Seven Hills Realty Trust 10-Q

Item 1A. Risk Factors Our business is subject to a number of risks and uncertainties, a number of which are described in "Summary of Principal Risk Factors" included in our Current Report on Form 8-K filed on March 24, 2021. The Merger may subject us to additional risks that are described below. The risks described in the "Summary of Principal Risk Factors" included in our Current Report on Form 8-K filed on March 24, 2021 and below may not be the only risks we face but are risks we believe may be material at this time. Other risks of which we are not yet aware, or that we currently believe are not material, may also materially and adversely impact our business operations or financial results. If any of the events or circumstances described below occurs, our business, financial condition, results of operations or ability to make distributions to our shareholders could be adversely affected and the value of an investment in our securities could decline. Investors and prospective investors should consider the risks described in "Summary of Principal Risk Factors" included in our Current Report on Form 8-K filed on March 24, 2021 and below and the information contained under the caption “Warning Concerning Forward-Looking Statements” and elsewhere in this Quarterly Report on Form 10-Q before deciding whether to invest in our securities. Risks Relating to the Merger The Exchange Ratio is fixed and will not be adjusted for any changes in the market price of either our common shares or the TRMT Common Shares. At the Effective Time, each TRMT Common Share outstanding immediately prior to the Effective Time will be converted into the right to receive 0.52 of a newly issued RMRM Common Share, with cash paid in lieu of fractional shares, or the Merger Consideration. The Exchange Ratio is fixed in the Merger Agreement and will not be adjusted for changes in the market price of our common shares or the TRMT Common Shares. Changes in the market price of the RMRM Common Shares prior to the consummation of the Merger will affect the market value of the Merger Consideration. The market price of our common shares and the TRMT Common Shares may change as a result of a variety of factors (many of which are beyond our and TRMT’s control), including the following: • market reaction to the announcement of the Merger, approval by our shareholders of the Merger Share Issuance and other Transactions and the prospects of the combined company; • changes in our or TRMT’s respective businesses, operations, assets, liabilities, financial position and prospects, or in the market’s assessments thereof; • changes in the operating performance of us or TRMT, or similar companies; • changes in market valuations of similar companies; • market assessments of the likelihood that the Merger and other Transactions will be completed; • the possibility that persons may engage in short sales of our common shares or the TRMT Common Shares; • interest rates, general market and economic conditions and other factors generally affecting the price of our common shares and the TRMT Common Shares; • federal, state and local legislation, governmental regulation and legal developments in the businesses in which we and TRMT operate; • dissident shareholder activity; • changes that affect the commercial real estate lending market generally; • changes in the United States or global economy or capital, financial or securities markets generally; and • other factors beyond our or TRMT’s control, including those described and referred to above under this “Risk Factors” section. 35 Table of Contents The market price of our common shares at the consummation of the Merger may vary from the price on the date the Merger Agreement was executed, on the date of the Proxy Statement and on the date of our special meeting and our special meeting. As a result, the market value of the Merger Consideration represented by the Exchange Ratio will also vary. Because the Merger will be completed after the date of the special meetings, at the time of the applicable special meeting, the exact market price of RMRM Common Shares that TRMT shareholders will receive upon consummation of the Merger will not be known. You should therefore consider that: • if the market price of RMRM Common Shares increases between the date the Merger Agreement was signed or the date of our special meeting or the TRMT special meeting and the closing of the Merger, TRMT shareholders will receive RMRM Common Shares that have a market value upon consummation of the Merger that is greater than, as applicable, the market value of such shares calculated pursuant to the Exchange Ratio on the date the Merger Agreement was signed or on the date of our special meeting or the TRMT special meeting, respectively; and • if the market price of RMRM Common Shares declines between the date the Merger Agreement was signed or the date of our special meeting or