What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-07-27 compared with 2022-04-27 · 148 added, 94 removed, 273 unchanged (47% of the section changed)

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We are a Maryland REIT.

Our business strategy is focused on originating and investing in floating rate first mortgage loans secured by middle market and transitional commercial real estate, or CRE.

Our business strategy is focused on originating and investing in floating rate first mortgage loans secured by middle market and transitional CRE.

We define middle market CRE as commercial properties that have values up to $100,000 and transitional CRE as commercial properties subject to redevelopment or repositioning activities that are expected to increase the value of the properties.

These mortgage loans 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, origination costs, premiums or discounts, as applicable, unless the assets are deemed impaired.

Loans held for investment are reported at cost, net of any unamortized loan fees, origination costs, premiums, discounts or reserves for loan losses, as applicable.

Tremont is registered with the Securities and Exchange Commission, or SEC, as an investment adviser under the Investment Advisers Act of 1940, as amended.

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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 1940 Act.

COVID-19 Pandemic

The COVID-19 pandemic and the various governmental and market responses intended to contain and mitigate the spread of the virus and its detrimental public health impact have had a significant impact on the global economy, including the U.S.

Many of the restrictions that had been imposed in the U.S.

during the pandemic have been lifted and commercial activity in the U.S.

has increasingly returned to pre-pandemic practices and operations.

To date, the COVID-19 pandemic has not had a significant impact on our business.

There remains uncertainty as to the ultimate duration and severity of the COVID-19 pandemic, including risks that may arise from mutations or related strains of the virus, the ability to successfully administer vaccinations to a sufficient number of persons or attain immunity to the virus by natural or other means to achieve herd immunity or otherwise render the virus reasonably manageable, and the impact on the U.S.

economy that may result from the inability of other countries to administer vaccinations to their citizens or their citizens’ ability to otherwise achieve immunity to the virus.

As a result, 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 on us and our business, see "Warning Concerning Forward-Looking Statements" elsewhere in this Quarterly Report on Form 10-Q and Part 1, Item 1A, "Risk Factors", of our 2021 Annual Report.

Non-GAAP Financial Measures

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In addition, our methodologies for calculating these non-GAAP financial measures may differ from the methodologies employed by other companies to calculate the same or similar supplemental performance measures;

therefore, our reported Distributable Earnings, Distributable Earnings per common share, Adjusted Distributable Earnings and Adjusted Distributable Earnings per common share may not be comparable to distributable earnings, distributable earnings per common share, adjusted distributable earnings and adjusted distributable earnings per common share, as reported by other companies.

We believe that Adjusted Book Value per common share is a meaningful measure of our capital adequacy because it excludes the unaccreted purchase discount resulting from the excess of the fair value of the loans TRMT then held for investment and that we acquired as a result of the Merger over the consideration we paid in the Merger.

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The table below calculates our book value per common share and demonstrates how we calculate Adjusted Book Value per common share:

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Shareholders' equity $ 266,730 $ 257,694

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The purchase discount of $36,443 was allocated to each acquired loan and is being accreted into income over the remaining term of the respective loan.

As of March 31, 2022 and December 31, 2021, the unaccreted purchase discount was $11,458 and $17,391.

As of June 30, 2022 and December 31, 2021, the unaccreted purchase discount was $9,820 and $17,391, respectively.

Our Loan Portfolio

The table below details overall statistics for our loan portfolio as of March 31, 2022 and December 31, 2021:

As of March 31, 2022 As of December 31, 2021

The table below details overall statistics for our loan portfolio as of June 30, 2022 and December 31, 2021:

As of June 30, 2022 As of December 31, 2021

Number of loans 28 26

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Loan Portfolio Details

The table below details our loan portfolio as of March 31, 2022:

The table below details our loan portfolio as of June 30, 2022:

Location Property Type Origination Date Committed Principal Amount Principal

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Aurora, IL Office / Industrial 12/18/2020 17,460 15,105 L + 4.35% L + 5.03% 12/18/2024 73 % 2

Miami, FL Office 01/19/2021 10,900 10,900 L + 4.50% L + 5.47% 01/19/2025 68 % 2

Olmstead Falls, OH Multifamily 01/28/2021 54,575 46,083 L + 4.00% L + 4.64% 01/28/2026 63 % 3

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Brandywine, MD Retail 03/29/2022 42,500 42,200 S + 3.85% S + 4.25% 03/29/2027 62 % 3

Farmington Hills, MI Multifamily 05/24/2022 31,520 28,520 S + 3.15% S + 3.50% 05/24/2027 75 % 3

Las Vegas, NV Multifamily 06/10/2022 28,950 23,100 S + 3.30% S + 4.08% 06/10/2027 60 % 3

Total/weighted average $ 734,883 $ 682,285 + 3.82% + 4.33% 68 % 2.7

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(3) LTV represents the initial loan amount divided by the underwritten in-place value of the underlying collateral at closing.

