considered when calculating diluted earnings per share. For the three months ended June 30, 2020 and 2019, i 105,126
and i 12,351 unvested common shares, respectively, and for the six months ended June 30, 2020 and 2019, i 63,739
and i 3,051 unvested common shares, respectively, were excluded from the calculation of diluted earnings per share because to do so would have been antidilutive.
Note 12. i Commitments
and Contingencies
Unfunded Loan Commitments
As of June 30, 2020, we had unfunded commitments of $ i 17,566 related to our loans held for investment that are not reflected in our condensed consolidated
balance sheets. These unfunded commitments had a weighted average initial maturity of i 1.5 years as of June 30, 2020. See Note 4 for further information related to our loans held for investment.
TREMONT
MORTGAGE TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(dollars in thousands, except per share data)
Secured Borrowings
As of June 30, 2020, we had an aggregate of $ i 201,138
in principal amount outstanding under our Master Repurchase Facility with a weighted average life to maturity of i 1.1 years. See Note 5 for further information regarding our secured debt agreements. Note 13. i Subsequent
Events
In July 2020, the borrower under our loan related to a property located in Coppell, TX sold a parcel of land that was a part of the property securing the loan. The borrower used $ i 2,089 of the sale proceeds to repay part of the outstanding balance under the loan and we allowed the borrower to use the remaining $ i 100
of sale proceeds to increase the reserve for future debt service obligation payments owed to us under the loan. We used $ i 1,358 of these repayment proceeds to repay a part of the outstanding balance under our Master Repurchase Facility.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our condensed consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report.
OVERVIEW (dollars in thousands, except share data)
We are a REIT that was organized under Maryland law in 2017. Our business strategy is focused on originating and investing in first mortgage whole loans secured by middle market and transitional CRE. We define middle market CRE as commercial
properties that have values up to $75,000 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 condensed consolidated balance sheets. Loans held for investment are reported at cost, net of any unamortized loan fees and origination costs as applicable, unless the assets are deemed impaired.
Our Manager is registered with the Securities and Exchange Commission, or the SEC, as an investment adviser under the Investment Advisers Act of 1940, as amended. We believe that our Manager provides us with significant experience and expertise in investing in middle market and transitional CRE.
We operate our business in a manner consistent with our qualification for taxation as a REIT under the IRC. As such, we generally are not
subject to U.S. federal income tax, provided that we meet certain distribution and other requirements. We also operate our business in a manner that permits us to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or the Investment Company Act.
COVID-19 Pandemic
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, the United States declared a national emergency concerning this pandemic, and several states and municipalities have declared public health emergencies. The COVID-19 pandemic and various governmental and market responses intended to contain and mitigate the spread of the virus and its detrimental public health impact have severely negatively impacted the global economy, including the U.S. economy. As a result, most market observers believe the global economy is
currently in the midst of a recession. States and municipalities across the United States have been allowing certain businesses to re-open and easing certain restrictions they had previously implemented in response to the COVID-19 pandemic, often in stages that are phased in over time. Recently, economic data have indicated that the U.S. economy has improved since the lowest periods experienced in March and April 2020. However, certain areas of the United States have experienced increased numbers of COVID-19 infections following the re-openings of their economies and easing of restrictions and, in some cases, certain states have imposed or re-imposed closings of certain business activities and other restrictions in response. It is unclear whether the increases in the number of COVID-19 infections will continue and/or amplify or whether any “second wave” of COVID-19 infection outbreaks will occur in the United States or elsewhere and, if so, what the impact of
that would be on human health and safety, the economy or our business.
The current economic conditions are adversely impacting some of our borrowers’ tenants, which in turn, has negatively impacted our borrowers’ businesses and liquidity and their ability to pay interest owed under our loans. See elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations for further information about the impact these conditions have had on our borrowers, our loans and Master Repurchase Agreement, as well as on the broader market conditions, including for the CRE lending industry, and certain actions we have taken in response.
We and our Manager are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, including:
| |
• | our
borrowers and their ability to withstand the current economic conditions and continue to fund their debt service obligations owed and due to us, |
| |
• | our operations, liquidity and capital needs and resources, |
| |
• | conducting financial modeling and sensitivity analysis, |
| |
• | actively
communicating with our borrowers, Citibank and other key constituents and stakeholders in order to help assess market conditions, opportunities, best practices and mitigate risks and potential adverse impacts, and |
| |
• | monitoring, with the assistance of counsel and other specialists, possible government relief funding sources and other programs that may be available to us or our borrowers to enable us and them to operate
through the current economic conditions and enhance their ability to fund their debt service obligations owed and due to us. |
In order to preserve our near term capital due to the economic downturn and uncertainty as to future economic conditions as a result of the COVID-19 pandemic, beginning with the first quarter of 2020, we reduced our quarterly distribution rate payable to our common shareholders to $0.01 per share and on July 16, 2020, declared a quarterly distribution payable to our common shareholders of $0.01 per share for the second quarter of 2020. In addition, our Manager extended its waiver of the management and incentive fees under our management agreement, which waiver was set to expire June 30, 2020, for and through the periods ending December
31, 2020. We believe that some of our impacted borrowers or their tenants have benefited, and/or may in the future benefit, from provisions of the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, passed by Congress in March 2020, or other Federal or state assistance allowing them to continue or resume business activity.
We do not have any employees and the personnel and various services we require to operate our business are provided to us by our Manager or by RMR LLC, pursuant to our management agreement with our Manager and our Manager’s shared services agreement with RMR LLC. RMR LLC has implemented enhanced cleaning protocols and social distancing guidelines at its corporate headquarters and its regional offices, as well as business continuity plans to ensure that employees of our Manager and of RMR LLC remain safe and able to support us and RMR LLC’s
other managed companies, including providing appropriate information technology such as notebook computers, smart phones, computer applications, information technology security applications and technology support. RMR LLC has also taken measures to reduce the possibility of persons gathering in groups and in close proximity to each other, for the purpose of mitigating the potential for spreading of COVID-19 infections.
There are extensive uncertainties surrounding the COVID-19 pandemic and its aftermath. These uncertainties include among others:
| |
• | the duration and severity of the negative economic impact; |
| |
• | the
strength and sustainability of any economic recovery; |
| |
• | the timing and process for how the federal, state and local governments and other market participants may oversee and conduct the return of economic activity when the COVID-19 pandemic abates, such as what continuing restrictions and protective measures may remain in place, be re-imposed or be added and what restrictions and protective measures may be lifted or reduced in order to foster a return of increased economic activity in the United States; and |
| |
• | whether,
following a recommencing of more normal levels of economic activities, the United States or other countries experience any “second wave” of COVID-19 infection outbreaks and, if so, the responses of governments, businesses and the general public to those events. |
As a result of these uncertainties, we are unable to determine what the ultimate impact will be on our borrowers’ and other stakeholders’ businesses, operations, financial results and financial position. For further information and risks relating to the COVID-19 pandemic and its aftermath on us and our business, see elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and Part II, Item 1A Risk Factors, in this Quarterly Report on Form 10-Q.