the TRMT special meeting and the closing of the Merger, TRMT shareholders will receive a number of common shares that have a market value upon consummation of the Merger that is less than, as applicable, the market value of such shares calculated pursuant to the Exchange Ratio on the date the Merger Agreement was signed or on the date of our special meeting or the TRMT special meeting, respectively. The Merger is subject to the satisfaction or waiver of conditions which may not be satisfied or completed on a timely basis, if at all. Failure to complete the Merger could have material and adverse effects on us. The consummation of the Merger is subject to the satisfaction or waiver of conditions, including, among others, the receipt of the approval by our shareholders and the receipt of the approval by TRMT’s shareholders. These conditions make the completion and the timing of the completion of the Merger uncertain. Also, either we or TRMT may terminate the Merger Agreement if the Merger is not completed by December 31, 2021, except that this right to terminate the Merger Agreement will not be available to a party if that party failed to fulfill its obligations under the Merger Agreement and that failure was a principal cause of, or resulted in, the failure of the Merger to be completed on or before such date. We cannot provide assurance that the Merger will be consummated on the terms or timeline currently contemplated, or at all. If the Merger is not completed on a timely basis, or at all, we may be adversely affected and subject to a number of risks, including the following: • we will be required to pay our costs relating to the Merger, such as legal, accounting, financial advisory and printing fees, whether or not the Merger is completed; • if the Merger is terminated under certain circumstances, we may be required to pay a termination fee to TRMT; • the time and resources committed by our management to matters relating to the Merger could otherwise have been devoted to pursuing other opportunities; and • the market price of our common shares could decline to the extent that the current market price reflects, and is positively affected by, a market assumption that the Merger will be completed. We or TRMT may waive one or more of the conditions to the Merger without re-soliciting shareholder approval. We or TRMT may determine to waive, in whole or in part, one or more of the conditions to our or TRMT’s obligations to consummate the Merger (other than the conditions that we and TRMT each receive opinions of counsel (i) that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the IRC and (ii) that we and TRMT will each be a party to that reorganization within the meaning of Section 368(b) of the IRC). Any determination whether to waive any condition to the Merger and whether to re-solicit shareholder approval or amend the Proxy Statement as a result of a waiver will be made by us or TRMT, as applicable, at the time of such waiver based on the facts and circumstances as they exist at that time. The Merger Agreement contains provisions that could discourage a potential competing acquirer of either us or TRMT, or could result in any competing proposal being at a lower price than it might otherwise be. The Merger Agreement contains provisions that, subject to certain exceptions, restrict our ability and the ability of TRMT to initiate, solicit, propose, knowingly encourage or knowingly facilitate competing third-party proposals to effect, among other things, a merger, reorganization, share exchange, consolidation or the sale of 20% or more of the shares or 36 Table of Contents consolidated net revenues, net income or total assets of us or TRMT. In addition, we and TRMT generally each have an opportunity to offer to modify the terms of the Merger Agreement in response to any competing superior proposal (as defined in the Merger Agreement) that may be made to the other party before our or TRMT’s board of trustees, as the case may be, may withdraw or modify its recommendation in response to such superior proposal or terminate the Merger Agreement to enter into a definitive agreement with respect to such superior proposal, provided that TRMT may only terminate the Merger Agreement after it has held a special meeting of its shareholders for the purpose of approving the Merger. Upon termination of the Merger Agreement under certain circumstances relating to an acquisition proposal, we may be required to pay to TRMT, or TRMT may be required to pay to us, a termination fee of $2.2 million plus reasonable fees and expenses. These provisions could discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of us or TRMT from considering or proposing such an acquisition, even if it were prepared to pay consideration with a higher per share value or implied premium to our shareholders than the value proposed to be received or realized in the Merger, or might result in a potential competing