As of March 31, 2022, we had $684,547 in aggregate loan commitments, consisting of a diverse portfolio, geographically and by property type, of 27 first mortgage loans.

The impact from the COVID-19 pandemic has negatively impacted some of our borrowers’ business operations or tenants, particularly in the cases of our retail and hospitality collateral, which are some of the types of properties that have been most negatively impacted by the pandemic.

As of June 30, 2022, we had $734,883 in aggregate loan commitments, consisting of a diverse portfolio, geographically and by property type, of 28 first mortgage loans.

The impact from the COVID-19 pandemic has negatively impacted some of our borrowers’ business operations or tenants, particularly in the cases of certain of our office and retail collateral, which are some of the types of properties that have been most negatively impacted by the pandemic.

We expect that those negative impacts may continue and may apply to other borrowers and/or their tenants.

Further, although economic activity in the U.S.

has improved significantly from the low points during the pandemic to date, certain industries have not recovered to their pre-pandemic positions.

has improved significantly from the low points during the pandemic to date, certain industries have not recovered to their pre-pandemic positions, certain industries have not recovered to their pre-pandemic positions, and current inflationary pressures and the possibility that the U.S.

economy may now be in, or will soon enter into, a recession or downturn may amplify those, or introduce additional, negative impacts.

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 of March 31, 2022, we had two loan representing approximately 4% of the carrying value of our loan portfolio with a loan risk rating of “4” or “higher risk”.

As of June 30, 2022, we had two loan representing approximately 4% of the carrying value of our loan portfolio with a loan risk rating of “4” or “higher risk”.

For further information and risks relating to the COVID-19 pandemic and current economic conditions on us and our business, see "—Factors Affecting our Operating Results" below and "Warning

Concerning Forward-Looking Statements" elsewhere in this Quarterly Report on Form 10-Q and Part I, Item 1A, "Risk Factors", of our 2021 Annual Report.

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 plans for the underlying collateral, among other things.

As of March 31, 2022 and April 25, 2022, 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.

We did not have any impaired loans, non-accrual loans or loans in default as of March 31, 2022;

As of June 30, 2022 and July 25, 2022, 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.

We did not have any impaired loans, non-accrual loans or loans in default as of June 30, 2022;

thus, we did not record a reserve for loan loss as of that date.

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The expiration date of the Wells Fargo Master Repurchase Agreement is March 11, 2025, unless extended or earlier terminated in accordance with the terms of the Wells Fargo Master Repurchase Agreement.

The Wells Fargo Master Repurchase Facility acts in the manner of a revolving credit facility that can be repaid as our loan investments are repaid and re-drawn as we fund new or additional loan investments.

On March 15, 2022, we amended and restated our Citibank Master Repurchase Agreement, which governs the Citibank Master Repurchase Facility.

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On April 25, 2022, we amended and restated our BMO Loan Program Agreement, which increased the maximum facility amount from $100,000 to $150,000.

On May 4, 2022, we amended and restated our UBS Master Repurchase Agreement.

The amended and restated UBS Master Repurchase Agreement, which was effective March 9, 2022, made certain changes to the agreement and related fee letter, including replacing LIBOR with SOFR for interest rate calculations on advancements under the UBS Master Repurchase Facility and modifying certain pricing terms.

For further information regarding our Secured Financing Facilities, see Note 4 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

The table below is an overview of our Secured Financing Facilities as of March 31, 2022:

Maturity Date Principal Balance Unused Capacity Maximum Facility Size Collateral Principal Balance

UBS Master Repurchase Facility 02/18/2024 $ 127,278 $ 64,722 $ 192,000 $ 192,044

The table below is an overview of our Secured Financing Facilities as of June 30, 2022:

Secured Financing Facility Maturity Date Principal Balance Unused Capacity Maximum Facility Size Collateral Principal Balance

Citibank Master Repurchase Facility 03/15/2025 $ 170,338 $ 44,662 $ 215,000 $ 237,917