Book Value per Common Share
The
table below calculates our book value per common share (amounts in thousands, except per share data):
|
| | | | | | | |
| | | |
Shareholders' equity | $ | 88,465 |
| | $ | 86,221 |
|
Total
outstanding common shares | 8,254 |
| | 8,240 |
|
Book value per common share | $ | 10.72 |
| | $ | 10.46 |
|
Our Loan Portfolio
|
| | | | | | | | |
| | | | |
Number of loans | | 14 |
| | 12 |
|
Total loan commitments | | $ | 296,050 |
| | $ | 260,167 |
|
Unfunded
loan commitments (1) | | $ | 17,566 |
| | $ | 17,268 |
|
Principal balance | | $ | 278,484 |
| | $ | 242,899 |
|
Unamortized
net deferred origination fees | | $ | (259 | ) | | $ | (821 | ) |
Carrying value | | $ | 278,225 |
| | $ | 242,078 |
|
Weighted
average coupon rate | | 5.70 | % | | 5.76 | % |
Weighted average all in yield (2) | | 6.39 | % | | 6.41 | % |
Weighted
average maximum maturity (years) (3) | | 3.1 |
| | 3.6 |
|
Weighted average LTV (4) | | 68 | % | | 70 | % |
| |
(1)
| Unfunded loan commitments are primarily used to finance property and building improvements and leasing capital and are generally funded over the term of the loan. |
| |
(2) | All in yield represents the yield on a loan, excluding any repurchase debt funding applicable to the loan and including amortization of deferred fees over the initial term of the loan. |
| |
(3) | Maximum maturity assumes all borrower loan extension options have been exercised, which options
are subject to the borrower meeting certain conditions. |
| |
(4) | LTV represents the initial loan amount divided by the underwritten in-place value at closing. |
Loan Portfolio Details
The table below details our loan portfolio as of June 30, 2020: |
| | | | | | | | | | | | | | | | | | | | | | |
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 | | | | | | | | | | | | | | |
Coppell,
TX | | Retail | | 02/05/2019 | | $ | 22,915 |
| | $ | 22,204 |
| | L + 3.50% | | L
+ 4.25% | | 02/05/2021 | | 73% | | 4 |
Houston, TX | | Multifamily | | 05/10/2019 | | 28,000 |
| | 27,695 |
| | L
+ 3.50% | | L + 4.37% | | 11/10/2022 | | 56% | | 4 |
Paradise Valley, AZ(4) | | Retail | | 11/30/2018 | | 11,853 |
| | 10,441 |
| | L
+ 4.25% | | L + 5.72% | | 11/30/2022 | | 48% | | 4 |
Dublin, OH | | Office | | 02/18/2020 | | 22,820 |
| | 17,534 |
| | L
+ 3.75% | | L + 5.08% | | 02/18/2023 | | 33% | | 3 |
Metairie, LA | | Office | | 04/11/2018 | | 18,102 |
| | 17,115 |
| | L
+ 5.00% | | L + 5.65% | | 04/11/2023 | | 79% | | 4 |
Barrington, NJ | | Industrial | | 05/06/2019 | | 37,600 |
| | 34,962 |
| | L
+ 3.50% | | L + 4.05% | | 05/06/2023 | | 79% | | 3 |
Houston, TX | | Office | | 06/26/2018 | | 15,200 |
| | 14,199 |
| | L
+ 4.00% | | L + 4.60% | | 06/26/2023 | | 69% | | 4 |
St. Louis, MO | | Office | | 12/19/2018 | | 29,500 |
| | 27,611 |
| | L
+ 3.25% | | L + 3.75% | | 12/19/2023 | | 72% | | 3 |
Atlanta, GA | | Hotel | | 12/21/2018 | | 24,000 |
| | 23,904 |
| | L
+ 3.25% | | L + 3.72% | | 12/21/2023 | | 62% | | 4 |
Rochester, NY | | Multifamily | | 01/22/2019 | | 24,550 |
| | 24,550 |
| | L
+ 3.25% | | L + 3.86% | | 01/22/2024 | | 74% | | 2 |
Omaha, NE | | Retail | | 06/14/2019 | | 14,500 |
| | 13,054 |
| | L
+ 3.65% | | L + 4.05% | | 06/14/2024 | | 77% | | 3 |
Yardley, PA | | Office | | 12/19/2019 | | 14,900 |
| | 14,178 |
| | L
+ 3.75% | | L + 4.47% | | 12/19/2024 | | 75% | | 3 |
Orono, ME | | Multifamily | | 12/20/2019 | | 18,110 |
| | 17,037 |
| | L
+ 3.25% | | L + 3.89% | | 12/20/2024 | | 72% | | 3 |
Allentown, PA | | Industrial | | 01/24/2020 | | 14,000 |
| | 14,000 |
| | L
+ 3.50% | | L + 4.02% | | 01/24/2025 | | 67% | | 3 |
Total/weighted average | | $ | 296,050 |
| | $ | 278,484 |
| | L
+ 3.60% | | L + 4.29% | |
| | 68% | | 3.5 |
| |
(1) | All in yield represents the yield on a loan, excluding any repurchase debt funding applicable to the loan and including amortization of deferred fees over the initial term of the
loan. |
| |
(2) | Maximum maturity assumes all borrower loan extension options have been exercised, which options are subject to the borrower meeting certain conditions. |
| |
(3) | LTV represents the initial loan amount divided by the underwritten in-place value at closing. |
| |
(4) | The borrower under this loan
exercised its option to reduce the unfunded loan commitment allowance by $937, pursuant to the terms of the loan agreement. |
As of June 30, 2020, we had $296,050 in aggregate loan commitments, consisting of a diverse portfolio, geographically and by property type, of 14 first mortgage whole loans. The impact from the COVID-19 pandemic has negatively impacted some of our borrowers’ business operations or tenants, particularly in the cases of our retail and hospitality collateral, which are the types of properties that have been significantly negatively impacted by the pandemic. We expect that those negative impacts may continue and may apply to other borrowers and/or their
tenants. Therefore, certain of our borrowers’ business plans will likely take longer to execute than initially expected and certain of our borrowers may be unable
to pay their debt service obligation owed and due to us as currently scheduled. As a result, at June 30, 2020, we had six loans representing 42% of the carrying value of our loan portfolio to a loan risk rating of “4” or “higher risk”. These six loans were downgraded from a risk rating of "3" or "acceptable risk" during
the three months ended March 31, 2020 and we did not downgrade any loans during the three months ended June 30, 2020. All of the loans in our portfolio are structured with risk mitigation mechanisms, such as cash flow sweeps or interest reserves, to help protect us against investment losses. In addition, we continue to actively engage with our borrowers regarding their execution of the business plan for the underlying collateral, among other things.
As of August 3, 2020, all of our borrowers had paid all of their debt service obligations owed and due to us and none of the loans included in our investment portfolio were in default. In July 2020,
the borrower under our loan related to a property located in Coppell, TX sold a parcel of land that was a part of the property securing the loan. The borrower used $2,089 of the sale proceeds to repay part of the outstanding balance under the loan and we allowed the borrower to use the remaining $100 of sale proceeds to increase the reserve for future debt service obligation payments owed to us under the loan. We used $1,358 of these repayment proceeds to repay a part of the outstanding balance under our Master Repurchase Facility.
We did not have any impaired loans, non-accrual loans or loans in default as of June 30, 2020; thus, we did not record
a reserve for loan loss as of that date. For further information regarding our risk rating policy, see Notes 2 and 4 to the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. However, depending on the duration and severity of the COVID-19 pandemic and the current economic downturn, our borrowers' businesses, operations and liquidity may be materially adversely impacted. As a result, they may become unable to pay their debt service obligations owed and due to us, which may result in the impairment of those loans, and our recording loan loss reserves with respect to those loans and recording of any income with respect to those loans on a nonaccrual basis. For further information regarding the risks associated with our loan portfolio, see the risk factors identified in Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q and the risk factors identified in Part I, Item
IA, "Risk Factors" of our Annual Report. Financing Activities
The table below is an overview of our Master Repurchase Facility, which provided financing for our loans held for investment, as of June 30, 2020 and December 31, 2019: |
| | | | | | | | | | | | | | | | | | |
| | Initial
Maturity Date | | Principal Balance | | Unused Capacity | | Maximum Facility Size | | Collateral Principal Balance |
| | | | | | | | | | |
Master
repurchase facility | | 11/06/2021 | | $ | 201,138 |
| | $ | 12,344 |
| | $ | 213,482 |
| | $ | 278,484 |
|
| | | | | | | | | | |
Master repurchase facility | | 11/06/2021 | | $ | 165,536 |
| | $ | 47,946 |
| | $ | 213,482 |
| | $ | 242,899 |
|
The table below details our Master Repurchase Facility activities during the three months ended June 30, 2020: |
| | | | |
| | Total |
| | $ | 195,566 |
|
Advancements | | 4,796 |
|
Deferred
Fees | | (19 | ) |
Amortization of Deferred Fees | | 122 |
|
| | $ | 200,465 |
|
The
table below details our Master Repurchase Facility activities during the six months ended June 30, 2020: |
| | | | |
| | Total |
| | 164,694 |
|
Advancements | | 35,602 |
|
Deferred
Fees | | (72 | ) |
Amortization of Deferred Fees | | 241 |
|
| | $ | 200,465 |
|
As
of June 30, 2020, outstanding advancements under our Master Repurchase Facility had a weighted average interest rate of LIBOR plus 200 basis points per annum, excluding associated fees and expenses. For further information regarding our Master Repurchase Agreement, see Note 5 to the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. As of June 30, 2020, we had a $201,138 aggregate outstanding principal balance under our Master Repurchase Agreement. In light of the impact of the COVID-19 pandemic, we continue to actively engage with Citibank regarding our liquidity position
and the status of the loans in our portfolio that are financed under our Master Repurchase Facility. Our Master Repurchase Agreement is structured with risk mitigation mechanisms, including a cash flow sweep, which would allow Citibank to control interest payments from our borrowers under our loans that are financed under our Master Repurchase Facility, and the ability to accelerate dates of repurchase and institute margin calls, which may require us to pay down balances associated with one or more of our loans that are financed under our Master Repurchase Facility. As of August 3, 2020, we believe we were in compliance with all the covenants and other terms under our Master Repurchase Agreement and, to date, Citibank has not utilized any such risk mitigation mechanisms under our Master Repurchase Agreement. We could experience a loss on repurchase transactions under our Master
Repurchase Agreement if a counterparty to these transactions defaults on its obligation to resell the underlying collateral back to us at the end of the transaction term, or if the value of the underlying collateral has declined as of the end of that term, or if we default on our obligations under the applicable agreement governing any such arrangement.
