What changed in this filing

/stocks — the workspaceLOADING

Item 1. Business

2023-02-13 compared with 2022-02-17 · 120 added, 125 removed, 622 unchanged (28% of the section changed)

Seven Hills Realty Trust (formerly known as RMR Mortgage Trust) is a Maryland REIT.

On January 5, 2021, the SEC issued an order granting our request to deregister as an investment company under the 1940 Act, or the Deregistration Order.

The issuance of the Deregistration Order enabled us to proceed with full implementation of our new business mandate to operate as a real estate investment trust that focuses primarily on originating and investing in first mortgage loans secured by middle market and transitional CRE, or the Business Change.

We define middle market CRE as commercial properties that have values of up to $100.0 million and transitional CRE as commercial properties subject to redevelopment or repositioning activities that are expected to increase the value of the properties.

As of December 31, 2021, we had a portfolio of 26 first mortgage loans with aggregate loan commitments of $648.3 million with a weighted average maximum maturity of 3.8 years, weighted average coupon rate of 4.54% and 5.08% all in yield.

Seven Hills Realty Trust is a Maryland REIT that focuses primarily on originating and investing in floating rate first mortgage loans in the $15.0 million to $75.0 million range, secured by middle market and transitional CRE properties that have values of up to $100.0 million.

We define transitional CRE as commercial properties subject to redevelopment or repositioning activities that are expected to increase the value of the properties.

As of December 31, 2022, we had a portfolio of 27 floating rate first mortgage loans with aggregate loan commitments of $727.6 million with a weighted average maximum maturity of 3.3 years, weighted average coupon rate of 8.07% and 8.57% all in yield.

We operate our business in a manner consistent with our qualification for taxation as a REIT under the Internal Revenue Code of 1986, or the IRC.

1 unchanged sentence

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 1940 Act.

Our principal executive offices are located at Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458-1634, and our telephone number is 617-332-9530.

Merger with Tremont Mortgage Trust

On April 26, 2021, we and TRMT, entered into an Agreement and Plan of Merger, or the Merger Agreement, pursuant to which, on the terms and subject to the satisfaction or waiver of the conditions thereof, TRMT agreed to merge with and into us, with us continuing as the surviving entity.

The Merger was consummated and became effective at 4:01 p.m., Eastern Time, on September 30, 2021, or the Effective Time.

At the Effective Time, the separate existence of TRMT ceased.

Pursuant to the terms set forth in the Merger Agreement and the letter agreement, dated as of August 26, 2021, by and between us and TRMT, or the Letter Agreement, at the Effective Time, each one issued and outstanding common share of beneficial interest, $0.01 par value per share, of TRMT, or the TRMT Common Shares, was automatically converted into the right to receive 0.516 of our common shares of beneficial interest, $0.001 par value per share, or our common shares.

No fractional common shares of ours were issued in the Merger and holders of shares of TRMT Common Shares received cash in lieu of any such fractional shares.

Pursuant to the Merger Agreement and the Letter Agreement, at the Effective Time, each outstanding unvested TRMT Common Share awarded under TRMT's equity compensation plan was converted into an award of our common shares determined by multiplying the number of unvested TRMT Common Shares subject to such award by 0.516 (rounded down to the nearest whole number).

Such award will continue to be subject to the same vesting and other terms and conditions as were in effect immediately prior to the Effective Time.

Effective as of the Effective Time, we changed our name to “Seven Hills Realty Trust.” The combined company continues to be managed by our Manager and TRMT's manager (until TRMT ceased to exist) and our common shares continue to trade on The Nasdaq Stock Market LLC, or Nasdaq, under our current symbol “SEVN."

The purchase price, based on the per share closing price of our common shares on September 30, 2021 of $10.31 per share, was $169.2 million, including the assumption of $129.0 million outstanding under TRMT's master repurchase agreement with Citibank, N.A., or Citibank, or the Citibank Master Repurchase Agreement.

For more information regarding the Merger, see Notes 1, 5, 6, 7, 10 and 11 to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

Our Manager is an investment adviser registered with the SEC, that is owned by RMR LLC, the majority owned operating subsidiary of The RMR Group Inc., or RMR Inc., a holding company listed on Nasdaq, under the symbol ‘‘RMR’’.

We believe that our Manager provides us with significant experience and expertise in investing in middle market and transitional CRE loans.

For further information about these and other such relationships and related person transactions, see "Risk Factors—Risks Relating to Our Relationships with TRC and RMR LLC" and Notes 10 and 11 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

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 United States during the pandemic have been lifted and commercial activity in the United States has increasingly returned to pre-pandemic practices and operations.

To date, the COVID-19 pandemic has not had a significant impact 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 elsewhere in this Annual Report on Form 10-K, including "Warning Concerning Forward-Looking Statements", Part I, Item 1A, "Risk Factors" and Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations".

Our Business Strategy.

We believe that having a business strategy which focuses on originating and investing in first mortgage loans in the $15.0 million to $75.0 million range, secured by middle market and transitional CRE properties that have values of up to $100.0 million, provides us with an opportunity to achieve attractive, risk-adjusted returns.

The decrease in traditional CRE debt providers as a result of added regulation in the United States in response to the 2008 global financial crisis was the primary catalyst for the initial growth of the alternative CRE lender segment.

Alternative lenders like us operate with fewer regulatory constraints than traditional CRE lenders.

This flexibility has allowed alternative CRE lenders to create customized loan structures tailored to borrowers' specific business plans for the underlying collateral properties.