acquirer proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee and expense reimbursement that may become payable in certain circumstances under the Merger Agreement. Our and TRMT’s management agreement with TRA contain provisions that could discourage a potential competing acquirer of either us or TRMT, or could result in any competing proposal being at a significantly lower price than it might otherwise be. The termination of our or TRMT’s management agreements with TRA may require us or TRMT, as applicable, to pay a substantial termination fee to TRA. TRA has agreed to waive its right to receive payment of the termination fee under its management agreement with TRMT upon the termination of TRMT's management agreement when the Merger is consummated. This waiver by TRA applies only in respect of the Merger and does not apply in respect of any competing proposal, superior proposal or other transaction or arrangement. The termination provisions of our or TRMT’s management agreements with TRA substantially increase the cost to us and TRMT of terminating these agreements, which may discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of us or TRMT from considering or proposing such an acquisition or could result in any competing proposal being at a significantly lower price than it might otherwise be. The pendency of the Merger could adversely affect our and TRMT’s business and operations. During the pendency of the Merger, due to operating covenants in the Merger Agreement, we and TRMT may each be unable to undertake or pursue certain strategic transactions or significant capital projects, financing transactions or other actions that are not in the ordinary course of business, even if such actions may be beneficial to us or TRMT. In addition, some borrowers may delay or defer decisions related to their business dealings with us and TRMT during the pendency of the Merger, which could negatively impact the revenues, earnings, cash flows or expenses of us and/or TRMT, regardless of whether the Merger is completed. Our and TRMT’s shareholders will be diluted by the consummation of the Merger. The consummation of the Merger will dilute the ownership position of our existing shareholders and result in TRMT shareholders having an ownership stake in us that is smaller than their current stake in TRMT. Upon consummation of the Merger, based upon the number of our common shares and the TRMT Common Shares outstanding as of the date of the Merger Agreement, we estimate that the our shareholders immediately prior to the Merger (in their capacities as such) will own approximately 70% of the combined company as a result of the Merger and TRMT shareholders immediately prior to the Merger (in their capacities as such) will own approximately 30% of the combined company as a result of the Merger, in each case without taking into account whether any of our or TRMT’s shareholders were also shareholders of TRMT or us, respectively, at that time. Consequently, our shareholders may have less influence over the management and policies of the combined company after the Effective Time than they currently exercise over our management and policies. Our Trustees and executive officers and TRMT’s trustees and executive officers and our and TRMT’s manager, TRA, have interests in the Merger that are different from, or in addition to, the interests of our and TRMT’s shareholders generally. This may create potential conflicts of interest or the appearance thereof, which may lead to increased dissident shareholder activity, including litigation. The interests of our Trustees and executive officers and TRMT’s trustees and executive officers and our and TRMT’s manager, TRA, include, among other things, the continued service as a trustee or executive officer of the combined company following the Merger, as applicable, certain rights to continuing indemnification and directors’ and officers’ liability insurance 37 Table of Contents for TRMT's trustees and executive officers, continuation of our management agreement with TRA following the Merger and the potential for increased fees payable to TRA in connection with the Merger. There is a risk that these interests may influence the trustees and executive officers and TRA to support the Merger. These interests of TRA and our Trustees and executive officers and TRMT’s trustees and executive officers in the Merger may increase the risk of litigation intended to enjoin or prevent the Merger and the risk of other dissident shareholder activity related thereto. In the past, and in particular following the announcement of a significant transaction, periods of volatility in the overall market or declines in the market price of a company’s securities, shareholder litigation and dissident shareholder proposals have often been instituted against companies alleging conflicts of interest in business dealings with affiliated or related persons and entities. The