UBS Master Repurchase Facility 02/18/2024 135,003 56,997 192,000 182,198

Wells Fargo Master Repurchase Facility 03/11/2025 67,427 57,573 125,000 88,446

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Total $ 455,044 $ 226,956 $ 682,000 $ 618,458

The table below details our Secured Financing Facilities activities during the three months ended March 31, 2022:

The table below details our Secured Financing Facilities activities during the three months ended June 30, 2022:

Carrying Value

Balance as of December 31, 2021 $ 339,627

Balance at March 31, 2022 $ 367,679

Borrowings 93,788

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Amortization of deferred fees 265

Balance as of March 31, 2022 $ 367,679

As of March 31, 2022, outstanding advancements under our Secured Financing Facilities had a weighted average interest rate of 2.32% per annum, excluding associated fees and expenses.

As of March 31, 2022 and April 25, 2022, we had a $369,432 and a $378,905, respectively, aggregate outstanding principal balance under our Secured Financing Facilities.

As of March 31, 2022, we were in compliance with all covenants and other terms under our Secured Financing Facilities.

Balance at June 30, 2022 $ 452,705

The table below details our Secured Financing Facilities activities during the six months ended June 30, 2022:

Carrying Value

Balance at December 31, 2021 $ 339,627

Borrowings 223,948

Repayments (109,773)

Deferred fees (1,571)

Amortization of deferred fees 474

Balance at June 30, 2022 $ 452,705

As of June 30, 2022, outstanding advancements under our Secured Financing Facilities had a weighted average interest rate of 3.36% per annum, excluding associated fees and expenses.

As of June 30, 2022 and July 25, 2022, we had a $455,044 and a $469,810, respectively, aggregate outstanding principal balance under our Secured Financing Facilities.

As of June 30, 2022, we were in compliance with all covenants and other terms under our Secured Financing Facilities.

RESULTS OF OPERATIONS (amounts in thousands, except per share data)

Three Months Ended March 31, 2022 Compared to Three Months Ended December 31, 2021:

Three Months Ended June 30, 2022 Compared to Three Months Ended March 31, 2022:

Three Months Ended

March 31, 2022 December 31, 2021 Change % Change

June 30, 2022 March 31, 2022 Change % Change

INCOME FROM INVESTMENTS:

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Total expenses 2,881 2,606 275 10.6 %

Income before income tax expense 11,171 20,958 (9,787) (46.7 %)

Income before income taxes 4,617 11,171 (6,554) (58.7 %)

Income tax expense (39) (45) 6 (13.3 %)

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Interest income from investments .

The increase in interest income from investments was primarily the result of prepayment premiums and accelerated amortization of the deferred fees of $2,402 on two loans repaid during the three months ended March 31, 2022, as well as a full quarter of interest income from investments on six loan investments that were originated during the three months ended December 31, 2021 and the interest income from the origination of three loan investments during the three months ended March 31, 2022.

The decrease in interest income from investments was primarily the result of prepayment premiums and accelerated amortization of deferred fees on two loans repaid during the three months ended March 31, 2022 of $2,402, partially offset by the impact of three loan investments originated during the first quarter of 2022, two loan investments originated during the second quarter of 2022 and higher interest rates since April 1, 2022.

Purchase discount accretion.

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The purchase discount was allocated to each acquired TRMT loan and is being accreted into income over the remaining term of the respective loan.

During the three months ended December 31, 2021, three loans acquired in the Merger were repaid, resulting in the respective allocated purchase discount being fully accreted.

No loans acquired in the Merger were repaid during the three months ended March 31, 2022;

therefore, purchase discount accretion decreased.

Two loans were fully amortized during the three months ended March 31, 2022 as a result of their repayment;

therefore, purchase discount accretion decreased quarter over quarter.

Interest and related expenses.

The increase in interest and related expenses was primarily the result of an increase in advances made to us under our Secured Financing Facilities and an increase in interest rates on those advances during the three months ended March 31, 2022 as compared to the three months ended December 31, 2021.

The increase in interest and related expenses was primarily the result of an increase in advances made to us under our Secured Financing Facilities and higher interest rates during the three months ended June 30, 2022 as compared to the three months ended March 31, 2022.

General and administrative expenses .

The decrease in general and administrative expenses was primarily due to a decrease in share-based compensation and professional fees during the three months ended March 31, 2022 as compared to the three months ended December 31, 2021.