We have fully committed the capital available to us. Our ability to obtain additional financing advancements under our Master Repurchase Facility is contingent upon our making additional advancements to our existing borrowers or our ability to effectively reinvest any additional capital, including any loan repayment proceeds, that we may obtain or receive. However, we cannot be sure that we will be able to obtain additional capital or additional financing advancements under our Master Repurchase Facility. It may take an extended period for us to reinvest any additional capital
we may receive, and any reinvestments we may be able to make may not provide us with similar returns or comparable risks as those of our current investments. See “—Factors Affecting Operating Results—Market Conditions” below for information regarding the impact of the current market conditions on the access of capital for CRE lenders such as us.
RESULTS OF OPERATIONS (dollars in thousands, except share data)
|
| | | | | | | | | | | | | | | |
| | |
| | 2020 | | 2019 | | Change | | %
Change |
INCOME FROM INVESTMENTS: | |
| |
| | | | |
Interest income from investments | | $ | 4,496 |
| | $ | 3,913 |
| | $ | 583 |
| | 15 | % |
Less:
interest and related expenses | | (1,368 | ) | | (2,031 | ) | | 663 |
| | (33 | %) |
Income from investments, net | | 3,128 |
| | 1,882 |
| | 1,246 |
| | 66 | % |
| | | | | | | | |
OTHER
EXPENSES: | | | | | | | | |
General and administrative expenses | | 524 |
| | 618 |
| | (94 | ) | | (15 | %) |
Reimbursement
of shared services expenses | | 242 |
| | 370 |
| | (128 | ) | | (35 | %) |
Total expenses (1) | | 766 |
| | 988 |
| | (222 | ) | | (22 | %) |
| |
|
| |
| |
| |
|
|
Net
income | | $ | 2,362 |
| | $ | 894 |
| | $ | 1,468 |
| | 164 | % |
| | | | | | | | |
Weighted
average common shares outstanding - basic and diluted | | 8,177 |
| | 5,401 |
| | 2,776 |
| | 51 | % |
| | | | | | | | |
Net
income per common share - basic and diluted | | $ | 0.29 |
| | $ | 0.16 |
| | $ | 0.13 |
| | 81 | % |
| |
(1) | Our
Manager has waived any base management or incentive fees otherwise due and payable by us under our management agreement through the period ending December 31, 2020. If our Manager had not waived these base management and incentive fees, we would have recognized $323 and $267 of base management fees for the three months ended June 30, 2020 and 2019, respectively, and $36 of incentive fees for the three months ended June 30, 2020. No incentive fees would have been paid or payable for the three months ended June 30,
2019. |
Interest income from investments. The increase in interest income from investments for the 2020 period reflects interest earned on the 14 loans included in our loan portfolio at June 30, 2020, as compared to 12 loans included in our loan portfolio at June 30, 2019, partially offset by a decline in average LIBOR rates for the 2020 period as compared to the 2019 period. Interest and related expenses. The decrease
in interest and related expenses is a result of a decline in average LIBOR rates for the 2020 period as compared to the 2019 period, partially offset by higher outstanding advancements under our Master Repurchase Facility.
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 professional fees. General and administrative expenses decreased for the 2020 period as compared to the 2019 period as a result of decreases in share based compensation.
Reimbursement of shared services expenses. Reimbursement
of shared services expenses represents reimbursement of the costs for the services that our Manager arranges on our behalf from RMR LLC. Reimbursement of shared services expenses for the 2020 period declined as compared to the 2019 period due to our reduced usage of shared services resulting from our loan portfolio being fully invested.
Net income. The increase in net income for the 2020 period as compared to the 2019 period is due to the changes noted above.
|
| | | | | | | | | | | | | | | |
| | |
| | 2020 | | 2019 | | Change | | %
Change |
INCOME FROM INVESTMENTS: | | | | | | | | |
Interest income from investments | | $ | 8,780 |
| | $ | 6,913 |
| | $ | 1,867 |
| | 27 | % |
Less:
interest and related expenses | | (3,125 | ) | | (3,580 | ) | | 455 |
| | (13 | %) |
Income from investments, net | | 5,655 |
| | 3,333 |
| | 2,322 |
| | 70 | % |
| | | | | | | | |
OTHER
EXPENSES: | | | | | | | | |
General and administrative expenses | | 1,064 |
| | 1,121 |
| | (57 | ) | | (5 | %) |
Reimbursement
of shared services expenses | | 563 |
| | 740 |
| | (177 | ) | | (24 | %) |
Total expenses (1) | | 1,627 |
| | 1,861 |
| | (234 | ) | | (13 | %) |
| | | | | | | | |
Net
income | | $ | 4,028 |
| | $ | 1,472 |
| | $ | 2,556 |
| | 174 | % |
| | | | | | | | |
Weighted
average common shares outstanding - basic and diluted | | 8,173 |
| | 4,275 |
| | 3,898 |
| | 91 | % |
| | | | | | | | |
Net
income per common share - basic and diluted | | $ | 0.49 |
| | $ | 0.34 |
| | $ | 0.15 |
| | 44 | % |
| |
(1) | Our
Manager has waived any base management or incentive fees otherwise due and payable by us under our management agreement through the period ending December 31, 2020. If our Manager had not waived these base management and incentive fees, we would have recognized $643 and $490 of base management fees for the six months ended June 30, 2020 and 2019, respectively, and $36 of incentive fees for the six months ended June 30, 2020. No incentive fees would have been paid or payable for the six months
ended June 30, 2019. |
Interest income from investments. The increase in interest income from investments for the six months ended June 30, 2020 reflects interest earned on the 14 loans included in our loan portfolio at June 30, 2020, as compared to 12 loans included in our loan portfolio at June 30, 2019, partially offset by a decline in average LIBOR rates for the six months ended June 30,
2020 as compared to the six months ended June 30, 2019. Interest and related expenses. The decrease in interest and related expenses is a result of a decline in average LIBOR rates for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 partially offset by higher outstanding advancements under our Master Repurchase Facility. General and administrative expenses.
General and administrative expenses decreased for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 as a result of decreases in share based compensation. Reimbursement of shared services expenses. Reimbursement of shared services expenses for the six months ended June 30, 2020 declined as compared to the six months ended June 30, 2019
due to our reduced usage of shared services resulting from our loan portfolio being fully invested. Net income. The increase in net income for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 is due to the changes noted above. Non-GAAP Financial Measures
We present Core Earnings, which is considered a “non-GAAP financial measure” within the meaning of the applicable SEC rules. Core Earnings does not represent net income or cash generated from operating activities and should not be considered
as an alternative to net income 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 may differ from the methodologies employed by other companies to calculate the same or similar supplemental performance measures; therefore, our reported Core Earnings may not be comparable to the core earnings as reported by other companies.
We believe that Core Earnings 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 is used in determining the amount of base management and incentive fees payable by us to our Manager under our management agreement.
Core Earnings
We calculate Core Earnings as net income, computed in accordance with GAAP, including realized losses not otherwise included in net income determined in accordance with GAAP, and excluding: (a) the incentive fees earned by our Manager (if any); (b) depreciation and amortization (if any); (c) non-cash equity compensation expense; (d) unrealized gains, losses and other similar non-cash items that are included in net income for the period of the calculation (regardless of whether such items are included in or deducted from net income or in other comprehensive income under GAAP) (if any); and (e) one-time events
pursuant to changes in GAAP and certain non-cash items (if any).
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | |
| | 2020 | | 2019 | | 2020 | | 2019 |
Reconciliation
of Net Income to Core Earnings: | | | | | | | | |
Net income | | $ | 2,362 |
| | $ | 894 |
| | $ | 4,028 |
| | $ | 1,472 |
|
Non-cash
equity compensation expense | | 71 |
| | 185 |
| | 113 |
| | 220 |
|
Core earnings | | $ | 2,433 |
| | $ | 1,079 |
| | $ | 4,141 |
| | $ | 1,692 |
|
| | | | | | | | |
Weighted
average common shares outstanding - basic and diluted | | 8,177 |
| | 5,401 |
| | 8,173 |
| | 4,275 |
|
| | | | | | | | |
Core
earnings per common share - basic and diluted | | $ | 0.30 |
| | $ | 0.20 |
| | $ | 0.51 |
| | $ | 0.40 |
|
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. For further information regarding the risks associated with our loan portfolio, see the risk factors identified in Part II, Item 1A, “Risk Factors” of this
Quarterly Report on Form 10-Q and the risk factors identified in Part I, Item IA, "Risk Factors" of our Annual Report.
Changes in Fair Value of our Assets. We generally hold our investments for their contractual terms, unless repaid earlier by the borrower. We evaluate our investments for impairment quarterly. Impairments occur when it is probable that we will not be able to collect all amounts due according to the applicable contractual terms. If we determine that a loan is impaired, we will record an allowance to reduce the carrying value of the loan to an amount that takes into account both the present value of expected future cash flows discounted at the loan's contractual effective interest rate and the fair value of any available collateral, net of any costs we expect to incur to realize that value.
Although we generally hold our investments for
their contractual terms, we may occasionally classify some of our investments as held for sale. Investments held for sale will be carried at the lower of their amortized cost or fair value within loans held for sale on our condensed consolidated balance sheets, with changes in fair value recorded through earnings. Fees received from our borrowers on any loans held for sale will be recognized as part of the gain or loss on sale. We do not currently expect to hold any of our investments for trading purposes.