In addition, the continued maturation of the market for CRE collateralized loan obligations, or CLOs (financial instruments secured by a pool of loans and used by lenders as a source of funding), in addition to other sources of funding, including repurchase agreements or warehouse lines of credit (a type of revolving credit facility available to lenders secured by originated mortgage loans), has assisted alternative lenders in financing a wider array of business plans and, as a result, in gaining considerable market share.

Capital for private CRE debt funds continues to be raised and the largest, most established alternative CRE debt providers continue to compete for loans with the highest quality borrowers in top tier markets.

We believe there will continue to be a great deal of competition amongst equity investors for the acquisition of top tier CRE assets as the amount of capital available to private equity real estate funds continues to grow.

As a result of this competition, we believe that private equity funds will continue to invest in middle market and transitional CRE assets in order to achieve targeted returns for investors.

We believe we are well positioned to lend to private equity sponsors of middle market and transitional CRE assets.

Our business strategies may be changed, amended, supplemented or waived at any time by our Board of Trustees without shareholder approval.

On January 5, 2021, the SEC issued an order granting our request to deregister as an investment company under the 1940 Act, or the Deregistration Order.

On September 30, 2021, we merged with Tremont Mortgage Trust, or TRMT, or the Merger.

For information about the Deregistration Order and the Merger, see Part I, Item 1, “Business” in our A n nual Report on Form 10-K for the year ended December 31, 2021 .

Our Investment and Leverage Strategies.

Our primary investment strategy is to balance capital preservation with generating attractive, risk adjusted returns on our investments.

To this end, the first mortgage loans that we target for origination and investment generally have the following characteristics:

• principal balances of up to $75.0 million;

Our primary investment strategy is to balance capital preservation with generating attractive, risk adjusted returns by creating customized loan structures tailored to borrowers’ specific business plans for the underlying collateral properties.

To this end, the loans that we target for origination and investment generally have the following characteristics:

• first mortgage loans with principal balances ranging from $15.0 million to $75.0 million;

• stabilized loan to value ratios, or LTVs, of 75% or less;

• terms of five years or less;

• floating interest rates tied to LIBOR or an alternative interest rate that approximates the interest rate as calculated in accordance with LIBOR such as the secured overnight financing rate, or SOFR, with premiums of 325 to 475 basis points over such rates;

• non-recourse to sponsors (subject to customary non-recourse carve-out guarantees) and secured by middle market and transitional CRE across the United States;

• equity owned by well capitalized sponsors with experience investing in the relevant real estate property type.

We invest in first mortgage loans that provide bridge financing on transitional CRE properties.

• floating interest rates based on the Secured Overnight Financing Rate, or SOFR, plus a margin that is competitive in the market;

• non-recourse to sponsors (subject to customary non-recourse carve-out guarantees);

• secured by middle market and transitional CRE across the United States that are equity owned by well capitalized sponsors with experience investing in the relevant property type.

We invest in floating rate first mortgage loans that provide bridge financing on transitional CRE properties.

These investments typically are secured by properties undergoing redevelopment or repositioning activities that are expected to increase the value of the properties.

We fund these loans over time as the borrowers’ business plans for the properties are carried out.

Our loans secured by transitional CRE are typically bridge loans that are usually refinanced with the proceeds from other CRE mortgage loans or property sales.

Our loans secured by transitional CRE are typically bridge loans that are refinanced with the proceeds from other CRE mortgage loans or property sales.

We expect to receive origination fees for bridge loans we make and we may also receive exit fees, extension fees, modification or similar fees in connection with some of our bridge loans.

Bridge loans may lead to future investment opportunities for us, including making mortgage loans to repay our transitional loans, otherwise known as “takeout mortgage loans.” We may also originate or acquire subordinated and mezzanine loans, which are loans secured by junior mortgages on the underlying collateral property or loans secured by a pledge of the ownership interests of either the entity owning the property or a pledge of the ownership interests in the entity that owns the interest in the entity owning the property.

We believe that our mortgage investment strategy is appropriate for the current market environment.

However, we may change our investment strategy from time to time to capitalize on investment opportunities at different times in the economic and CRE investment cycle.

We believe that the flexibility of our investment strategy and the experience and resources of TRC and its affiliates, will allow us to take advantage of changing market conditions to preserve capital and generate attractive risk adjusted returns on our investments.

Our strategy to invest in floating rate first mortgage loans generally will result in an increase to our net income in periods of rising interest rates and a decrease to our net income in periods of declining interest rates.

Decreases to our net income during periods of declining interest rates may be mitigated by active interest rate floors that are higher than the applicable benchmark index.

As of December 31, 2022, 96.5% of our loan portfolio by principal outstanding had interest rate floors in place with a weighted average floor of 0.62%.

We generally seek to match the terms of our financing, including benchmark indices and duration, to the loans we originate and pledge as collateral.

As of December 31, 2022, all amounts outstanding under our financing agreements pay interest at floating rates that are not subject to floors.

We currently expect that our leverage, on a debt to equity basis, will generally be below a ratio of 3:1.

As of December 31, 2022, our debt to equity ratio was 1.7:1.

We employ direct leverage, and we may employ structural leverage, on our first mortgage loan investments.

We expect our initial direct leverage will come from repurchase facilities or other secured financing facilities for which we may pledge first mortgage loans as collateral.

If we employ structural leverage, it will involve the sale of senior interests in first mortgage loans, such as A-Notes, to third parties and our retention of B-Notes and other subordinated interests in the loans.

Our direct leverage is from repurchase facilities and other secured financing facilities for which we may pledge our first mortgage loans as collateral.

If we employ structural leverage, we expect it will involve the sale of senior interests in first mortgage loans, such as A-Notes, to third parties and our retention of B-Notes and other subordinated interests in the loans.