The increase in general and administrative expenses was primarily due to an increase in share based compensation of $448 resulting from common shares awarded to our Trustees during the second quarter of 2022, partially offset by a reduction in professional fees during the three months ended June 30, 2022 as compared to the three months ended March 31, 2022.

Reimbursement of shared services expenses.

Reimbursement of shared services expenses represents reimbursement of the costs for the services that Tremont arranges on our behalf from RMR.

The decrease in reimbursement of shared services expenses was primarily the result of an adjustment recognized during the three months ended December 31, 2021 to increase our estimate of costs for the usage of shared services from RMR for the year ended December 31, 2021 to reflect actual costs incurred.

The decrease in reimbursement of shared services expenses was primarily the result of an adjustment to our estimate of costs for the usage of shared services from RMR.

Other transaction related costs.

The decrease in other transaction related costs was primarily the result of a decrease in the costs associated with the final settlement of legal complaints filed in connection with the Merger and our conversion from a Maryland statutory trust to a Maryland REIT during the three months ended December 31, 2021.

Other transaction related costs incurred during the three months ended March 31, 2022 primarily consisted of audit fees relate to the Merger.

Income tax expense.

Income tax expense represents income taxes paid or payable by us in certain jurisdictions where we are subject to state income taxes.

The decrease in income tax expense was primarily the result of income tax expense incurred during the three months ended December 31, 2021 on realized gains on the disposition of our securities portfolio upon our conversion from an investment company under the 1940 Act to a mortgage REIT.

The decrease in net income was due to the changes noted above.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021:

Six Months Ended June 30,

2022 2021 Change % Change

INCOME FROM INVESTMENTS:

Interest income from investments $ 18,448 $ 5,056 $ 13,392 264.9 %

Purchase discount accretion 7,571 — 7,571 n/m

interest and related expenses (4,744) (192) (4,552) n/m

Income from investments, net 21,275 4,864 16,411 337.4 %

OTHER EXPENSES:

Base management fees 2,126 1,436 690 48.1 %

General and administrative expenses 2,324 1,306 1,018 77.9 %

Reimbursement of shared services expenses 1,000 601 399 66.4 %

Other transaction related costs 37 — 37 n/m

Total expenses 5,487 3,343 2,144 64.1 %

Income before income taxes 15,788 1,521 14,267 938.0 %

Income tax expense (84) (11) (73) 663.6 %

Net income $ 15,704 $ 1,510 $ 14,194 940.0 %

Weighted average common shares outstanding - basic and diluted 14,514 10,205 4,309 42.2 %

Net income per common share - basic and diluted $ 1.08 $ 0.15 $ 0.93 620.0 %

n/m - not meaningful

Interest income from investments .

The increase in interest income from investments was primarily the result of interest income generated from the 17 loans originated or acquired since July 1, 2021 and prepayment premiums and accelerated amortization of deferred fees on two loans repaid during the six months ended June 30, 2022 of $2,402.

Purchase discount accretion.

The fair value of the loans acquired in the Merger on September 30, 2021 exceeded the purchase price of the loans.

In accordance with GAAP, a purchase discount was recorded for the difference between the fair value and purchase price of the loans acquired.

The purchase discount was allocated to each acquired TRMT loan and is being accreted into income over the remaining term of the respective loan.

Interest and related expenses.

The increase in interest and related expenses was primarily the result of an increase in advances made to us under our Secured Financing Facilities and higher interest rates during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021.

Base management fees.

The increase in base management fees was primarily due to the Merger.

As a result of the Merger, the net book value of TRMT, as of September 30, 2021, was included as "Equity" for purposes of determining the base management fee and incentive fee, if any, under the management agreement.

General and administrative expenses .

The increase in general and administrative expenses was primarily due to increases in share based compensation, insurance, professional fees and fees paid to our Trustees for their services during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021.

Reimbursement of shared services expenses.

Reimbursement of shared services expenses represents reimbursement of the costs for the services that Tremont arranges on our behalf from RMR.

The increase in reimbursement of shared services expenses was primarily the result of increased usage of shared services after the Merger on September 30, 2021.

Other transaction related costs.

Other transaction related costs primarily consisted of audit fees related to the Merger during the six months ended June 30, 2022.

Income tax expense.

Income tax expense represents income taxes paid or payable by us in certain jurisdictions where we are subject to state income taxes.

The increase in net income was due to the changes noted above.