For further information regarding the risks associated with our loan portfolio, see the risk factors identified in Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q and the risk factors identified in Part I, Item IA, "Risk Factors" of our Annual Report.
Availability of Leverage and Equity. We use leverage to make additional
investments that may increase our returns. We may not be able to obtain the expected amount of leverage we desire or its cost may exceed our expectation and, consequently, the returns generated from our investments may be reduced. In order to grow our loan portfolio, we will need to obtain additional capital. However, our access to additional capital depends on many factors including the price at which our common shares trade relative to their book value and market lending conditions. See " —Market Conditions" below. We have experienced and may continue to experience challenges raising equity capital in the future.
Market Conditions.
Prior to the COVID-19 pandemic, CRE transaction volumes were increasing, driving demand for CRE loans. In 2019, alternative lenders, like us, had gained considerable market share and loan pricing had begun to stabilize. The COVID-19 pandemic has had a severe impact on the CRE debt markets due to the decline in the economy and the uncertainty of future economic conditions. Since late March 2020, there have been sharp declines in real estate transaction volume and the availability of liquidity provided by traditional lending sources such as banks and commercial mortgage backed securities, or CMBS. The reduced supply of liquidity has caused an increase in credit spreads on recently issued, 10-year, investment grade CMBS, which not only increased the pricing for investments funded with debt but also increased pricing on lending sources, such as credit facilities, used to leverage such investments. Since late April 2020, market volatility has declined significantly, and CMBS
loan spreads have somewhat stabilized, but are still trending substantially wider than before the COVID-19 pandemic. In addition, there have been signs of increased activity in the CMBS securitization market as lenders have begun to aggregate new loans for securitization. However, the continued low level of CRE sale transactions and the curtailing of economic activities as a result of certain states imposing or reinstating restrictions on economic activities in response to increased COVID-19 infections poses additional challenges to the underwriting process, which may continue to cause alternative lenders to refrain from providing new loans in the short term.
Many alternative lenders appear to currently be unable or unwilling to lend due to the decline in the economy and the uncertainty of future economic conditions, as well as additional financial burdens related to margin calls
by repurchase and credit facility lenders resulting from decreased collateral value, increased borrowing costs or the loss of repurchase or credit facilities altogether. We believe that most alternative lenders finance properties with respect to which the borrowers have value enhancing business plans, which business plans can be challenging to evaluate in the current economic environment. Alternative lenders with significant exposure to retail and hospitality collateral have seen COVID-19 pandemic related travel and stay-at-home restrictions significantly negatively impact collateral performance and are in active dialogue with borrowers that are most significantly negatively impacted by the economic downturn. Alternative lenders that use mark-to-market repurchase facilities have been forced to cover margin calls due to volatility in pricing, regardless of the credit quality or performance of the loan collateral. Those alternative lenders that are not subject to these
additional financial burdens or disproportionately negative impacts are cautiously evaluating new loan opportunities, but a lack of CRE sales volume has resulted in limited financing opportunities for those lenders that are able to deploy capital and increased competition for high quality loan opportunities.
We believe that, compared to 2008 through 2010, the CRE debt markets are better positioned to weather an economic downturn. Lenders with high exposure to hospitality and retail collateral will need to continue to closely monitor loan performance, but overall, lenders' disciplined underwriting standards during the period preceding the outbreak of the COVID-19 pandemic should help mitigate the impact. We believe that the increased government regulations imposed on banks and insurers in response to the last financial crisis generally have them better positioned for the current economic downturn. Furthermore, increased government
regulation was a catalyst for the growth of the alternative lender segment of the CRE debt markets. Alternative lenders filled the void left by banks to provide financing to borrowers secured by properties with value enhancing and opportunistic business plans.
Despite the volatility and recent liquidity challenges impacting the CRE debt markets, we believe that the alternative lending market is well positioned for future growth, subject to the duration and severity of the current economic downturn. The hospitality and retail sectors have been significantly negatively impacted by the economic downturn, and loans secured by hospitality and retail collateral are expected to continue to be challenges for lenders with significant exposure to such collateral. It is unclear how consumer and travel habits will be impacted over the long term during and after the COVID-19 pandemic; if consumer and travel activity do not substantially
rebound, we believe that this uncertainty will continue to burden these sectors. In the near term, borrowing costs are likely to increase as banks and alternative lenders begin to increase lending activity and determine how to quantify and price risk in the midst of an economic recession. We believe that once the U.S. economy meaningfully improves and returns to a more stable state, there will be significant opportunities for alternative lenders, like us, to provide creative, flexible debt capital for a wide array of circumstances and business plans.
Changes in Market Interest Rates. With respect to our business operations, increases in interest rates, in general, may cause: (a) the interest expense associated with our variable rate borrowings, if any, to increase; (b) the value of our fixed rate investments, if any, to decline; (c) 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. See " —Market Conditions" above for a discussion of the current market including interest rates.
Conversely, decreases in interest rates, in general, may cause: (a) the interest expense associated with our variable rate borrowings, if any, to decrease; (b) the value of our fixed rate investments, if any, to increase; (c) the coupon rates on our variable rate investments, if any, to reset, perhaps on a delayed basis, to lower rates; and (d) it to become easier and more
affordable
for our borrowers to refinance, and as a result repay, our loans, but may negatively impact our future returns if any such repayment proceeds were to be reinvested in lower yielding investments.
The interest income on our loans and interest expense on our borrowings float with one month LIBOR. Because we generally leverage approximately 75% of our investments, as LIBOR increases, our income from investments, net of interest and related expenses, will increase. LIBOR decreases are mitigated by interest rate floor provisions in our loan agreements with borrowers; therefore, changes to income from investments, net, may not move proportionately with the decrease in LIBOR.
LIBOR is currently expected to be phased out in 2021. We do not know what standard, if any, will replace LIBOR if it is phased out. We currently expect that, as a result of any phase out of LIBOR, the interest rates
under our loan agreements with borrowers would be revised as provided under the agreements or amended as necessary to provide for an interest rate that approximates the existing interest rate as calculated in accordance with LIBOR. In addition, we currently expect that the interest rates we pay under our Master Repurchase Facility and any other then existing debt financing arrangements would be similarly revised as provided under the agreement or amended as necessary for that same purpose.
Size of Portfolio. The size of our loan portfolio, as measured both by the aggregate principal balance and the number of our CRE loans and our other investments, is also an important factor in determining our operating results. Generally, if the size of our loan portfolio grows, the amount of interest income we receive would increase and we may achieve certain economies of scale and diversify risk within our loan portfolio.
A larger portfolio, however, may result in increased expenses; for example, we may incur additional interest expense or other costs to finance our investments. Also, if the aggregate principal balance of our loan portfolio grows but the number of our loans or the number of our borrowers does not grow, we could face increased risk by reason of the concentration of our investments. At this time, we are focused on managing our current loan portfolio. We believe our growth is limited by our ability to access additional cost-effective capital.
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 fund our lending commitments, repay or meet
margin calls resulting from our borrowings, fund and maintain our assets and operations, make distributions to our shareholders and fund other business operating requirements. We require a significant amount of cash to originate, purchase and invest in our target investments, make additional unfunded loan commitment payments, repay principal and interest on our borrowings, make distributions to our shareholders and fund other business operating requirements. We have been limited in our ability to access capital and, as a result, we have limited capital to invest. The long-term impact of the COVID-19 pandemic and its aftermath on financial markets is uncertain. To the extent that impact is sustained for an extended period, we expect that we will be further challenged in accessing capital. Our sources of cash flows include payments of principal, interest and fees we receive on our investments, other cash we may generate from our business and operations and any unused borrowing
capacity, including under our Master Repurchase Facility or other repurchase agreements or financing arrangements, and may also include bank loans or public or private issuances of debt or equity securities. We believe that these sources of funds will be sufficient to meet our operating and capital expenses and pay our debt service obligations owed and make any distributions to our shareholders for the next 12 months and for the foreseeable future, subject to the duration and severity of the COVID-19 pandemic and economic impact on our borrowers and their ability to fund their debt service obligations owed to us. For further information regarding the risks associated with our loan portfolio, see the risk factors identified in Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q and the risk factors identified in Part I, Item IA, "Risk Factors" of our Annual Report.
Pursuant to our Master Repurchase
Agreement, we may sell to, and later repurchase from, Citibank floating rate mortgage loans and other related assets, or purchased assets. The initial purchase price paid by Citibank for each purchased asset is up to 75% of the lesser of the market value of the purchased asset or the unpaid principal balance of such purchased asset, subject to Citibank’s approval. Upon the repurchase of a purchased asset, we are required to pay Citibank the outstanding purchase price of the purchased asset, accrued interest and all accrued and unpaid expenses of Citibank relating to such purchased asset. The price differential (or interest rate) relating to a purchased asset is equal to one month LIBOR plus a premium of 200 to 250 basis points, determined by the yield of the purchased asset and the property type of the purchased asset's real estate collateral. As of June 30, 2020, the maximum
amount available for advancement under our Master Repurchase Facility was $213,482, of which we had a $201,138 aggregate outstanding principal balance, and the weighted average interest rate of advancements under our Master Repurchase Facility was 2.97% for the six months ended June 30, 2020. Our Master Repurchase Facility is scheduled to expire on November 6, 2021. For further information regarding our Master Repurchase Facility, 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 and "—Overview-Financing Activities" above.