relationships described above may precipitate such activities by dissident shareholders and, if instituted against us or TRMT or our Trustees or executive officers or TRMT’s trustees or executive officers, such activities could result in substantial costs, a material delay or prevention of the Merger and a diversion of management’s attention, even if the shareholder action is without merit or unsuccessful. Lawsuits may be commenced seeking to enjoin or prevent the Merger or seeking other relief which may delay or prevent the completion of the Merger and result in us or TRMT incurring substantial costs. Public company merger and acquisition transactions are often subject to lawsuits initiated by plaintiff’s counsel seeking to enjoin or prevent the transaction or obtain other relief. We, our Trustees, officers and advisors and TRMT, its trustees, officers and advisors may become subject to similar litigation with respect to the Merger. Any such lawsuit could seek, among other things, injunctive or other equitable relief including a request to rescind parts of the Merger Agreement and to otherwise enjoin the parties from consummating the Merger, as well as require payment of fees and other costs by the defendants. We, TRMT and any other defendant may incur substantial costs defending any such lawsuit, including the distraction of management’s attention, even if such lawsuits are without merit or unsuccessful. No assurance can be made as to the outcome of any such lawsuits. If the plaintiffs were successful in obtaining an injunction prohibiting the parties from completing the Merger or in obtaining other relief, the completion of the Merger may be prevented or delayed or their terms could change. Risks Relating to Taxation We may incur adverse tax consequences if TRMT has failed or fails to qualify for taxation as a REIT for United States federal income tax purposes. If TRMT has failed or fails to qualify for taxation as a REIT for United States federal income tax purposes and the Merger is completed, we may inherit significant tax liabilities and could lose our qualification for taxation as a REIT should TRMT's disqualifying activities continue after the Merger. Even if we retain our qualification for taxation as a REIT, if TRMT does not qualify for taxation as a REIT for a taxable year before the Merger or the taxable year that includes the Merger and if no relief is available, we will face serious tax consequences that could substantially reduce our cash available for distribution to our shareholders because: • we, as successor by merger to TRMT, will inherit any of TRMT’s corporate income tax liabilities, including penalties and interest; • we would be subject to tax on the built-in gain on each asset of TRMT existing at the Effective Time if we were to dispose of a TRMT asset during the five year period following the Effective Time; and • we, as successor by merger to TRMT, will inherit any TRMT earnings and profits and could be required to pay a special distribution and/or employ applicable deficiency dividend procedures (including interest payments to the United States Internal Revenue Service, or the IRS) to eliminate any earnings and profits accumulated by TRMT for taxable periods for which TRMT did not qualify for taxation as a REIT. As a result of these factors, TRMT's failure before the Merger to qualify for taxation as a REIT could impair our ability after the Merger to expand our business and raise capital, and could materially adversely affect the value of our common shares. Finally, if there is an adjustment to TRMT's real estate investment trust taxable income or dividends paid deductions, we could elect to use the deficiency dividend procedure in respect of preserving TRMT's REIT qualification. That deficiency dividend procedure could require us to make significant distributions to our shareholders and to pay significant interest to the IRS . 38 Table of Contents REITs are subject to a range of complex organizational and operational requirements. As REITs, we and TRMT must distribute to our respective shareholders with respect to each taxable year at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with GAAP), without regard to the deduction for dividends paid and excluding net capital gain. A REIT must also meet certain requirements with respect to the nature of its income and assets and the ownership of its shares. For any taxable year that we or TRMT fail to qualify for taxation as a REIT, we or TRMT, as applicable, will not be allowed a deduction for distributions paid to our or TRMT’s shareholders, as applicable, in computing taxable income, and thus would become subject to United States federal income tax as if we or TRMT were a regular taxable corporation. In such an event, we or TRMT, as the case may be, could be subject to potentially significant tax liabilities. Unless entitled to relief under certain statutory provisions, we or TRMT, as the