Reconciliation of Net Income to Distributable Earnings and Adjusted Distributable Earnings

The table below demonstrates how we calculate Distributable Earnings, Distributable Earnings per common share, Adjusted Distributable Earnings and Adjusted Distributable Earnings per common share, which are non-GAAP measures, and provides a reconciliation of these non-GAAP measures to net income:

Three Months Ended March 31, 2022 Three Months Ended December 31, 2021

Three Months Ended Six Months Ended

June 30, 2022 March 31, 2022 June 30, 2022 June 30, 2021

Reconciliation of net income to Distributable Earnings and Adjusted Distributable Earnings:

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Other transaction related costs (1)

Income tax expense (2)

Adjusted Distributable Earnings $ 3,490 $ 5,310 $ 8,800 $ 1,692

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Weighted average common shares outstanding - diluted 14,521 14,519 14,514 10,205

Net income per common share - basic and diluted $ 0.31 $ 0.76 $ 1.08 $ 0.15

Distributable Earnings per common share - basic and diluted $ 0.24 $ 0.36 $ 0.60 $ 0.17

Adjusted Distributable Earnings per common share - basic and diluted $ 0.24 $ 0.37 $ 0.61 $ 0.17

(1) Other transaction related costs for the three months ended March 31, 2022 include expenses related to the Merger and to our conversion from a Maryland statutory trust to a Maryland REIT.

For the three months ended December 31, 2021, other transaction related costs include expenses related to our conversion from a Maryland statutory trust to a Maryland REIT and the final settlement of legal complaints filed in connection with the Merger.

(2) Income tax expense represents the portion of our income tax expense incurred on realized gains on the disposition of our securities portfolio upon our conversion from an investment company under the 1940 Act to a mortgage REIT.

(1) Other transaction related costs for the three months ended March 31, 2022 and six months ended June 30, 2022 include expenses related to the Merger.

Factors Affecting Operating Results

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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.

If we determine that a loan is impaired, we will record a reserve 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 intend to generally hold our investments for their contractual terms or until repaid earlier by the borrowers, we may occasionally classify some of our investments as held for sale.

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Market Conditions.

CRE transaction total volume for 2021 exceeded the previous annual high watermark of 2019.

Investor demand for CRE assets, historically low interest rates and strong property fundamentals, particularly for multifamily and industrial assets, have caused CRE valuations to continue to grow.

These conditions continue to drive significant demand for CRE debt.

CRE loan originations, driven by property acquisitions and refinancing activities of borrowers capitalizing on increasing property values, reached a record high in 2021.

Investor demand for the relative risk adjusted returns offered by CRE debt investments has also contributed to the growth of the CRE mortgage loan market.

This increased demand has allowed alternative lenders, like us, to continue to gain market share, as borrowers seek flexible capital to complete value add business plans to optimize property values or to have the option to sell or refinance in short to medium term time frames.

However, significant inflation experienced in 2022 and Russia's invasion of Ukraine, along with the additional supply chain issues and overall geopolitical risks have caused recent increased uncertainty in the CRE debt markets.

Federal Reserve's reaction to inflationary pressures has resulted in increased borrowing and transaction costs for both borrowers and lenders alike.

Despite the recent increase in borrowing costs, nominal interest rates remain low, and CRE investors continue to see strength in the fundamentals of the U.S.

CRE markets, especially in the multifamily and industrial sectors.

Transaction activity and loan origination opportunities continue to be strong, as CRE investors are seemingly willing to accept higher borrowing costs in the short term as they perceive longer term upside to rent growth resulting from continued demand for affordable rental housing and industrial space.

Recovery from the impact of the COVID-19 pandemic on the hospitality and retail sectors continues to improve.

CRE transactions for 2021 exceeded the previous annual high watermark of 2019.

Investor demand for CRE assets, historically low interest rates and strong property fundamentals resulted in increased CRE valuations.

Record transaction volumes and increasing CRE valuations continued into 2022;

however, inflationary pressures and geopolitical concerns caused widespread macroeconomic uncertainty and volatility.

In response to inflationary pressures, the U.S.

Federal Reserve increased the federal funds rate by 25 basis points in March 2022, 50 basis points in May 2022 and 75 basis points in June 2022, the largest single increase in nearly 30 years, and has signaled that further large increases are likely to occur.

Federal Reserve's actions have caused increased borrowing costs and volatility in the CRE debt markets, while concerns of a possible recession have caused increased credit spreads.

Combined, these factors are resulting in increased conservatism in underwriting standards in the CRE debt markets.

Tighter underwriting standards, which are resulting in lower leveraged loans, have caused some buyers to seek to reprice, or in some circumstances, cancel pending transactions entirely.