The following is a summary of our sources and uses of cash flows for the periods presented (dollars in thousands):
|
| | | | | | | | |
| | |
| | 2020 | | 2019 |
Cash,
cash equivalents and restricted cash at beginning of period | | $ | 8,875 |
| | $ | 27,335 |
|
Net cash provided by (used in): | | | | |
Operating
activities | | 2,931 |
| | 805 |
|
Investing activities | | (34,805 | ) | | (122,431 | ) |
Financing
activities | | 33,632 |
| | 105,758 |
|
Cash, cash equivalents and restricted cash at end of period | | $ | 10,633 |
| | $ | 11,467 |
|
Cash
Provided by Operating Activities
During the six months ended June 30, 2020, net cash provided by operating activities of $2,931 was primarily due to our net income for the period and favorable changes in working capital from amounts due to our Manager accrued but not yet paid, partially offset by unfavorable changes in working capital primarily due to interest income accrued and not yet received and expenses paid in the period but accrued in previous periods. During the six months ended June 30, 2019, net cash provided by operating activities of $805
was primarily due to our net income for the period, partially offset by unfavorable changes in working capital primarily due to interest income accrued and not yet received. Cash Used in Investing Activities
During the six months ended June 30, 2020, net cash used in investing activities consisted of $25,738 of loan originations, net of deferred fees, and $9,067 of additional fundings on our loans held for investment. During the six months ended June 30, 2019, net cash
used in investing activities consisted of $119,062 of loan originations, net of deferred fees, and $3,369 of additional fundings on our loans held for investment. Cash Provided by Financing Activities
During the six months ended June 30, 2020, our cash provided by financing activities primarily consisted of $35,602 of advancements under our Master Repurchase Facility, partially offset by distributions paid to our shareholders. During the six months ended June 30,
2019, our cash flows provided by financing activities consisted of $92,983 of advancements under our Master Repurchase Facility, $14,220 of borrowings under the RMR Credit Agreement and $26,074 of net proceeds from the issuance and sale of our common shares in an underwritten public offering, or the Offering, partially offset by distributions paid to our shareholders. We used the Offering proceeds to repay the $14,220 balance then outstanding under the RMR Credit Agreement and to reduce borrowings under our Master Repurchase Facility by approximately $11,900. As of June 30, 2020, we have fully committed the capital available to us. Our ability to obtain additional financing advancements under our Master Repurchase Facility is contingent upon our making additional
fundings to our existing borrowers or our ability to effectively reinvest any additional capital, including any loan repayment proceeds, that we may obtain or receive. However, we cannot be sure that we will be able to obtain additional capital or additional financing advancements under our Master Repurchase Facility. It may take an extended period for us to reinvest any additional capital we may receive, and any reinvestments we may be able to make may not provide us with similar returns or comparable risks as those of our current investments. Distributions
During the six months ended June 30, 2020, we paid quarterly distributions to our shareholders aggregating $1,895, or $0.23 per common share,
using cash on hand. For further information regarding distributions, 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. In order to preserve our near term capital due to the economic downturn and uncertainty as to future economic conditions as a result of the COVID-19 pandemic, beginning with the first quarter of 2020, we reduced our quarterly distribution rate payable to our common shareholders to $0.01 per share and on July 16, 2020, declared a quarterly distribution payable to our common shareholders of $0.01 per share for the second quarter of 2020.
Our Board of Trustees will continue to monitor our financial performance and economic outlook as the year progresses to determine a prudent level for any subsequent quarterly distributions for 2020 or to declare and pay a distribution required to maintain our qualification for taxation as a REIT. We currently expect that we will need to make an increased distribution in the future to maintain our qualification for taxation as a REIT for 2020. However, any future distributions are subject to the approval of our Board of Trustees.
Contractual Obligations and Commitments
Our contractual obligations and commitments as of June 30, 2020 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) | | $ | 17,566 |
| | $ | 3,415 |
| | $ | 14,151 |
| | $ | — |
| | $ | — |
|
Principal
payments on master repurchase facility (2) | | 201,138 |
| | 29,680 |
| | 171,458 |
| | — |
| | — |
|
Interest
payments (3) | | 5,142 |
| | 3,864 |
| | 1,278 |
| | — |
| | — |
|
| | $ | 223,846 |
| | $ | 36,959 |
| | $ | 186,887 |
| | $ | — |
| | $ | — |
|
| |
(1) | The
allocation of our unfunded loan commitments is based on the current loan maturity date to which the commitments relate. |
| |
(2) | The allocation of outstanding advancements under our Master Repurchase Agreement is based on the current maturity date of each loan investment with respect to which the individual borrowing relates. |
| |
(3) | Projected interest expense is attributable to only our debt service obligations at existing rates as of June 30, 2020
and is not intended to estimate future interest costs which may result from debt prepayments, additional borrowings, new debt issuances or changes in interest rates. |
Off-Balance Sheet Arrangements
As of June 30, 2020, we had no off-balance sheet arrangements that have had or that we expect would be reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Debt Covenants
Our principal debt obligations at June 30, 2020 were the outstanding balances
under our Master Repurchase Facility. Our Master Repurchase Agreement provides for acceleration of the date of repurchase of any then purchased assets and Citibank’s liquidation of the purchased assets upon the occurrence and continuation of certain events of default, including a change of control of us, which includes our Manager ceasing to act as our sole manager or to be a wholly owned subsidiary of RMR LLC. Our Master Repurchase Agreement also provides that upon the repurchase of any then purchased asset, we are required to pay Citibank the outstanding purchase price of such purchased asset and accrued interest and any and all accrued and unpaid expenses of Citibank relating to such purchased asset. In connection with our Master Repurchase Agreement, we entered into the Guaranty, which requires us to guarantee 25% of our subsidiary's prompt and complete payment of the purchase price, purchase price differential and any
costs and expenses of Citibank related to our Master Repurchase Agreement. The Guaranty also requires us to comply with customary financial covenants, which include the maintenance of a minimum tangible net worth, minimum cash liquidity, a total indebtedness to tangible net worth ratio and a minimum interest coverage ratio.
As of June 30, 2020, we had a $201,138 aggregate outstanding principal balance under our Master Repurchase Facility. In light of the impact of the COVID-19 pandemic, we continue to actively engage with Citibank regarding our liquidity position and the status of the loans in our portfolio that are financed under our Master Repurchase Facility. Our Master Repurchase Agreement is structured with risk mitigation mechanisms, including a cash flow sweep, which would allow
Citibank to control interest payments from our borrowers under our loans that are financed under our Master Repurchase Facility, and the ability to accelerate dates of repurchase and institute margin calls, which may require us to pay down balances associated with one or more of our loans that are financed under our Master Repurchase Facility. As of June 30, 2020, we believe we were in compliance with all the covenants and other terms under our Master Repurchase Agreement and, to date, Citibank has not utilized any such risk mitigation mechanisms under our Master Repurchase Agreement. Related Person Transactions
We have relationships and historical and continuing transactions with our Manager, RMR LLC, RMR Inc. and others related to them. For example: 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 June 30, 2020, owned approximately 19.4% of our outstanding common shares; RMR Inc. is the managing member of RMR LLC; Adam
Portnoy, one of our Managing Trustees, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., and he is also a director of our Manager, a managing director and the president and chief executive officer of RMR Inc., and an officer and employee of RMR LLC; David M. Blackman, our other Managing Trustee and our President and Chief Executive Officer, also serves as the president, chief executive officer and a director of our Manager and is an officer and employee of RMR LLC; and each of our other officers is also an officer and/or employee of our Manager or RMR LLC. In addition, other companies to which RMR LLC or its subsidiaries provide management services have trustees, directors and officers some of whom are also trustees, directors
or officers of us, our Manager, RMR LLC or RMR Inc. and some of our Trustees and officers serve as trustees, directors or officers of these companies.
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 Annual Report, our definitive Proxy Statement for our 2020 Annual Meeting of Shareholders and our other filings with the SEC. In addition, see the section captioned “Risk Factors” of our Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships. Our filings with the SEC and copies of certain of our agreements with these related persons, including our management agreement with our Manager, are available
as exhibits to our filings with the SEC and accessible at the SEC’s website, www.sec.gov. We may engage in additional transactions with related persons, including businesses to which RMR LLC or its subsidiaries provide management services.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk (dollars in thousands, except per share data)
We believe that our business is exposed to two principal market risks: (a) changes in the level of economic activity in the U.S. economy generally or in geographic areas where the properties that are the subject of our real estate investments are located; and (b) changes in market interest rates.