As of December 31, 2022, we had a portfolio of 27 loans held for investment with a total commitment of $727.6 million, of which $49.0 million remained unfunded.

For further information regarding our loans held for investment, see Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and Note 6 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

The charts below detail the geographic region and property type of the properties securing the loans in our portfolio by carrying value as of December 31, 2022:

For further information regarding our loans held for investment, see Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and Note 5 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

We believe that our investment and leverage strategies are appropriate for the current market environment.

However, we may change our investment and leverage strategies from time to time to capitalize on investment opportunities at different times in the economic and CRE investment cycle.

We believe that the flexibility of our investment and leverage strategies and the experience and resources of Tremont and its affiliates will allow us to take advantage of changing market conditions to preserve capital and generate attractive risk adjusted returns on our investments.

Our investment and leverage strategies may be changed, amended, supplemented or waived at any time by our Board of Trustees without shareholder approval.

1 unchanged sentence

To maintain our qualification for taxation as a REIT under the IRC, we must distribute at least 90% of our annual REIT taxable income (excluding capital gains) and satisfy a number of organizational and operational requirements.

Accordingly, we generally will not be able to retain sufficient cash from operations to fund our loan originations or investments or to repay our debts.

Instead, we expect to fund our loan originations or investments and to repay our debts by utilizing our existing debt facilities or other future financing arrangements, issuing debt or equity securities or using retained cash from operations that may exceed any distributions we make.

Accordingly, we generally will not be able to retain sufficient cash from operations to fund our loan originations or investments.

Instead, we expect to fund our loan originations or investments by utilizing our existing debt facilities or other future financing arrangements, issuing debt or equity securities or using retained cash from operations that may exceed any distributions we make.

We will decide when and whether to issue equity or new debt depending upon market conditions and other factors.

Because our ability to raise capital depends, in large part, upon market conditions, we cannot be sure that we will be able to raise sufficient capital to repay our debts or to fund our growth strategies.

Because our ability to raise capital depends, in large part, upon market conditions, we cannot be sure that we will be able to raise sufficient capital to fund our growth strategies.

We expect to repay our debts through repayments from our borrowers on loans held for investment.

We funded our loan originations to date using cash on hand and advancements under our debt facilities, and we acquired TRMT's loan portfolio in the Merger with our common shares.

For further information regarding our debt agreements, see Note 7 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

For further information regarding our financing sources and activities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in this Annual Report on Form 10-K.

For further information regarding our debt agreements, see Note 6 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

For further information regarding our financing sources and activities, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in this Annual Report on Form 10-K.

Our Board of Trustees may change our financing policies at any time without a vote of, or notice to, our shareholders.

The financial services industry and CRE markets are highly competitive.

We compete with a variety of institutional investors, including other mortgage REITs, specialty finance companies, public and private funds, including mortgage REITs, funds or investors that our Manager, RMR LLC or their subsidiaries currently, or may in the future, sponsor, advise or manage, banks, insurance companies and other financial institutions.

We compete with a variety of banks, insurance companies, other financial institutions, specialty finance companies and public and private funds, including mortgage REITs, that Tremont, RMR or their subsidiaries currently, or may in the future, sponsor, advise or manage.

Some of our competitors may have a lower cost of funds and greater financial and other resources than we have.

Many of our competitors are not subject to the operating constraints associated with REIT tax or SEC reporting compliance or maintenance of an exemption from registration as an investment company under the 1940 Act.

For additional information about competition and other risks associated with our business, see “Risk Factors—We operate in a highly competitive market for investment opportunities and competition may limit our ability to originate or acquire our target investments on attractive terms or at all and could also affect the pricing of any investment opportunities” in this Annual Report on Form 10-K.

Our Manager and RMR LLC.

On January 5, 2021, we terminated our investment advisory agreement with RMR Advisors LLC, or RMR Advisors, in connection with the Deregistration Order and we entered into a management agreement with our Manager, effective January 5, 2021, to manage our day to day operations, subject to the oversight and direction of our Board of Trustees.

Our Manager is an SEC registered investment adviser that is owned by RMR LLC, the majority owned operating subsidiary of RMR Inc., a holding company listed on Nasdaq under the symbol ‘‘RMR’’.

Substantially all of RMR Inc.'s business is conducted by its majority owned operating subsidiary, RMR LLC, which is an alternative asset management company that is focused on CRE and related businesses.

RMR LLC or its subsidiaries also act as a manager to other publicly traded real estate companies, privately held real estate funds and real estate related operating businesses.

Most of the CRE assets under management by RMR LLC are middle market properties owned by four publicly traded equity REITs that are managed by RMR LLC.

Many of our competitors are not subject to the operating constraints associated with maintaining REIT status, SEC reporting compliance or maintaining an exemption from registration as an investment company under the 1940 Act.

For additional information about competition and other risks associated with our business, see Item 1A, “Risk Factors—We operate in a highly competitive market for investment opportunities and competition may limit our ability to originate or acquire our target investments on attractive terms or at all and could also affect the pricing of any investment opportunities” in this Annual Report on Form 10-K.

Our Manager, Tremont Realty Capital LLC.

Tremont manages our day to day operations, subject to the oversight and direction of our Board of Trustees.

Tremont is an investment adviser registered with the SEC, that is owned by RMR, the majority owned operating subsidiary of The RMR Group Inc., or RMR Inc., a holding company listed on The Nasdaq Stock Market LLC, or Nasdaq.

RMR is an alternative asset management company that is focused on CRE and related businesses.

RMR or its subsidiaries also act as a manager to other publicly traded real estate companies, privately held real estate funds and real estate related operating businesses.