As a result, CRE transaction total volume for the second quarter of 2022 has slowed but is still expected to meet or exceed transaction volumes for the same period of each of the five years prior to the COVID-19 pandemic.

The CRE industry is traditionally a lagging indicator of economic conditions and CRE assets have historically tended to perform well in periods of inflation.

Despite the recent increase in borrowing costs and macroeconomic and geopolitical uncertainties, CRE investors continue to see strength in the fundamentals of the U.S.

We believe that we are in a period of price resetting, as buyers and sellers of CRE assets recalibrate their expectations and CRE investors and lenders reprice and reconsider risk in the current higher interest rate environment.

Some investors have in the past viewed CRE as a hedge against inflation, with long term earnings potential from rent growth resulting from continued demand for certain CRE asset classes, such as affordable rental housing and industrial space, and acquisition and financing opportunities may continue to exist for borrowers able to accept higher borrowing costs in the short term.

Recovery from the impact of the COVID-19 pandemic continues to vary among different market sectors.

Hotels located in destinations that can be driven to, select service hotels that offer services and amenities in moderation and extended stay hotels continue to see improvements in performance, along with increased investor and lender demand.

Retail has performed better than many expected and investors continue to favor grocery anchored, service oriented and neighborhood shopping centers over larger shopping centers anchored by big box retailers, regional malls or lifestyle centers.

However, the office sector continues to pose underwriting challenges, especially for older suburban assets, and there continues to be uncertainty surrounding the long term impacts of work-from-home and flexible work schedules on demand for office space.

While the debt capital markets experienced strong performance in 2021 and into the first quarter of 2022, we believe challenges remain.

The longer term impact of the COVID-19 pandemic and the risk of future variants of the virus is still uncertain.

Supply chain issues remain and inflation has started to impact the broader markets.

Federal Reserve raised interest rates in March 2022 and has indicated that it expects to raise interest rates several more times during 2022, which will continue to increase borrowing costs for property owners.

Despite these challenges, we believe that if and as the U.S.

economy continues to grow, there will continue to be significant opportunities for alternative lenders like us to provide creative, flexible debt capital for a wide array of circumstances and business plans.

Additionally, hotel assets are uniquely positioned to reprice daily and take advantage of inflationary pressures, provided demand remains strong and challenges related to increased labor costs can be managed effectively.

Retail has performed better than many expected thus far, but recession concerns and reductions in discretionary spending in response to inflation may have a negative impact on certain retailers.

Investors have continued to favor grocery anchored, service oriented and neighborhood shopping centers over larger shopping centers anchored by big box retailers, regional malls or lifestyle centers.

The office sector continues to pose underwriting challenges, especially for older urban assets, and there continues to be uncertainty surrounding the long term impacts of work-from-home and flexible work schedules on demand for office space.

The debt capital markets experienced strong performance in 2021 and into the first quarter of 2022.

CRE debt providers continue to be willing and able to extend credit to borrowers, albeit at lower leverage levels and with higher credit spreads.

Market volatility and the increase in interest rates has not affected all lenders equally.

Banks and life insurance companies have reduced their leverage ratios and increased credit spreads, but continue to originate new loans, while lenders that rely on secondary markets to finance their lending activities have experienced other challenges.

Credit spreads in the secondary market for commercial mortgage-backed securities, or CMBS, and CRE collateralized loan obligations, or CLO, bonds have widened substantially due to competing demand for alternative fixed income investments.

As a result, some lenders who originate and sell loans into the CRE CLO market as a means of financing have been forced to sell their loans at a discount or have chosen to wait until market volatility subsides and credit spreads stabilize, causing a slowdown in loan originations.

In addition to increased overall borrowing costs, lenders may experience challenges due to increasing interest rates on floating rate loan portfolios.

Floating rate loans are often used to finance transitional properties with a business plan to increase cash flows, allowing for increasing debt costs to be serviced.

Lenders are impacted by the ability of their borrowers to service their debt while implementing their business plans and, as a result, lenders' underwriting criteria may become more conservative.

Additionally, floating rate lenders typically limit interest rate risk by requiring borrowers to obtain interest rate caps or swaps to limit the impact of rising rates on a property’s ability to service its debt.

While interest rate caps and swaps on existing loans protect lenders in periods of rising interest rates, the cost to the borrower to obtain interest rate caps or swaps on new loans may result in decreased loan amounts.