Changes in the general economy may impact the ability and willingness of our borrowers to pay interest on and repay principal of our loans. A U.S. recession or a slowing of economic activity, including as a result of the COVID-19 pandemic, in the markets where the underlying collateral for our loans are located may cause our borrowers to default or may cause the value of the collateral to decrease and be less than the outstanding amount of the loan. To mitigate these market risks, when evaluating a potential investment,
we perform thorough diligence on the value of the proposed collateral, including as compared to comparable collateral in the same market, and the historical business practices and credit worthiness of our borrowers and their affiliates, as well as compare our borrowers' proposed business plans for and projected income from the proposed collateral to our expectations regarding the market conditions of the geographic area where the collateral is located and the potential for future income from the collateral. In addition, with respect to our existing loans, we continuously monitor the credit quality and performance of our borrowers and loan collateral, and we structure our loans with risk mitigation mechanisms, such as cash flow sweeps or interest reserves, to help protect us against investment losses. However, despite these risk mitigation efforts and measures, our borrowers may default on our loans and/or the value of the underlying collateral may decrease significantly
if market conditions decline or for other reasons. For further information regarding the risks associated with our loan portfolio, see the risk factors identified in Part II, Item 1A, "Risk Factors" of this Quarterly Report on Form 10-Q and the risk factors identified in Part I, Item IA, "Risk Factors" of our Annual Report.
Floating Rate Investments
As of June 30, 2020, our loans held for investment had an aggregate principal balance of $278,484 and the weighted average maximum maturity of our loan portfolio was 3.1 years, assuming all borrower loan extension options have been exercised. All our loans held for investment were made in U.S. dollars and earn interest at LIBOR plus a premium.
Accordingly, we are exposed to interest rate risk for changes in U.S. dollar based short term rates, specifically LIBOR. As LIBOR decreases, our risk is partially mitigated by interest rate floor provisions in our loan agreements with borrowers. In addition, upon repayment from our borrowers we are vulnerable to decreases in interest rate premiums due to market conditions at the time any such repayment proceeds are reinvested. Floating Rate Debt
At June 30, 2020, our floating rate debt obligations consisted of $201,138 in outstanding advancements 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
our floating rate debt was borrowed in U.S. dollars and requires interest to be paid at a rate of LIBOR plus a premium. Accordingly, we are exposed to interest rate risk for changes in U.S. dollar based short term rates, specifically LIBOR. In addition, upon selling additional mortgage loans and other assets under our Master Repurchase Facility, we are vulnerable to increases in interest rate premiums due to market conditions or perceived credit characteristics of our borrowers.
The table below details the impact, based on our current loan portfolio and debt outstanding at June 30, 2020, on our interest income and interest expense of an immediate increase or decrease of 100 basis points in LIBOR, the applicable interest rate benchmark: |
| | | | | | | | | | | | | | |
| | | | Interest Rate Per Year (1) | | 100 Basis Point Increase | | 18 Basis Point Decrease (3) |
Assets (Liabilities) Subject to Interest Rate Sensitivity: | | | | | | | | |
Loans
held for investment | | $ | 278,484 |
| | 5.70% | | $ | — |
| | $ | — |
|
Master
repurchase facility | | (201,138 | ) | | 2.18% | | (2,011 | ) | | 355 |
|
Total change in net income from investments | |
|
| | | | $ | (2,011 | ) | | $ | 355 |
|
| | | | | | | | |
Annual
earnings per share impact (2) | | | | | | $ | (0.25 | ) | | $ | 0.04 |
|
| |
(1) | Weighted
based on interest rates and principal balances as of June 30, 2020. |
| |
(2) | Based on weighted average number of shares outstanding (diluted) for the three months ended June 30, 2020. |
| |
(3) | Our
loan agreements with borrowers include interest rate floor provisions which set a minimum LIBOR for each loan. We do not currently have a LIBOR floor provision relating to any of the outstanding balances under our Master Repurchase Facility. As a result, if LIBOR decreases below the floor established for any of our investments, our income from investments will decrease less than our borrowing costs and the net amount may result in an increase in our net investment income. The above table illustrates the incremental impact on our annual income from investments, net, due to increases and decreases in LIBOR of 100 basis points, taking into consideration our borrowers' interest rate floors as of June 30, 2020. The 100 basis point increase in LIBOR used in the analysis above does not result in any increase in interest we would receive in our loans held for investment because
the increased rate would not exceed the current interest rate floor provision. The 100 basis point decrease in LIBOR used in the analysis above has been limited in that analysis to 18 basis points to result in a LIBOR rate of 0.00%. The results are based on our current loan portfolio and debt outstanding at June 30, 2020. Any changes to the mix of our investments of debt outstanding could impact this interest rate sensitivity analysis and this illustration is not meant to forecast future results. |
To mitigate the impact of future changes in market interest rates on our business, we require borrowers to pay floating interest rates to us rather than fixed interest rates on our loans held for investment and, to the extent that we use leverage to make investments,
we will continue to "match index" certain investments with our debt or leverage obligations so that they create similar movements in interest rates based upon similar indexes and other terms. Furthermore, depending upon our beliefs regarding future market conditions affecting interest rates, we may purchase interest rate hedge instruments that allow us to change the character of interest receipts and debt service obligations owed to us from fixed to floating rates or the reverse.
LIBOR Phase Out
LIBOR is currently expected to be phased out in 2021. All the agreements 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 June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Warning Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. Also, whenever we use words such as “believe”, “expect”, “anticipate”, “intend”, “plan”, “estimate”, “will”, “may” and negatives or derivatives of these or similar expressions, we are making forward-looking statements. These forward-looking statements are based upon our present intent, beliefs or expectations, but forward-looking statements are not guaranteed to occur and may not occur. Forward-looking statements in this Quarterly Report on Form 10-Q relate to various aspects of our business, including:
| |
• | The
duration and severity of the economic downturn resulting from the COVID-19 pandemic and its impact on us and our borrowers, |
| |
• | The likelihood and extent to which our borrowers will be negatively impacted by the COVID-19 pandemic and its aftermath and be able and willing to fund their debt service obligations owed to us, |
| |
• | Our expectations about our borrowers’ business plans and their abilities to successfully execute them, |
| |
• | Our
expectations regarding the diversity and other characteristics of our loan investment portfolio, |
| |
• | Our ability to carry out our business strategy and take advantage of opportunities for our business that we believe exist, |
| |
• | Our expectations of the opportunities that will exist in the CRE debt market, including the middle market, when the U.S. economy improves and returns to a more stable state for a sustained period, |
| |
• | Our
ability to obtain additional capital to enable us to make additional investments or to increase our potential returns, including by using available leverage, |
| |
• | Our ability to pay distributions to our shareholders and to sustain the amount of such distributions, |
| |
• | Our expectations as to the amount of capital we may be able to preserve as a result of reducing the distribution rate on our common shares, |
| |
• | Our
operating and investment targets, investment and financing strategies and leverage policies, |
| |
• | Our expected operating results, |
| |
• | The amount and timing of cash flows we receive from our investments, |
| |
• | Our expectations regarding the impact of the COVID-19 pandemic on our borrowers and our financial
condition, |
| |
• | The ability of our Manager to locate suitable investments for us, to monitor, service and administer our existing investments and to otherwise implement our investment strategy, |
| |
• | 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 from our investments, |
| |
• | Yields that may be available to us from mortgages on middle market and transitional CRE, |
| |
• | The duration and other terms of our loan agreements with borrowers, |
| |
• | The credit qualities of our borrowers, |
| |
• | The
ability and willingness of our borrowers to repay our investments in a timely manner or at all, |
| |
• | The cost and availability of additional advancements under our Master Repurchase Facility, or other debt financing under additional repurchase or bank facilities we may obtain from time to time, and our ability to obtain such additional debt financing, |
| |
• | Our qualification for taxation as a REIT, |
| |
• | Our expectation that we will need to make an increased distribution in the future to maintain our qualification for taxation as a REIT for 2020, |
| |
• | Our ability to maintain our exemption from registration under the Investment Company
Act, |
| |
• | Our understanding of the competitive nature of our industry and our ability to successfully compete under such circumstances, |
| |
• | 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 effect they may have on us or our competitors, and |
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, |
| |
• | 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 pandemics, including the COVID-19 pandemic, or other manmade or natural disasters beyond our control, and |
| |
• | Additional factors, including, but not limited to, those set forth in Part II, Item IA, "Risk Factors" of this Quarterly Report on Form 10-Q and the risk factors identified in Part I, Item IA, "Risk Factors" of our Annual Report. |
For example:
| |
• | We have a limited operating history, and we may not be able to operate our business successfully
or generate sufficient revenue to make or sustain distributions to our shareholders, |
| |
• | To make additional investments and continue to grow our business, we will need to obtain additional cost-effective capital. We cannot be sure that we will be successful in obtaining any such additional capital. If we are unable to obtain such additional capital, we may not be able to further grow our business by making additional investments, |
| |
• | Beginning with the first quarter of 2020, we reduced our quarterly distribution rate on our