case may be, would also be disqualified from treatment as a REIT for the four taxable years following the year in which we or TRMT lost our qualification, and dispositions of assets within five years after requalifying as a REIT could give rise to gain that would be subject to corporate income tax. If we or TRMT failed to qualify for taxation as a REIT, the market price of our common shares may decline, and we may need to reduce substantially the amount of distributions to our shareholders because of our potentially increased tax liability. Risks Relating to an Investment in our Common Shares Following the Merger The market price of our Common Shares may decline as a result of the Merger. The market price of our common shares may decline as a result of the Merger if we do not achieve the perceived benefits of the Merger or the effect of the Merger on our financial results is not consistent with the expectations of financial or industry analysts. In addition, upon consummation of the Merger, our shareholders and TRMT shareholders will own our common shares, and we will operate an expanded business with a different mix of assets, risks and liabilities. Our current shareholders and current TRMT shareholders may not wish to continue to invest in us as the combined company, or for other reasons may wish to dispose of some or all of our common shares that they own. If, following the Effective Time, large amounts of our common shares are sold, the price of our common shares could decline. 39 Table of Contents Item 6. Exhibits Exhibit Number Description 2.1 Agreement and Plan of Merger, dated as of April 26, 2021, between The Company and Tremont Mortgage Trust. (Incorporated by reference to the Company’s Current Report on Form 8-K filed on April 27, 2021.) 3.1 Amended and Restated Agreement and Declaration of Trust of the Company, effective January 5, 2021. (Incorporated by reference to the Company’s Current Report on Form 8-K filed on January 6, 2021.) 3.2 Amended and Restated Bylaws of the Company, adopted March 23, 2021. (Filed herewith.) 4.1 Form of Common Share Certificate. (Filed herewith.) 10.1 Management Agreement, dated January 5, 2021, by and between the Company and Tremont Realty Advisors LLC, and, solely in respect to Section 29 thereof, The RMR Group Inc.(+) (Incorporated by reference to the Company’s Current Report on Form 8-K filed on January 6, 2021.) 10.2 Form of Amended and Restated Indemnification Agreement.(+) (Incorporated by reference to the Company’s Current Report on Form 8-K filed on January 6, 2021.) 10.3 Summary of Trustee Compensation.(+) (Incorporated by reference to the Company’s Current Report on Form 8-K filed on March 24, 2021.) 10.4 Master Repurchase Agreement, dated February 18, 2021, by and between RMTG Lender LLC and UBS AG. (Incorporated by reference to the Company’s Current Report on Form 8-K filed on February 22, 2021.) 10.5 Limited Guaranty, dated February 18, 2021, by the Company, in favor of UBS AG. (Incorporated by reference to the Company’s Current Report on Form 8-K filed on February 22, 2021.) 10.6 Letter Agreement, dated as of April 26, 2021, among RMR Mortgage Trust, Tremont Mortgage Trust and Tremont Realty Advisors LLC. (Incorporated by reference to the Company’s Current Report on Form 8-K filed on April 27, 2021.) 10.7 Voting Agreement, dated as of April 26, 2021, between RMR Mortgage Trust and Tremont Realty Advisors LLC. (Incorporated by reference to the Company’s Current Report on Form 8-K filed on April 27, 2021.) 21.1 Subsidiaries of the Company. (Incorporated by reference to the Company’s Current Report on Form 8-K filed on March 24, 2021.) 99.1 Summary of Principal Risk Factors. (Incorporated by reference to the Company’s Current Report on Form 8-K filed on March 24, 2021.) 31.1 Rule 13a-14(a) Certification. (Filed herewith.) 31.2 Rule 13a-14(a) Certification. (Filed herewith.) 31.3 Rule 13a-14(a) Certification. (Filed herewith.) 31.4 Rule 13a-14(a) Certification. (Filed herewith.) 32.1 Section 1350 Certification. (Furnished herewith.) 101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 101.SCH XBRL Taxonomy Extension Schema Document. (Filed herewith.) 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. (Filed herewith.) 101.DEF XBRL Taxonomy Extension Definition Linkbase Document. (Filed herewith.) 101.LAB XBRL Taxonomy Extension Label Linkbase Document. (Filed herewith.) 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. (Filed herewith.) 104 Cover Page Interactive Data File. (Formatted as Inline XBRL and contained in Exhibit 101.) (+) Management contract or compensatory plan or arrangement. 40 Table of Contents 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. RMR MORTGAGE TRUST By: /s/ Thomas J. Lorenzini Thomas J. Lorenzini President Dated: May 4, 2021 By: /s/ G. Douglas Lanois G. Douglas Lanois Chief Financial Officer and Treasurer (principal financial and accounting officer) Dated: May 4, 2021 41