We believe the CRE lending industry is well positioned to face these challenges.

Unlike in the years leading up to the financial crisis of 2008, underwriting standards have remained consistent and there continues to be significant sources of liquidity, both in the form of debt and equity capital, for the CRE sector.

We believe there will continue to 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.

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therefore, changes to income from investments, net, may not move proportionately with the increase or decrease in benchmark rates.

As of March 31, 2022, LIBOR and SOFR were 0.45% and 0.30%, respectively, and would have to exceed the floor established by any of our loans, which currently range from 0.10% to 2.32%, for us to realize an increase in interest income.

As of June 30, 2022, LIBOR and SOFR were 1.79% and 1.69%, respectively, and would have to exceed the floor established by any of our loans, which currently range from 0.10% to 2.32%, for us to realize an increase in interest income.

Interest rates under our loan agreements with borrowers entered into prior to January 1, 2022 have been or are expected to be amended to replace LIBOR with SOFR prior to June 30, 2023, the date LIBOR is expected to no longer be available.

Since January 1, 2022, interest rates under our new loan agreements with borrowers are based on SOFR.

Our Citibank Master Repurchase Agreement was amended and restated in March 2022 to, among other things, replace LIBOR with SOFR for interest rate calculations on advances.

Our Citibank Master Repurchase Agreement and UBS Master Repurchase Agreement were amended and restated effective March 2022 to, among other things, replace LIBOR with SOFR for interest rate calculations on advances.

Interest rates on advances under our BMO Facility and Wells Fargo Master Repurchase Facility have been based on SOFR since we entered into the agreements governing these facilities.

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Our sources of cash flows include cash on hand, 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 Secured Financing Facilities or other repurchase agreements or financing arrangements we may obtain, which 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, 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 its 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 Part I, Item 1A, "Risk Factors" of our 2021 Annual Report.

For further information regarding the risks associated with our loan portfolio, see Part I, Item 1A, "Risk Factors" of our 2021 Annual Report and elsewhere in this Management Discussion and Analysis of Financial Condition and Operating Results.

Pursuant to the terms of our UBS Master Repurchase Facility and our Citibank Master Repurchase Facility, we may sell to, and later repurchase from, UBS and Citibank, the purchased assets related to the applicable facility.

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The interest rate relating to an existing UBS purchased asset is equal to one month LIBOR plus a premium within a fixed range, determined by the debt yield and property type of the purchased asset’s real estate collateral.

The interest rate related to our Citibank purchased assets was amended March 15, 2022 as part of the amendment to the Citibank Master Repurchase Agreement to replace one month LIBOR with one month SOFR plus a premium within a fixed range, determined by the debt yield and property type of the purchased asset’s real estate collateral.

The interest rates related to our Citibank and UBS purchased assets were amended earlier this year as part of the amendments to the Citibank Master Repurchase Agreement and UBS Master Repurchase Agreement to replace one month LIBOR with one month SOFR plus a premium within a fixed range, determined by the debt yield and property type of the purchased asset’s real estate collateral.

UBS and Citibank each has the discretion to make advancements at margins higher than 75%.

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The following is a summary of our sources and uses of cash flows for the periods presented:

Three Months Ended March 31,

Six Months Ended June 30,

Cash, cash equivalents and restricted cash at beginning of period $ 26,295 $ 103,564

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Cash, cash equivalents and restricted cash at end of period $ 48,396 $ 30,607

The increase in cash provided by operating activities for the 2022 period compared to the 2021 period was primarily the result of our origination activities since April 1, 2021.

Since April 1, 2021, we have increased the size of our loan portfolio from 7 loans to 27 loans as of March 31, 2022.

The decrease in cash used in investing activities in the 2022 period compared to the 2021 period is primarily due to the repayment of loans in the 2022 period, partially offset by an increase in origination activity in the 2022 period.

The increase in cash used in financing activities in the 2022 period compared to the 2021 period is primarily due to proceeds received from our Secured Financing Facilities, partially offset by repayments on our Secured Financing Facilities for the 2022 period.

As of March 31, 2021, we had not yet borrowed any funds under our Secured Financing Facilities.

The increase in cash provided by operating activities for the 2022 period compared to the 2021 period was primarily the result of our origination activities.

As of June 30, 2022, we have increased the size of our loan portfolio from 9 loans to 28 loans since July 1, 2021.

The decrease in cash used in investing activities is primarily due to the repayment of loans in the 2022 period, partially offset by an increase in origination activity in the 2022 period.