Most of the CRE assets under management by RMR are middle market properties owned by four publicly traded equity REITs that are managed by RMR.

As of December 31, 2022, RMR Inc.

had over $33 billion of real estate assets under management and the combined RMR LLC managed companies had approximately $12 billion of annual revenues, nearly 2,100 properties and approximately 37,000 employees.

In addition, RMR LLC, on behalf of its managed companies, manages significant capital expenditure budgets for building improvements and property redevelopment, which experience enhances our Manager's ability to evaluate business plans for transitional real estate owned by our borrowers.

We believe that our Manager’s relationship with RMR LLC provides us with a depth of market knowledge that may allow us to identify high quality investment opportunities and to evaluate them more thoroughly than many of our competitors, including other commercial mortgage REITs.

We also believe that RMR LLC’s broad platform provides us with access to RMR LLC’s extensive network of real estate owners, operators, intermediaries, sponsors, financial institutions and other real estate related professionals and businesses with which RMR LLC has historical relationships.

We also believe that our Manager provides us with significant experience and expertise in investing in middle market and transitional CRE.

As of the date of this Annual Report on Form 10-K, the executive officers of RMR LLC are:

had over $37 billion of real estate assets under management and the combined RMR managed companies had more than $16 billion of annual revenues, nearly 2,100 properties and over 38,000 employees.

In addition, RMR, on behalf of its managed companies, manages significant capital expenditure budgets for building improvements and property redevelopment.

We believe that Tremont’s relationship with RMR provides us with a depth of market knowledge that may allow us to identify high quality investment opportunities and to evaluate them more thoroughly than many of our competitors, including other commercial mortgage REITs.

We also believe that RMR’s broad platform provides us with access to its extensive network of real estate owners, operators, intermediaries, sponsors, financial institutions and other real estate related professionals and businesses with which RMR has historical relationships.

We also believe that Tremont provides us with significant experience and expertise in investing in middle market and transitional CRE.

As of the date of this Annual Report on Form 10-K, the executive officers of RMR are:

Portnoy, president and chief executive officer;

6 unchanged sentences

Portnoy and Jordan are our Managing Trustees.

In connection with the Business Change, our Board of Trustees appointed Thomas J.

Lorenzini as our President and G.

Douglas Lanois as our Chief Financial Officer and Treasurer.

Lorenzini and Lanois are officers and employees of our Manager and/or RMR LLC.

Our President, Thomas J.

Lorenzini, and our Chief Financial Officer and Treasurer, Tiffany R.

Sy, are officers and employees of Tremont and/or RMR.

For further information about these and other such relationships and related person transactions, see Item 1A, "Risk Factors—Risks Relating to Our Relationships with Tremont and RMR" and Notes 9 and 10 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

Board Diversity.

As of December 31, 2022, our Board of Trustees was comprised of seven Trustees, of which five were independent, two, or approximately 29%, were female and one, or approximately 14%, was a member of underrepresented minorities.

Human Capital.

We have no employees.

All services which would otherwise be provided to us by employees are provided to or arranged by our Manager, which is a subsidiary of RMR LLC.

As of December 31, 2021, RMR LLC had approximately 600 employees, including our Manager’s employees located at its headquarters and more than 30 regional offices located throughout the United States.

All services that would otherwise be provided to us by employees are provided to or arranged by Tremont, which is a subsidiary of RMR.

As of December 31, 2022, RMR had approximately 600 employees, including Tremont’s employees, located at its headquarters and more than 30 offices throughout the United States.

Environmental, Social and Governance.

We are committed to responsibly managing risk and preserving capital.

We consider the environmental, social and governance, or ESG, characteristics of potential borrowers and collateral property when evaluating investment opportunities, performing due diligence procedures and making capital allocation decisions.

We are managed by Tremont, a subsidiary of RMR.

As such, many of the ESG initiatives employed by RMR apply to us.

In addition to the consideration of ESG in the investment process, key ESG initiatives we share with Tremont and RMR include corporate sustainability and environmental improvements at our office locations and diversity, equality and inclusion programs.

Government Regulation.

12 unchanged sentences

Copies of our governance guidelines, our code of business conduct and ethics, or our Code of Conduct, and the charters of our audit, compensation and nominating and governance committees are posted on our website and also may be obtained free of charge by writing to our Secretary, Seven Hills Realty Trust, Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458-1634.

We also have a

policy outlining procedures for handling concerns or complaints about accounting, internal accounting controls or auditing matters and a governance hotline accessible on our website that shareholders can use to report concerns or complaints about accounting, internal accounting controls or auditing matters or violations or possible violations of our Code of Conduct.

We make available, free of charge, through the “Investors” section of our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after these forms are filed with, or furnished to, the SEC.

We also have a policy outlining procedures for handling concerns or complaints about accounting, internal accounting controls or auditing matters and a governance hotline accessible on our website that shareholders can use to report concerns or complaints about accounting, internal accounting controls or auditing matters or violations or possible violations of our Code of Conduct.

We make available, free of charge, through the “Investors” section of our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after these forms are filed with, or furnished to, the SEC.

Any material we file with or furnish to the SEC is also maintained on the SEC website, www.sec.gov.

23 unchanged sentences

• a “qualified foreign pension fund” (as defined in Section 897(l)(2) of the IRC) or any entity wholly owned by one or more qualified foreign pension funds;

shareholder that is a passive foreign investment company or controlled foreign corporation;

• a person subject to special tax accounting rules as a result of their use of applicable financial statements (within the meaning of Section 451(b)(3) of the IRC);

24 unchanged sentences

Any entity (or other arrangement) treated as a partnership for federal income tax purposes that is a holder of our shares and the partners in such a partnership (as determined for federal income tax purposes) are urged to consult their own tax advisors about the federal income tax consequences and other tax consequences of the acquisition, ownership and disposition of our shares.

Merger with Tremont Mortgage Trust

In September 2021, we acquired TRMT in a transaction that was intended to qualify as a “reorganization” within the meaning of Section 368(a) of the IRC, and our tax counsel, Sullivan & Worcester LLP, so opined.

The assets that we acquired in the Merger generally (a) qualify as real estate assets that satisfy the REIT asset tests that are described below under the heading “—REIT Qualification Requirements—Asset Tests,” and (b) generate gross income that satisfies the REIT gross income tests that are described below under the heading “—REIT Qualification Requirements—Income Tests.” As a result, we believe that our acquisition of TRMT’s assets has not and will not materially impact our qualification for taxation as a REIT.

We inherited the historical tax bases and holding periods of TRMT with respect to the assets we acquired in the Merger.

As the successor by merger to TRMT, we are also generally liable for unpaid taxes, including penalties and interest (if any), of

In addition to inheriting TRMT’s tax liabilities, if TRMT failed to qualify for taxation as a REIT for federal income tax purposes in any period prior to the consummation of the Merger, we could lose our qualification for taxation as a REIT should the disqualifying activities continue after the Merger.

Even if we retain our qualification for taxation as a REIT, if TRMT did not qualify for taxation as a REIT for a taxable year before the Merger or for its taxable year that included the Merger and if no relief is available, then we would face the following tax consequences:

• as the successor by merger to TRMT, we would generally inherit any corporate income tax liabilities of TRMT, including penalties and interest;

• we would be subject to tax on the built-in gain on each asset of TRMT existing at the completion of the Merger if we were to dispose of a TRMT asset during a specified period (generally five years) following the completion of the Merger;

• we could be required to pay a special distribution and/or employ applicable deficiency dividend procedures (including interest payments to the IRS) to eliminate any earnings and profits accumulated by TRMT for taxable periods for which it did not qualify for taxation as a REIT.

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.

Taxation as a REIT

11 unchanged sentences

For all these purposes, our distributions include cash distributions, any in kind distributions of property that we might make, and deemed or constructive distributions resulting from capital market activities (such as some redemptions), as described below.

Our tax counsel, Sullivan & Worcester LLP, is of the opinion that we have been organized and have qualified for taxation as a REIT under the IRC for our 2020 and 2021 taxable years, and that our current and anticipated investments and plan of operation will enable us to continue to meet the requirements for qualification and taxation as a REIT under the IRC.

Our tax counsel, Sullivan & Worcester LLP, is of the opinion that we have been organized and have qualified for taxation as a REIT under the IRC for our 2020 through 2022 taxable years, and that our current and anticipated investments and plan of operation will enable us to continue to meet the requirements for qualification and taxation as a REIT under the IRC.

Our tax counsel’s opinions are conditioned upon the assumption that our declaration of trust and all other legal documents to which we have been or are a party have been and will be complied with by all parties to those documents, upon the accuracy and completeness of the factual matters described in this Annual Report on Form 10-K and upon representations made by us to our tax counsel as to certain factual matters relating to our organization and operations and our expected manner of operation.

3 unchanged sentences

Any opinion of Sullivan & Worcester LLP as to our qualification or taxation as a REIT will be expressed as of the date issued.

Our tax counsel will have no obligation to advise us or our shareholders of any subsequent change in the matters stated, represented or assumed, or of any

subsequent change in the applicable law.

Our tax counsel will have no obligation to advise us or our shareholders of any subsequent change in the matters stated, represented or assumed, or of any subsequent change in the applicable law.

Also, the opinions of our tax counsel are not binding on either the IRS or a court, and either could take a position different from that expressed by our tax counsel.

1 unchanged sentence

While we believe that we have satisfied and will satisfy these tests, our tax counsel does not review compliance with these tests on a continuing basis.

If we fail to qualify for taxation as a REIT in any year, then we will be subject to federal income taxation as if we were a corporation taxed under subchapter C of the IRC, or a C corporation, and our shareholders will be taxed like shareholders of regular C corporations, meaning that federal income tax generally will be applied at both the corporate and shareholder levels.

If we fail to qualify for taxation as a REIT in any year, then we will be subject to federal income taxation as if we were a corporation taxed under subchapter C of the IRC, or a C corporation, and our shareholders will be taxed like shareholders of a regular C corporation, meaning that federal income tax generally will be applied at both the corporate and shareholder levels.

In this event, we could be subject to significant tax liabilities, and the amount of cash available for distribution to our shareholders could be reduced or eliminated.

2 unchanged sentences

• We will be taxed at regular corporate income tax rates on any undistributed “real estate investment trust taxable income,” determined by including our undistributed ordinary income and net capital gains, if any.

We may elect to retain and pay income tax on our net capital gain.

In addition, if we so elect by making a timely designation to our shareholders, a shareholder would be taxed on its proportionate share of our undistributed capital gain and would generally be expected to receive a credit or refund for its proportionate share of the tax we paid.

• If we have net income from “prohibited transactions”—that is, dispositions at a gain of inventory or property held primarily for sale to customers in the ordinary course of a trade or business other than dispositions of foreclosure property and other than dispositions excepted by statutory safe harbors—we will be subject to tax on this income at a 100% rate.

8 unchanged sentences

• Our subsidiaries that are C corporations, including our “taxable REIT subsidiaries”, as defined in Section 856(l) of the IRC, or TRSs, generally will be required to pay federal corporate income tax on their earnings, and a 100% tax may be imposed on any transaction between us and one of our TRSs that does not reflect arm’s length terms.

• If it is determined that TRMT failed to satisfy one or more of the REIT tests described below before the Merger, the IRS might allow us, as TRMT’s successor, the same opportunity for relief as though we were the remediating REIT.

• We acquired TRMT by merger in 2021.

If it is determined that TRMT failed to satisfy one or more of the REIT tests described below before its merger into us, the IRS might allow us, as TRMT’s successor, the same opportunity for relief as though we were the remediating REIT.

In such case, TRMT would be deemed to have retained its qualification for taxation as a REIT and the relevant penalties or sanctions for remediation would fall upon us in a manner comparable to the above.

29 unchanged sentences

To the extent that our shares owned by disqualified organizations are held in street name by a broker-dealer or other nominee, the IRS asserts that the broker-dealer or nominee is liable for a tax at the highest corporate income tax rate on the portion of our excess inclusion or similar income allocable to the shares held on behalf of the disqualified organizations.

investment company or other pass-through entity owning our shares would, according to the IRS, also be subject to tax at the highest corporate income tax rate on any excess inclusion or similar income from us that is allocated to their record name owners that are disqualified organizations.

A regulated investment company or other pass-through entity owning our shares would, according to the IRS, also be subject to tax at the highest corporate income tax rate on any excess inclusion or similar income from us that is allocated to their record name owners that are disqualified organizations.

In sum, although we do not intend to own assets or conduct activities if doing so would produce “excess inclusion” or similar income for us or our shareholders, tax-exempt investors, foreign investors, taxpayers with net operating losses, regulated investment companies, pass-through entities and broker-dealers and other nominees should carefully consider the tax consequences described above and are urged to consult their tax advisors in connection with their decision to invest in or hold our shares.

41 unchanged sentences

In addition, any corporation (other than a REIT and other than a QRS) in which a TRS directly or indirectly owns more than 35% of the voting power or value of the outstanding securities is automatically a TRS (excluding, for this purpose, certain “straight debt” securities).

Subject to the discussion below, we believe that we and each of our TRSs have complied with, and will continue to comply with, the requirements for TRS status at all times during which the subsidiary’s TRS election is intended to be in effect, and we believe that the same will be true for any TRS that we later form or acquire.

Subject to the discussion below, we believe that we and each of our TRSs have complied with, and

will continue to comply with, the requirements for TRS status at all times during which the subsidiary’s TRS election is intended to be in effect, and we believe that the same will be true for any TRS that we later form or acquire.

Because our TRSs are taxed as C corporations that are separate from us, their assets, liabilities and items of income, deduction and credit generally are not imputed to us for purposes of the REIT qualification requirements described in this summary.

17 unchanged sentences

If we receive contingent interest that is based on the cash proceeds realized upon the sale of the property securing the loan (a “shared appreciation provision”), then the income attributable to the participation feature will be treated as gain from the sale of the underlying real property and will satisfy both the 75% and 95% gross income tests provided that the property is not held by the borrower as inventory or dealer property.

Interest income that we receive from a mortgage loan in which all or a portion of the interest income payable is contingent on the earnings of the borrower will generally be qualifying income for purposes of both the 75% and 95% gross income tests if it is based upon the gross receipts or sales, and not the net income or profits, of the borrower.

This limitation does not apply, however, where the borrower leases substantially all of its interest in the property to tenants or subtenants, to the extent that the rental income derived by the borrower or lessee, as the case may be, would qualify as “rents from real property,” as described below under “—Rents from Real Property,” had we earned the income directly.

7 unchanged sentences

In the case of CMBS or agency securities treated as interests in a REMIC, income derived from REMIC interests will generally be qualifying income for purposes of both the 75% and 95% gross income tests.

If less than 95% of the assets of the REMIC are real estate assets, however, then only a proportionate part of our interest in the

REMIC and income derived from the interest will qualify for purposes of the 75% gross income test.

If less than 95% of the assets of the REMIC are real estate assets, however, then only a proportionate part of our interest in the REMIC and income derived from the interest will qualify for purposes of the 75% gross income test.

In addition, some REMIC regular interests are benefited by interest swap or cap contracts or other derivative instruments that could produce some nonqualifying income for the holder of the REMIC regular interests.

27 unchanged sentences

To the extent possible, our goal would be to deploy one or more of these tax efficient solutions in respect of property that we acquire through foreclosure.

While we cannot be sure, we believe that our Manager, through RMR, is positioned to leverage its established relationships with tenants and operators across a wide

variety of real estate asset sectors, and in particular its established relationships with managers of lodging facilities and health care facilities, to facilitate our goals in this regard.

While we cannot be sure, we believe that Tremont, through RMR, is positioned to leverage its established relationships with tenants and operators across a wide variety of real estate asset sectors, and in particular its established relationships with managers of lodging facilities and health care facilities, to facilitate our goals in this regard.

In other circumstances where real property is reduced to possession after a foreclosure action, we may choose to treat such property as “foreclosure property” pursuant to Section 856(e) of the IRC.

4 unchanged sentences

For purposes of the 75% and 95% gross income tests, all income from the property will be qualifying income as long as the property qualifies as foreclosure property.

In particular, any gain from the sale of the foreclosure property will be qualifying income for purposes of the 75% and 95% gross income tests and will be exempt from the 100% tax on gains from prohibited transactions described below under “—Prohibited Transactions.” But, in exchange for these benefits, any gain that a REIT recognizes on the sale of foreclosure property held as inventory or primarily for sale to customers, plus any income it receives from foreclosure property that would not otherwise qualify under the 75% gross income test in the absence of foreclosure property treatment, reduced by expenses directly connected with the production of those items of income, would be subject to income tax at the highest regular corporate income tax rate under the foreclosure property income tax rules of Section 857(b)(4) of the IRC.

In particular, any gain from the sale of the foreclosure property will be qualifying income for purposes of the 75% and 95% gross income tests and will be exempt from the 100% tax on gains from prohibited transactions described below under “—Prohibited Transactions.” But, in exchange for these benefits, any gain that a REIT recognizes on the sale of foreclosure property held as inventory or primarily for sale to customers, plus any income it receives from foreclosure property that would not otherwise qualify under the 75% gross income test in the absence of foreclosure property treatment, reduced by expenses directly connected with the production of those items of income, would be subject to federal income tax at the highest regular corporate income tax rate under the foreclosure property income tax rules of Section 857(b)(4) of the IRC.

Thus, if a REIT should lease foreclosure property in exchange for rent that qualifies as “rents from real property,” which is our goal described above, then that rental income is not subject to the foreclosure property income tax.

13 unchanged sentences

In addition, we may directly or indirectly provide noncustomary services to tenants of our properties without disqualifying all of the rent from the property if the payments for such services do not exceed 1% of the total gross income from the property.

to the extent that we do not directly or constructively hold a 10% or greater interest, as measured by vote or value, in the lessee’s equity.

Finally, with the exception of specified rental arrangements with our TRSs (including in respect of lodging facilities or health care facilities), rental income will qualify as “rents from real property” only to the extent that we do not directly or constructively hold a 10% or greater interest, as measured by vote or value, in the lessee’s equity.

We expect that all or substantially all the rents and related service charges that we may receive will be “rents from real property” and will to that extent be qualifying income for purposes of both the 75% and 95% gross income tests.

46 unchanged sentences

If we do invest in distressed mortgage loans, we intend to invest in distressed mortgage loans in a manner consistent with maintaining our qualification for taxation as a REIT.

Pursuant to our master repurchase agreement with UBS AG, or UBS, or our UBS Master Repurchase Agreement and our Citibank Master Repurchase Agreement, or collectively, our Master Repurchase Agreements, we nominally sell assets to the counterparty and simultaneously agree to repurchase those assets.

Pursuant to our master repurchase agreement with UBS AG, or UBS, or our UBS Master Repurchase Agreement, our master repurchase agreement with Citibank, N.A., or Citibank, or our Citibank Master Repurchase Agreement and our master repurchase agreement with Wells Fargo, National Association, or Wells Fargo, or our Wells Fargo Master Repurchase Agreement, or collectively, our Master Repurchase Agreements, we nominally sell assets to the counterparty and simultaneously agree to repurchase those assets.

We believe that we are treated for U.S.

7 unchanged sentences

For purposes of this relief provision, the failure will be de minimis if the value of the assets causing the failure does not exceed the lesser of (a) 1% of the total value of our assets at the end of the relevant quarter or (b) $10.0 million.

If our failure is not de minimis, or if any of the other REIT asset tests have been violated, we may nevertheless qualify for taxation as a REIT if (a) we provide the IRS with

a description of each asset causing the failure, (b) the failure was due to reasonable cause and not willful neglect, (c) we pay a tax equal to the greater of (1) $50,000 or (2) the highest regular corporate income tax rate imposed on the net income generated by the assets causing the failure during the period of the failure, and (d) within six months after the last day of the quarter in which we identify the failure, we either dispose of the assets causing the failure or otherwise satisfy all of the REIT asset tests.

If our failure is not de minimis, or if any of the other REIT asset tests have been violated, we may nevertheless qualify for taxation as a REIT if (a) we provide the IRS with a description of each asset causing the failure, (b) the failure was due to reasonable cause and not willful neglect, (c) we pay a tax equal to the greater of (1) $50,000 or (2) the highest regular corporate income tax rate imposed on the net income generated by the assets causing the failure during the period of the failure, and (d) within six months after the last day of the quarter in which we identify the failure, we either dispose of the assets causing the failure or otherwise satisfy all of the REIT asset tests.

These relief provisions may apply to a failure of the applicable asset tests even if the failure first occurred in a year prior to the taxable year in which the failure was discovered.

37 unchanged sentences

While the payment of a deficiency dividend will apply to a prior year for purposes of our REIT distribution requirements and our dividends paid deduction, it will be treated as an additional distribution to the shareholders receiving it in the year such dividend is paid.

We may elect to retain, rather than distribute, some or all of our net capital gain and pay income tax on such gain.

In addition, if we so elect by making a timely designation to our shareholders, our shareholders would include their proportionate share of such undistributed capital gain in their taxable income, and they would receive a corresponding credit for their share of the federal corporate income tax that we pay thereon.

Our shareholders would then increase the adjusted tax basis of their shares by the difference between (a) the amount of capital gain dividends that we designated and that they included in their taxable income, and (b) the tax that we paid on their behalf with respect to that capital gain.

Our Acquisition of Tremont Mortgage Trust

We inherited the historical tax bases and holding periods of TRMT with respect to the assets we acquired in the Merger.

As the successor by merger to TRMT, we are also generally liable for unpaid taxes, including penalties and interest (if any), of TRMT.

• as the successor by merger to TRMT, we would generally inherit any corporate income tax liabilities of TRMT, including penalties and interest;

• we would be subject to tax on the built-in gain on each asset of TRMT existing at the time we acquired it if we were to dispose of such an asset during the five-year period following the date that we acquired TRMT;

That deficiency dividend procedure could require us to make significant distributions to our shareholders and to pay significant interest to the IRS.

Distributions to our Shareholders

As described above, we expect to make distributions to our shareholders from time to time.

These distributions may include cash distributions, in kind distributions of our shares or other property, and deemed or constructive distributions resulting from capital market activities.

These distributions may include cash distributions, in kind distributions of property, and deemed or constructive distributions resulting from capital market activities.

federal income tax treatment of our distributions will vary based on the status of the recipient shareholder as more fully described below under the headings “—Taxation of Taxable U.S.

26 unchanged sentences

However, corporate shareholders may be required to treat up to 20% of any capital gain dividend as ordinary income under Section 291 of the IRC.

In addition, we may elect to retain net capital gain income and treat it as constructively distributed.

In that case:

(1) we will be taxed at regular corporate capital gains tax rates on retained amounts;

If for any taxable year we designate capital gain dividends for our shareholders, then a portion of the capital gain dividends we designate will be allocated to the holders of a particular class of shares on a percentage basis equal to the ratio of the amount of the total dividends paid or made available for the year to the holders of that class of shares to the total dividends paid or made available for the year to holders of all outstanding classes of our shares.

We will similarly designate the portion of any dividend that is to be taxed to noncorporate U.S.

shareholders at preferential maximum rates (including any qualified dividend income) so that the designations will be proportionate among all outstanding classes of our shares.

We may elect to retain and pay income taxes on some or all of our net capital gain.

In addition, if we so elect by making a timely designation to our shareholders:

(1) each of our U.S.

6 unchanged sentences

(4) both we and our corporate shareholders will make commensurate adjustments in our respective earnings and profits for federal income tax purposes.

If we elect to retain our net capital gains in this fashion, we will notify our U.S.

shareholders of the relevant tax information within 60 days after the close of the affected taxable year.

We will similarly designate the portion of any dividend that is to be taxed to noncorporate U.S.

shareholders at preferential maximum rates (including any qualified dividend income) so that the designations will be proportionate among all outstanding classes of our shares.

Distributions in excess of our current or accumulated earnings and profits will not be taxable to a U.S.

64 unchanged sentences

national securities exchange, capital gain dividends that we declare and pay to a non-U.S.

shareholder on those shares, as well as dividends to a non-U.S.

shareholder on those shares, as well as dividends to such a non-U.S.

shareholder on those shares attributable to our sale or exchange of “United States real property interests” within the meaning of Section 897 of the IRC, or USRPIs, will not be subject to withholding as though those amounts were effectively connected with a U.S.

15 unchanged sentences

national securities exchange and we made a distribution on those shares that was attributable to gain from the sale or exchange of a USRPI, then a non-U.S.

holding those shares would be taxed as if the distribution was gain effectively connected with a trade or business in the United States conducted by the non-U.S.

shareholder holding those shares would be taxed as if the distribution was gain effectively connected with a trade or business in the United States conducted by the non-U.S.

In addition, the applicable withholding agent would be required to withhold from a distribution to such a non-U.S.

4 unchanged sentences

shareholder, may owe the up to 30% branch profits tax under Section 884 of the IRC (or lower applicable tax treaty rate) in respect of these amounts.

Although the law is not entirely clear on the matter, it appears that amounts designated by us as undistributed capital gain in respect of our shares that are held by non-U.S.

shareholders generally should be treated in the same manner as actual distributions by us of capital gain dividends.

Under this approach, the non-U.S.

shareholder would be able to offset as a credit against its resulting U.S.

federal income tax liability its proportionate share of the tax paid by us on the undistributed capital gain treated as distributed to the non-U.S.

shareholder, and receive from the IRS a refund to the extent its proportionate share of the tax paid by us were to exceed the non-U.S.

shareholder’s actual U.S.

federal income tax liability on such deemed distribution.

If we were to designate any portion of our net capital gain as undistributed capital gain, a non-U.S.

shareholder should consult its tax advisors regarding taxation of such undistributed capital gain.

Dispositions of Our Shares .

31 unchanged sentences

Unless the U.S.

shareholder has established on a properly executed IRS Form W-9 or substantially similar form that it comes

within an enumerated exempt category, distributions or proceeds on our shares paid to it during the calendar year, and the amount of tax withheld, if any, will be reported to it and to the IRS.

shareholder has established on a properly executed IRS Form W-9 or substantially similar form that it comes within an enumerated exempt category, distributions or proceeds on our shares paid to it during the calendar year, and the amount of tax withheld, if any, will be reported to it and to the IRS.

Distributions on our shares to a non-U.S.

60 unchanged sentences

A non-exempt prohibited transaction, in addition to imposing potential personal liability upon ERISA Plan fiduciaries, may also result in the imposition of an excise tax under the IRC or a penalty under ERISA upon the disqualified person or party in interest.

If the disqualified person who engages in the transaction is the individual on behalf of whom an IRA, Roth IRA or other tax-favored account is maintained (or his beneficiary), the IRA, Roth IRA or other tax-favored account may lose its tax-exempt status and its assets may be deemed to have been distributed to the individual in a taxable distribution on account of the non-exempt prohibited transaction, but no excise tax will be imposed.

If the disqualified person who engages in the transaction is the individual on behalf of whom an IRA, Roth IRA or other tax-favored account is maintained (or their beneficiary), the IRA, Roth IRA or other tax-favored account may lose its tax-exempt status and its assets may be deemed to have been distributed to the individual in a taxable distribution on account of the non-exempt prohibited transaction, but no excise tax will be imposed.

Fiduciaries considering an investment in our securities should consult their own legal advisors as to whether the ownership of our securities involves a non-exempt prohibited transaction.

20 unchanged sentences

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-K

Item 1. Business