common shares to $0.01 per share. Our distribution rate is set and reset from time to time by our Board of Trustees. The timing, amount and form of future distributions will be determined at the discretion of our Board of Trustees and will depend upon various factors that our Board of Trustees deems relevant, including our historical and projected income, our Core Earnings, the then-current and expected needs and availability of cash to pay our obligations and fund our investments, distributions which may be required to be paid by us to maintain our qualification for taxation as a REIT, limitations on distributions contained in our financing arrangements and other factors deemed relevant by our |
Board
of Trustees in its discretion. Therefore, we cannot be sure that we will resume paying distributions in the future at historic levels or that we will increase distributions in the future,
| |
• | Competition may limit our ability to identify and make desirable investments with any additional capital we may obtain or with any proceeds we may receive from repayments of our investments, |
| |
• | Our belief that there will be strong demand for alternative sources of CRE debt capital when the U.S. economy improves and returns to a more stable state for a
sustained period may not be correct, |
| |
• | The value of our loans depends upon our borrowers’ ability to generate cash flows from operating the underlying collateral for our loans. Our borrowers may not have sufficient cash flows to repay our loans according to their terms, which may result in delinquency and foreclosure on our loans, |
| |
• | Our investments contain certain risk mitigation mechanisms that may help protect us against investment losses by mitigating the impact from our borrowers being unable to pay their debt service
obligations owed to us as scheduled for a temporary period. However, these mechanisms may not adequately cover the debt service amount and will likely not be able to fully fund the debt service obligations owed to us if the tenants’ businesses fail or they default on their debt service obligations owed to us, |
| |
• | The impact of the COVID-19 pandemic is affecting all parts of the economy including our borrowers who are experiencing the negative impact of current economic conditions. As a result, we may not have sufficient capital to meet commitments from actions that Citibank takes if our borrowers default or the value of our collateral declines below required levels, |
| |
• | Our
actions to actively manage our investments to minimize the impact of the economic challenges imposed by the COVID-19 pandemic may not succeed or any success they may have may not help us avoid realizing negative impacts resulting from economic challenges imposed by the COVID-19 pandemic, including with respect to our liquidity and financial results, |
| |
• | Our engagement with Citibank, the lender under our Master Repurchase Facility, and our borrowers may not enable us to maximize our ability to collect interest and principal on our investments and minimize any actions that Citibank may take if our borrowers default or the value of any of the collateral underlying our loans declines below prescribed levels. These actions may not succeed or, any success
they may have, may not prevent us from realizing negative impacts from the current business conditions, including with respect to our liquidity and financial results. Further, despite our active engagement with Citibank, Citibank may ultimately determine to utilize one or more of the risk mitigation mechanisms available to it under our Master Repurchase Agreement, |
| |
• | The risk mitigation mechanisms that apply to our investments may not adequately cover our borrowers' debt service amounts and the borrowers may not be able to fully fund their debt service obligations owed to us, |
| |
• | Prepayment
of our loans may adversely affect the value of our loan portfolio and our ability to make or sustain distributions to our shareholders, |
| |
• | Loans secured by properties in transition involve a greater risk of loss than loans secured by stabilized properties, |
| |
• | Our Manager'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, |
| |
• | Although, as of August 3, 2020, Citibank has not instituted cash sweeps on our accounts and we have not received a margin call under our Master Repurchase Facility, it may do so in the future in accordance with our Master Repurchase Agreement, |
| |
• | Continued availability of additional advancements under our Master Repurchase Facility is subject to us identifying suitable
loans to invest in and our satisfying certain financial covenants and other conditions, as applicable, that we may be unable to satisfy, |
| |
• | Financing for floating rate mortgages and other related assets that we may seek to sell pursuant to our Master Repurchase Facility is subject to approval by the lender under our Master Repurchase Facility, whose approval we may not obtain, |
| |
• | Actual
costs under our Master Repurchase Facility will be higher than LIBOR plus a premium because of fees and expenses associated with our debt, |
| |
• | As of June 30, 2020, we have fully committed the capital available to us. Our ability to obtain additional financing advancements under our Master Repurchase Facility is contingent upon our making additional advancements to our existing borrowers or our ability to effectively reinvest any additional capital, including any loan repayment proceeds, that we may obtain or receive. However, we cannot be sure that we will be able to obtain additional capital or additional financing advancements under our Master Repurchase
Facility. It may take an extended period for us to reinvest any additional capital we may receive, and any reinvestments we may be able to make may not provide us with similar returns or comparable risks as those of our current investments, |
| |
• | Any phase out of LIBOR may have an impact on our investments and our debt financing arrangements, |
| |
• | We believe that the market price for our common shares may need to increase to approximately book value for us to practically access additional capital in the public market. We believe
this because of expected negative market reactions, among other reasons, if we were to complete an equity offering at a price that is below approximately book value. However, we are not prohibited from selling our common shares at less than book value and could do so if we determined it to be in our interests, |
| |
• | We are dependent upon our Manager, its affiliates and their personnel. We may be unable to find suitable replacements if our management agreement is terminated, |
| |
• | We believe that our relationships with our related
parties, including our Managing Trustees, our Manager, RMR LLC and others affiliated with them may benefit us and provide us with competitive advantages in operating and growing our business. However, the advantages we believe we may realize from these relationships may not materialize, |
| |
• | Our intention to remain exempt from registration under the Investment Company Act imposes limits on our operations, and we may fail to remain exempt from registration under the Investment Company Act, and |
| |
• | Our failure to remain qualified
for taxation as a REIT could have significant adverse consequences. |
Currently unexpected results could occur due to many different circumstances, some of which are beyond our control, such as acts of terrorism, the COVID-19 pandemic, natural disasters or changes in capital markets or the economy generally.
The information contained elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report or in our other filings with the SEC, including in the section captioned “Risk Factors” herein or therein, or incorporated herein or therein, identifies other important factors that could cause differences from our forward-looking statements. Our filings with the SEC are available on the SEC's website at www.sec.gov. You
should not place undue reliance upon our forward-looking statements.
Except as required by law, we do not intend to update or change any forward-looking statements as a result of new information, future events or otherwise.
Statement Concerning Limited Liability
The Articles of Amendment and Restatement of Tremont Mortgage Trust, a copy of which, together with any amendments or supplements thereto, is duly filed with the State Department of Assessments and Taxation of Maryland, provide that the name Tremont Mortgage Trust refers to the trustees collectively as trustees, but not individually or personally. No trustee, officer, shareholder, employee or agent of Tremont Mortgage Trust shall be held to any personal liability, jointly or severally, for any obligation of, or claim against, Tremont Mortgage Trust. All persons or entities dealing
with Tremont Mortgage Trust, in any way, shall look only to the assets of Tremont Mortgage Trust for the payment of any sum or the performance of any obligation.
Part II. Other Information
Item 1A. Risk Factors
Our business faces many risks, a number of which are described in
the section captioned “Risk Factors” in our Annual Report. The risks described in our 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 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 Annual Report and below, and the information contained in the section captioned “Warning Concerning Forward-Looking Statements” and elsewhere in this Quarterly Report before deciding whether to invest in our securities.
Our business, operations,
financial results and liquidity could be materially adversely impacted by the COVID-19 pandemic, and it is not known what the duration of this pandemic will be or what its ultimate adverse impact on us and our business will be, but we expect it will be substantial.
COVID-19 has been declared a pandemic by the World Health Organization and, in response to the outbreak, the U.S. Health and Human Services Secretary has declared a public health emergency in the United States. COVID-19 has had a devastating impact on the global economy, including the U.S. economy, and has resulted in a global economic recession.
These conditions could materially and adversely impact our business, results of operations and liquidity. In addition, some of our borrowers and their tenants have experienced substantial
declines in their businesses and some of our borrowers have sought relief from us from their debt service obligations owed to us, and we expect these declines and requests to continue or increase in the future. As a result of the COVID-19 pandemic and restrictions implemented in response, there have been construction moratoriums and decreases in available construction workers and construction activity, including required inspectors and governmental personnel for permitting and other requirements. These conditions may prevent our borrowers from completing ongoing and planned construction projects and improving their properties that secure our loans. As a result, borrowers may be unable to generate sufficient cash flow to make payments on or refinance our loans, and we may not recover some or all of our investment. We have, as of August 3, 2020, provided relief to one of our borrowers who was in default during April 2020
but is no longer in default and we continue to actively engage in discussions with our borrowers to maximize our ability to collect interest and principal payments from them. We cannot be sure these efforts will succeed and, if the current economic conditions continue or worsen for a prolonged period, there is a significant risk that some of our other borrowers may default on their debt service obligations owed to us.
During economic recessions, real estate values typically decline, sometimes significantly. Declining real estate values may increase the likelihood that our borrowers will default on their debt service obligations owed to us and that we will incur losses as a result because the value of the collateral that secures our loans may then be less than the debt owed to us plus our costs of recovery. Further, if borrowers do not repay our loans or we realize amounts that
are less than the amount of the investment plus our costs, our investment portfolio will reduce in size. In addition, if a borrower defaults on our loan and we take actions related to the collateral securing that loan, we may be delayed for an extended period of time on converting that collateral to investable cash, which would impair our ability to redeploy that capital and grow our portfolio.
We have been limited in our ability to access capital and, as a result, we have limited capital to invest. The long-term impact of the COVID-19 pandemic and its aftermath on financial markets is uncertain. To the extent that impact is sustained for an extended period, we expect that we will be further challenged in accessing capital. As a result, our ability to grow our business and investment portfolio may be limited for an indefinite period.
In
addition, we believe that the risks associated with our investments will increase during periods of economic slowdown or recession, especially if these periods are accompanied by declining real estate values. Consequently, our investment strategy may be adversely affected by a prolonged economic downturn or recession related to the COVID-19 pandemic where declining real estate values would likely reduce the level of new mortgage and other real estate related loan originations since borrowers often use the appreciation in the value of their existing properties to support the purchase or investment in additional properties. Any sustained period of increased payment delinquencies, foreclosures or losses resulting from the impact of the COVID-19 pandemic would adversely affect our ability to originate or acquire loans, which would materially and adversely affect our results of operations, financial condition, liquidity and business and our ability to make or sustain distributions
to our shareholders.
We cannot predict the extent and duration of the COVID-19 pandemic or the severity and duration of its economic impact, but we expect it will be substantial. Potential consequences of the current unprecedented measures taken in response to the spread of COVID-19 and the current market disruptions and volatility affecting us include, but are not limited to:
| |
• | the current low market price of our common shares may continue
for an indefinite period and could decline further; |
| |
• | possible significant declines in the value of our portfolio; |
| |
• | our inability to accurately or reliably value our portfolio; |
| |
• | our
inability to comply with financial covenants that could result in our defaulting under our Master Repurchase Agreement; |
| |
• | our maintaining the current reduced rate of distributions on our common shares for an extended period of time or suspending our payment of distributions entirely; |
| |
• | our failure to pay interest and principal when due on our outstanding debt, which would result in events of default under our Master Repurchase
Facility and our possible loss of our Master Repurchase Facility; |
| |
• | our inability to access debt and equity capital on attractive terms, or at all; |
| |
• | increased risk of default or bankruptcy of our borrowers; |
| |
• | increased
risk of our borrowers being unable to weather an extended cessation of normal economic activity and thereby impairing their ability to continue functioning as going concerns and to pay their debt service obligations owed to us; |
| |
• | our and our borrowers’ inability to operate our businesses if the health of our respective management personnel and other employees is affected, particularly if a significant number of individuals are impacted; and |
| |
• | reduced
economic demand resulting from mass employee layoffs or furloughs in response to governmental action taken to slow the spread of COVID-19, which could impact the continued viability of our borrowers. |
Further, the extent and strength of any economic recovery after the COVID-19 pandemic abates, including following any "second wave" or other intensifying of the pandemic, is uncertain and subject to various factors and conditions. Our business, operations and financial position may continue to be negatively impacted after the COVID-19 pandemic abates and may remain at depressed levels compared to prior to the outbreak of the COVID-19 pandemic and those conditions may continue for an extended period.
We reduced our quarterly distribution rate on our common shares to $0.01 per share; future distributions may remain at this level for an indefinite period, subject
to applicable REIT tax requirements, or be eliminated and the form of payment could change.
Beginning with the first quarter of 2020, we reduced our quarterly distribution rate on our common shares to $0.01 per share. We currently intend to continue to make quarterly distributions to our shareholders at this rate, subject to applicable REIT tax requirements. However:
| |
• | our ability to make or sustain the rate of distributions may continue to be adversely affected by the negative impact of the COVID-19 pandemic and its aftermath on our business, results of operations and liquidity; |
| |
• | our
making of distributions is subject to restrictions contained in our Master Repurchase Agreement and may be subject to restrictions in future debt service obligations we may incur; during the continuance of any event of default under our Master Repurchase Agreement, we may be limited or in some cases prohibited from making distributions to our shareholders; and |
| |
• | our distribution rate is set and reset from time to 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, 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 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. Accordingly, future distribution rates may be increased or decreased and there is no assurance as to the rate at which future distributions will be paid.
For these reasons, among others, our distribution rate may not increase for an indefinite period and could be eliminated.
In order to preserve liquidity, we may elect to pay distributions to our shareholders, in part, in a form other than cash, such as issuing additional common shares of
ours to our shareholders, as permitted by the applicable tax rules.
Some of our borrowers have requested relief from their debt service obligations owed to us in response to the current economic conditions resulting from the COVID-19 pandemic and we expect to receive additional similar requests in the future; we may determine to grant relief in response to these requests in the future if we determine it prudent or appropriate to do so.
The current economic conditions resulting from the COVID-19 pandemic have significantly negatively impacted some of our borrowers’ businesses, operations and liquidity. Some of our borrowers have requested relief from their debt service obligations owed to us. As of August 3, 2020, we have provided one borrower with relief in the form of an increase
to the interest reserve balance that may be used to make interest payments. We expect to receive additional similar requests in the future, and we may determine to grant relief in the future if we determine it prudent or appropriate to do so. In addition, if our borrowers are unable to continue as going concerns as a result of the current economic conditions or otherwise, we may incur losses of all or some of our loan investments to them, including if the collateral securing our loans less our costs of recovery are less than the defaulted amounts. Our Master Repurchase Agreement requires, and the agreements governing any additional repurchase facilities, bank credit facilities or debt arrangements that we may enter into will likely require, us to provide additional collateral or pay down debt.
Our Master Repurchase
Facility, or other repurchase or bank credit facilities (including term loans and revolving facilities) or debt arrangements that we may enter into to finance investments, may involve the risk that the value of the investments sold by us or pledged to the provider of such repurchase or other bank credit facilities or debt arrangements may decline, and, in such circumstances, we would likely be required to provide additional collateral or to repay all or a portion of the funds advanced thereunder. With respect to our Master Repurchase Facility, subject to certain conditions, Citibank has sole discretion to determine the market value of the investments that serve as collateral under the facility for purposes of determining whether we are required to pay margin to Citibank. Where a decline in the value of collateral, including as a result of the impact of COVID-19 pandemic, results in a margin deficit, Citibank may require us to eliminate that margin deficit through a
combination of purchased asset repurchases and cash transfers to Citibank, subject to Citibank's approval. We may not have funds available to eliminate any such margin deficit and may be unable to raise funds from alternative sources on favorable terms or at all, which would likely result in a default under our Master Repurchase Agreement. In the event of any such default, Citibank could accelerate our outstanding debts and terminate our ability to obtain additional advancements under our Master Repurchase Facility, and our financial condition and prospects would be materially and adversely affected. Any debt arrangements that we may enter into in the future would likely contain similar provisions. In addition, if any of our current or future lenders file for bankruptcy or become insolvent, our investments that serve as collateral under the applicable repurchase or other bank credit facilities or debt arrangement may become subject to bankruptcy or insolvency proceedings,
thus depriving us, at least temporarily, of the benefit of those assets. Such an event could restrict our access to additional debt arrangements and therefore increase our cost of capital. Lenders under any future repurchase or other bank credit facilities or debt arrangements may also require us to maintain a certain amount of cash or set aside assets sufficient to maintain a specified liquidity position that would allow us to satisfy our collateral obligations. As a result, we may not be able to leverage our assets to maximum capacity, which could reduce our return on assets. If we are unable to meet any such collateral obligations, our financial condition and prospects could deteriorate rapidly.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer purchases of equity securities. The following table provides information about our purchases of our equity securities during the quarter ended June 30, 2020. |
| | | | | | | | | | | | | | |
Calendar Month | | Number
of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
June 2020 | | 390 |
| | $ | 3.08 |
| | — |
| | $ | — |
|
Total | | 390 |
| | $ | 3.08 |
| | — |
| | $ | — |
|
| |
(1) | This
common share withholding and purchase was made to satisfy the tax withholding and payment obligations of a former officer and employee of RMR LLC in connection with the vesting of awards of our common shares. We withheld and purchased these shares at their fair market value based upon the trading price of our common shares at the close of trading on Nasdaq on the purchase date. |
Item 6. Exhibits |
| | |
Exhibit Number | | Description |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
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 | | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. (Filed herewith.) |
101.DEF | | XBRL
Taxonomy Extension Definition Linkbase Document. (Filed herewith.) |
101.LAB | | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. (Filed herewith.) |
104 | | Cover Page
Interactive Data File. (Formatted as Inline XBRL and contained in Exhibit 101.) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. |
| | |
| TREMONT
MORTGAGE TRUST |
| | |
| | |
| By: | |
| | President and Chief Executive Officer |
| | |
| | |
| By: | |
| | Chief Financial Officer and Treasurer (principal financial and accounting officer) |
| | |