The increase in cash used in financing activities is primarily due to increased proceeds received from our Secured Financing Facilities during the 2022 period, partially offset by repayments on our Secured Financing Facilities and an increase in distributions to our common shareholders for the 2022 period.

Distributions

During the three months ended March 31, 2022, we paid distributions to our common shareholders totaling $3,649, or $0.25 per common share, using cash on hand.

On April 14, 2022, we declared a quarterly distribution of $0.25 per common share, or $3,649, to shareholders of record on April 25, 2022.

We expect to pay this distribution to our common shareholders on May 19, 2022 using cash on hand.

During the six months ended June 30, 2022, we paid distributions to our common shareholders totaling $7,298, or $0.50 per common share, using cash on hand.

On July 14, 2022, we declared a quarterly distribution of $0.25 per common share, or $3,660, to shareholders of record on July 25, 2022.

We expect to pay this distribution to our common shareholders on August 18, 2022 using cash on hand.

For further information regarding distributions, see Note 6 to the Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Contractual Obligations and Commitments

Our contractual obligations and commitments as of March 31, 2022 were as follows:

Our contractual obligations and commitments as of June 30, 2022 were as follows:

Payment Due by Period

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(2) The allocation of outstanding advancements under our Secured Financing Facilities is based on the earlier of the current maturity date of each loan investment with respect to which the individual borrowing relates or the maturity date of the respective Secured Financing Facilities.

(3) Projected interest payments are attributable only to our debt service obligations at existing rates as of March 31, 2022 and are not intended to estimate future interest costs which may result from debt prepayments, additional borrowings, new debt issuances or changes in interest rates.

(3) Projected interest payments are attributable only to our debt service obligations at existing rates as of June 30, 2022 and are not intended to estimate future interest costs which may result from debt prepayments, additional borrowings, new debt issuances or changes in interest rates.

Debt Covenants

Our principal debt obligations as of March 31, 2022 were the outstanding balances under our Secured Financing Facilities.

Our principal debt obligations as of June 30, 2022 were the outstanding balances under our Secured Financing Facilities.

The agreements governing our Master Repurchase Facilities, or our Master Repurchase Agreements, provide for acceleration of the date of repurchase of any then purchased assets and the liquidation of the purchased assets by UBS, Citibank or Wells Fargo, as applicable, upon the occurrence and continuation of certain events of default, including a change of control of us, which includes Tremont ceasing to act as our sole manager or to be a wholly owned subsidiary of RMR.

Our Master Repurchase Agreements also provide that upon the repurchase of any then purchased asset, we are required to pay UBS, Citibank or Wells Fargo the outstanding purchase price of such purchased asset and accrued interest and any and all accrued and unpaid expenses of UBS, Citibank or Wells Fargo, as applicable, relating to such purchased asset.

Our Master Repurchase Agreements also provide that upon the repurchase of any then purchased asset, we are required to pay UBS,

Citibank or Wells Fargo the outstanding purchase price of such purchased asset and accrued interest and any and all accrued and unpaid expenses of UBS, Citibank or Wells Fargo, as applicable, relating to such purchased asset.

In connection with our Master Repurchase Agreements, we entered into our guarantees, or the Master Repurchase Guarantees, which require us to guarantee 25% of the aggregate repurchase price and 100% of losses in the event of certain bad acts, as well as any costs and expenses of UBS, Citibank and Wells Fargo, as applicable, related to our Master Repurchase Agreements.

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The BMO Loan Program Agreement and the BMO Guaranty contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of these types.

As of March 31, 2022, we had a $287,156 aggregate outstanding principal balance under our Master Repurchase Facilities.

As of June 30, 2022, we had a $372,768 aggregate outstanding principal balance under our Master Repurchase Facilities.

Our Master Repurchase Agreements are structured with risk mitigation mechanisms, including a cash flow sweep, which would allow UBS, Citibank and Wells Fargo, as applicable, to control interest payments from our borrowers under our loans that are financed under our respective Master Repurchase Facilities, 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 Facilities.

As of March 31, 2022, we had a $82,276 aggregate outstanding principal balance under the BMO Facility.

As of March 31, 2022, we were in compliance with all covenants and other terms under our Secured Financing Facilities.

As of June 30, 2022, we had a $82,276 aggregate outstanding principal balance under the BMO Facility.

As of June 30, 2022, we were in compliance with all covenants and other terms under our Secured Financing Facilities.

Related Person Transactions

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis