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Item 2. Management’s Discussion and Analysis

2023-07-31 compared with 2023-04-25 · 234 added, 144 removed, 186 unchanged (67% of the section changed)

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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.

Factors Affecting Operating Results

Our results of operations are impacted by a number of factors and primarily depend on the interest income from our investments and the financing and other costs associated with our business.

Our operating results are also impacted by CRE market conditions generally and in the sectors relating to our loans and unanticipated defaults by our borrowers, if any.

For further information regarding the risks associated with our loan portfolio, see Note 3 to the Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 and elsewhere in this Management Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q and Part I, Item 1A, "Risk Factors" of our 2022 Annual Report.

Credit Risk .

We are subject to the credit risk of our borrowers in connection with our investments.

We seek to mitigate this risk by utilizing a comprehensive underwriting, diligence and investment selection process and by ongoing monitoring of our investments.

Nevertheless, unanticipated credit losses could occur that may adversely impact our operating results.

Changes in Fair Value of our Assets .

We generally intend to hold our investments for their contractual terms, unless repaid earlier by the borrowers.

We evaluate the credit quality of each of our loans at least quarterly.

If a loan is determined to be collateral dependent (because the repayment of the loan is expected to be provided substantially through the operation or sale of the underlying collateral property) and the borrower is experiencing financial difficulties, but foreclosure is not probable, we will record an allowance for credit losses by comparing the collateral's fair value to the amortized cost basis of the loan.

For collateral-dependent loans for which foreclosure is probable, the related allowance for credit losses is determined using the fair value of the collateral compared to the loan's amortized cost.

Availability of Leverage and Equity .

We use leverage to make additional investments that may increase our returns.

We may not be able to obtain the expected amount of leverage we desire or its cost may exceed our expectation and, consequently, the returns generated from our investments may be reduced.

Our ability to further grow our loan portfolio over time will depend, to a significant degree, upon our ability to obtain additional capital.

However, our access to additional capital depends on many factors including the price at which our common shares trade relative to their book value and market lending conditions.

See "—Market Conditions" below.

Market Conditions.

In response to inflationary pressures, the Federal Open Market Committee of the U.S.

Federal Reserve, or the FOMC, has increased the federal funds rate by 525 basis points since March 2022 and while the FOMC paused interest rate increases at its June 2023 meeting, it raised rates by 25 basis points at its July 2023 meeting and has indicated additional increases may be necessary to combat inflation.

These inflationary pressures and interest rate increases have contributed and continue to contribute to macroeconomic uncertainty and volatility in the United States and in the CRE debt markets.

Additionally, increased borrowing costs and concerns of a possible economic recession have resulted in tighter underwriting standards and an overall decline in CRE transactions.

Many CRE debt providers have become less willing, or able, to extend credit to borrowers, and those that are extending credit are doing so at lower leverage levels and often with higher credit spreads.

Market volatility and higher interest rates has not affected all lenders equally.

Life insurance companies have reduced their leverage ratios and increased credit spreads, but continue to originate new loans.

Concerns about the capital adequacy and liquidity of the banking sector caused by the failures of certain banks in March 2023 has significantly decreased lending activity from such traditional sources.

Lenders that rely on secondary markets to finance their lending activities continue to experience challenges.

Credit spreads in the secondary market for CMBS and CRE collateralized loan obligations, or CLO, bonds have widened substantially and demand for such bonds as fixed income investments has declined due to increasing concerns about the underlying loans' credit quality and/or their ability to be refinanced in the current interest rate environment.

As a result, the liquidity of some lenders who originate and sell loans into the CRE CLO market as a means of financing has been negatively impacted.

In addition to tighter underwriting standards and increased overall borrowing costs, lenders may be impacted by challenges experienced by their borrowers.

While rising interest rates generally result in increased income on floating rate portfolios, the borrowers of floating rate loans may find it more difficult to service their debt.

Floating rate lenders often require borrowers to obtain interest rate caps or swaps to help mitigate this risk.

While interest rate caps and swaps on loans protect lenders in periods of rising interest rates, the cost to borrowers to obtain new or replace existing interest rate caps or swaps may be prohibitive.

Additionally, continued uncertainty surrounding the demand for office space and recent increases in nonperforming office loans in CMBS bonds have made loans secured by office properties less attractive to originate.

As a result, borrowers of certain office loans may have difficulties refinancing and repaying their maturing debt obligations.

These challenges could cause floating rate portfolio amounts overall to decrease and/or losses to be incurred if borrowers are unable to obtain interest rate caps or swaps, service their debt or repay their debt obligations as they become due, and as a result, could offset the increase in interest income generated from higher interest rates.

Despite the current market conditions and headwinds experienced in the overall CRE lending market, we believe certain alternative lenders, like us, are uniquely positioned to face these challenges.

Capital remains available for investment in CRE assets, and certain favored asset types, such as multifamily and industrial, continue to transact.

We believe there will be significant opportunities for alternative lenders with available liquidity, to capitalize on challenges that traditional lenders may experience.

Additionally, we believe overall CRE transaction activity will improve once market uncertainty and volatility subside and there are, and will continue to be, opportunities for alternative lenders, like us, to provide creative, flexible debt capital for a wide array of circumstances and business plans.

Changes in Interest Rates.

With respect to our business operations, increases in interest rates, in general, may cause:

(a) the coupon rates on our variable rate investments to reset, perhaps on a delayed basis, to higher rates;

(b) it to become more difficult and costly for our borrowers, which may negatively impact their ability to repay our investments;

and (c) the interest expense associated with our variable rate borrowings to increase.

See "—Market Conditions" above for a discussion of the current market including interest rates.

Conversely, decreases in interest rates, in general, may cause:

(a) the coupon rates on our variable rate investments to reset, perhaps on a delayed basis, to lower rates;

(b) it to become easier and more affordable for our borrowers to refinance, and as a result, repay our loans, but may negatively impact our future returns if any such repayment proceeds were to be reinvested in lower yielding investments;

and (c) the interest expense associated with our variable rate borrowings to decrease.

The interest income on our loans and interest expense on our borrowings float with benchmark rates, such as SOFR.

Because we generally intend to leverage approximately 75% of the amount of our investments, as benchmark rates increase above the floors of our loans, our income from investments, net of interest and related expenses, will increase.

Decreases in benchmark rates are mitigated by interest rate floor provisions in all but one of our loan agreements with borrowers, ranging from 0.10% to 5.05%;

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

As of June 30, 2023, SOFR was 5.14%, which exceeds the floors established by all of our loans, and as a result none of our loan investments currently had active interest rate floors.

Certain of our loan agreements entered into prior to January 1, 2022 required the borrowers to pay us interest at floating rates based upon the London Interbank Offered Rate, or LIBOR.

LIBOR was phased out for new contracts as of December 31, 2021 and is no longer available effective June 30, 2023.

As of June 30, 2023, all of our pre-existing contracts have been amended to replace LIBOR with SOFR.

Size of Portfolio .

The size of our loan portfolio, as measured both by the aggregate principal balance and the number of our CRE loans and our other investments, is also an important factor in determining our operating results.

Generally, if the size of our loan portfolio grows, the amount of interest income we receive would increase and we may achieve certain economies of scale and diversify risk within our loan portfolio.

A larger portfolio, however, may result in increased expenses;

for example, we may incur additional interest expense or other costs to finance our investments.

Also, if the aggregate principal balance of our loan portfolio grows but the number of our loans or the number of our borrowers does not grow, we could face increased risk by reason of the concentration of our investments.

Prepayment Risk.

We are subject to risk that our loan investments will be repaid at an earlier date than anticipated, which may reduce the returns realized on those loans as less interest income may be received over time.

Additionally, we may not be able to reinvest the principal repaid at a similar or higher yield of the original loan investment.

We seek to limit this risk by structuring our loan agreements with fees required to be paid to us upon prepayment of a loan within a specified period of time before the loan’s maturity;

however, unanticipated prepayments could negatively impact our operating results.

Non-GAAP Financial Measures

We present Distributable Earnings, Distributable Earnings per common share and Adjusted Book Value per common share, which are considered “non-GAAP financial measures” within the meaning of the applicable SEC rules.

We present Distributable Earnings, Distributable Earnings per common share, Adjusted Distributable Earnings, Adjusted Distributable Earnings per common share and Adjusted Book Value per common share, which are considered “non-GAAP financial measures” within the meaning of the applicable SEC rules.

These non-GAAP financial measures do not represent net income, net income per common share or cash generated from operating activities and should not be considered as alternatives to net income or net income per common share determined in accordance with GAAP or as an indication of our cash flows from operations determined in accordance with GAAP, a measure of our liquidity or operating performance or an indication of funds available for our cash needs.

In addition, our 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 may not be comparable to distributable earnings and distributable earnings per common share as reported by other companies.

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 and 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 impact of certain non-cash estimates or adjustments, including the unaccreted purchase discount resulting from the excess of the fair value of the loans Tremont Mortgage Trust, or TRMT, then held for investment and that we acquired as a result of our merger with TRMT on September 30, 2021, or the Merger, over the consideration we paid in the Merger and our allowance for credit losses for our loan portfolio and unfunded loan commitments.

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We believe that one of the factors that investors consider important in deciding whether to buy or sell securities of a REIT is its distribution rate.

Over time, Distributable Earnings and Distributable Earnings per common share may be useful indicators of distributions to our shareholders and are measures that are considered by our Board of Trustees when determining the amount of distributions.

We believe that Distributable Earnings and Distributable Earnings per common share provide meaningful information to consider in addition to net income, net income per common share and cash flows from operating activities determined in accordance with GAAP.

Over time, Distributable Earnings, Distributable Earnings per common share, Adjusted Distributable Earnings and Adjusted Distributable Earnings per common share may be useful indicators of distributions to our shareholders and are measures that are considered by our Board of Trustees when determining the amount of distributions.

We believe that Distributable Earnings, Distributable Earnings per common share, Adjusted Distributable Earnings and Adjusted Distributable Earnings per common share provide meaningful information to consider in addition to net income, net income per common share and cash flows from operating activities determined in accordance with GAAP.

These measures help us to evaluate our performance excluding the effects of certain transactions, the variability of any management incentive fees that may be paid or payable and GAAP adjustments that we believe are not necessarily indicative of our current loan portfolio and operations.

In addition, Distributable Earnings is used in determining the amount of base management and management incentive fees payable by us to Tremont under our management agreement.

Distributable Earnings

Distributable Earnings and Adjusted Distributable Earnings

We calculate Distributable Earnings and Distributable Earnings per common share as net income and net income per common share, respectively, computed in accordance with GAAP, including realized losses not otherwise included in net income determined in accordance with GAAP, and excluding:

(a) the management incentive fees earned by Tremont, if any;

(b) depreciation and amortization, if any;

(b) depreciation and amortization of real estate owned and related intangible assets, if any;

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The realized loss amount reflected in Distributable Earnings will equal the difference between the cash received or expected to be received and the carrying value of the asset.

We define Adjusted Distributable Earnings and Adjusted Distributable Earnings per common share as Distributable Earnings and Distributable Earnings per common share, respectively, excluding the effects of certain non-recurring transactions and revenues and expenses from real estate owned.

Adjusted Book Value per Common Share

The table below calculates our book value per common share:

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Shareholders' equity $ 267,798 $ 271,579

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Adjusted Book Value per common share $ 18.87 $ 18.92

(1) Excludes the impact of 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 our Merger over the consideration we paid in the Merger.

(1) Excludes the impact of 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.

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, 2023 and December 31, 2022, the unaccreted purchase discount was $5,519 and $6,703, respectively.

As of June 30, 2023 and December 31, 2022, the unaccreted purchase discount was $4,471 and $6,703, respectively.

(2) Excludes the impact of our allowance for credit losses.

As of March 31, 2023, our allowance for credit losses for our loan portfolio and unfunded loan commitments was $5,608.

As of June 30, 2023, our allowance for credit losses for our loan portfolio and unfunded loan commitments was $5,926.

As of December 31, 2022, we did not have an allowance for credit losses.

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Our Loan Portfolio

The table below details overall statistics for our loan portfolio as of March 31, 2023 and December 31, 2022:

As of March 31, 2023 As of December 31, 2022

The table below details overall statistics for our loan portfolio as of June 30, 2023 and December 31, 2022:

As of June 30, 2023 As of December 31, 2022

Number of loans 24 27

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Loan Portfolio Details

The table below details our loan portfolio as of March 31, 2023:

The table below details our loan portfolio as of June 30, 2023:

# Location Property Type Origination Date Committed Principal Amount Principal

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First mortgage loans

1 Olmsted Falls, OH Multifamily 01/28/2021 $ 54,575 $ 46,084 L + 4.00% L + 4.64% 01/28/2026 63 % 3

2 Dallas, TX Office 08/25/2021 50,000 43,450 L + 3.25% L + 3.61% 08/25/2026 72 % 4

1 Olmsted Falls, OH Multifamily 01/28/2021 $ 54,575 $ 46,085 S + 4.00% S + 4.64% 01/28/2026 63 % 3

2 Dallas, TX Office 08/25/2021 50,000 43,450 S + 3.25% S + 3.61% 08/25/2026 72 % 4

3 Passaic, NJ Industrial 09/08/2022 47,000 38,440 S + 3.85% S + 4.22% 09/08/2027 69 % 3

4 Brandywine, MD Retail 03/29/2022 42,500 42,200 S + 3.85% S + 4.25% 03/29/2027 62 % 2

5 West Bloomfield, MI Retail 12/16/2021 42,500 37,594 L + 3.85% L + 4.66% 12/16/2024 59 % 3

5 West Bloomfield, MI Retail 12/16/2021 42,500 37,659 S + 3.85% S + 4.66% 12/16/2024 59 % 3

6 Auburn, AL Multifamily 05/11/2023 37,500 37,500 S + 3.25% S + 3.96% 11/11/2026 67 % 3

7 Starkville, MS Multifamily 03/22/2022 37,250 36,918 S + 4.00% S + 4.32% 03/22/2027 70 % 4

8 Farmington Hills, MI Multifamily 05/24/2022 31,520 28,983 S + 3.15% S + 3.50% 05/24/2027 75 % 3

8 Downers Grove, IL Office 09/25/2020 30,000 29,500 L + 4.25% L + 4.69% 11/25/2024 67 % 2

9 Downers Grove, IL Office 09/25/2020 30,000 29,500 S + 4.25% S + 4.69% 11/25/2024 67 % 2

10 Las Vegas, NV Multifamily 06/10/2022 28,950 24,729 S + 3.30% S + 4.03% 06/10/2027 60 % 3

Louis, MO Office 12/19/2018 28,866 28,866 L + 3.25% L + 3.74% 06/20/2023 72 % 3

11 Plano, TX Office 07/01/2021 27,385 26,307 L + 4.75% L + 5.16% 07/01/2026 78 % 3

12 Carlsbad, CA Office 10/27/2021 24,750 23,825 L + 3.25% L + 3.58% 10/27/2026 78 % 3

11 Plano, TX Office 07/01/2021 27,385 26,463 S + 4.75% S + 5.16% 07/01/2026 78 % 3

12 Carlsbad, CA Office 10/27/2021 24,750 24,130 S + 3.25% S + 3.58% 10/27/2026 78 % 3

13 Fontana, CA Industrial 11/18/2022 24,355 22,000 S + 3.75% S + 4.28% 11/18/2026 72 % 3

14 Downers Grove, IL Office 12/09/2021 23,530 23,530 L + 4.25% L + 4.57% 12/09/2026 72 % 3

Louis, MO Office 12/19/2018 23,867 23,867 S + 3.25% S + 3.74% 12/19/2023 72 % 3

15 Downers Grove, IL Office 12/09/2021 23,530 23,530 S + 4.25% S + 4.57% 12/09/2026 72 % 3

16 Dublin, OH Office 02/18/2020 22,507 22,507 S + 5.25% S + 5.31% 08/16/2023 33 % 3

16 Bellevue, WA Office 11/05/2021 21,000 20,000 L + 3.85% L + 4.19% 11/05/2026 68 % 3

17 Portland, OR Multifamily 07/09/2021 19,687 19,687 L + 3.57% L + 3.97% 07/09/2026 75 % 3

18 Ames, IA Multifamily 11/15/2021 18,000 17,820 L + 3.80% L + 4.13% 11/15/2026 71 % 2

19 Yardley, PA Office 12/19/2019 16,500 15,865 L + 4.58% L + 5.97% 12/19/2024 75 % 4

20 Sandy Springs, GA Retail 09/23/2021 16,489 15,287 L + 3.75% L + 4.10% 09/23/2026 72 % 3

17 Bellevue, WA Office 11/05/2021 21,000 20,000 S + 3.85% S + 4.19% 11/05/2026 68 % 3

18 Portland, OR Multifamily 07/09/2021 19,688 19,688 S + 3.57% S + 3.97% 07/09/2026 75 % 3

19 Ames, IA Multifamily 11/15/2021 18,000 17,925 S + 3.80% S + 4.13% 11/15/2026 71 % 2

20 Sandy Springs, GA Retail 09/23/2021 16,488 15,287 S + 3.75% S + 4.10% 09/23/2026 72 % 3

21 Delray Beach, FL Retail 03/18/2022 16,000 15,602 S + 4.25% S + 4.91% 03/18/2026 56 % 3

22 Westminster, CO Office 05/25/2021 15,750 14,739 L + 3.75% L + 4.25% 05/25/2026 66 % 2

23 Portland, OR Multifamily 07/30/2021 13,400 13,400 L + 3.57% L + 3.98% 07/30/2026 71 % 3

24 Seattle, WA Multifamily 08/16/2021 12,500 12,397 L + 3.55% L + 3.89% 08/16/2026 70 % 3

22 Westminster, CO Office 05/25/2021 15,750 15,750 S + 3.75% S + 4.25% 05/25/2026 66 % 2

23 Portland, OR Multifamily 07/30/2021 13,400 13,400 S + 3.57% S + 3.98% 07/30/2026 71 % 3

24 Allentown, PA Industrial 01/24/2020 9,307 9,307 S + 3.50% S + 4.03% 01/24/2025 67 % 3

Total/weighted average $ 674,475 $ 628,696 + 3.80% + 4.28% 67 % 2.9

Total/weighted average $ 677,822 $ 634,920 S + 3.80% S + 4.26% 67 % 3.0

(1) All in yield represents the yield on a loan, including amortization of deferred fees over the initial term of the loan and excluding any purchase discount accretion.

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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, 2023, we had $674,475 in aggregate loan commitments, consisting of a diverse portfolio, geographically and by property type, of 25 first mortgage loans.

As of March 31, 2023, we had three loans representing approximately 15% of the amortized cost of our loan portfolio with a loan risk rating of “4” or “higher risk”.

As of June 30, 2023, we had $677,822 in aggregate loan commitments, consisting of a diverse portfolio, geographically and by property type, of 24 first mortgage loans.

As of June 30, 2023, we had two loans representing approximately 12% of the amortized cost of our loan portfolio with a loan risk rating of “4” or “higher risk”.

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 actively engage with our borrowers regarding their execution of the business plans for the underlying collateral, among other things.

As of March 31, 2023 and April 20, 2023, all of our borrowers had paid all of their debt service obligations owed and due to us.

We did not have any past due loans or nonaccrual loans as of March 31, 2023.

The borrower of our loan secured by an office property located in Yardley, PA did not pay its debt service obligations due in May 2023, resulting in an event of default.

In June 2023, we assumed legal title to the property through a deed in lieu of foreclosure.

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

As of June 30, 2023 and July 27, 2023, all of our borrowers with outstanding loans had paid their debt service obligations owed and due to us.

We did not have any outstanding past due loans or nonaccrual loans as of June 30, 2023.

However, our borrowers' businesses, operations and liquidity may be materially adversely impacted by current inflationary pressures, rising or sustained high interest rates, supply chain issues or a prolonged economic slowdown or recession could amplify those negative impacts.

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Financing Activities

The table below is an overview of our Secured Financing Facilities as of March 31, 2023:

The table below is an overview of our Secured Financing Facilities as of June 30, 2023:

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

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Total $ 454,465 $ 227,535 $ 682,000 $ 612,920

The table below details our Secured Financing Facilities activities during the three months ended March 31, 2023:

The table below details our Secured Financing Facilities activities during the three months ended June 30, 2023:

Carrying Value

Balance at March 31, 2023 $ 433,385

Borrowings 28,125

Repayments (9,150)

Deferred fees (6)

Amortization of deferred fees 336

Balance at June 30, 2023 $ 452,690

The table below details our Secured Financing Facilities activities during the six months ended June 30, 2023:

Carrying Value

Balance at December 31, 2022 $ 471,521

Borrowings 28,125

Repayments (47,275)

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Amortization of deferred fees 643

Balance at March 31, 2023 $ 433,385

As of March 31, 2023, outstanding advancements under our Secured Financing Facilities had a weighted average interest rate of 6.76% per annum, excluding associated fees and expenses.

As of March 31, 2023 and April 20, 2023, we had a $435,490 and $426,340, respectively, aggregate outstanding principal balance under our Secured Financing Facilities.

As of March 31, 2023, we were in compliance with all covenants and other terms under our Secured Financing Facilities.

Balance at June 30, 2023 $ 452,690

As of June 30, 2023, outstanding advancements under our Secured Financing Facilities had a weighted average interest rate of 7.19% per annum, excluding associated fees and expenses.

As of June 30, 2023 and July 27, 2023, we had a $454,465 and $441,786, respectively, aggregate outstanding principal balance under our Secured Financing Facilities.

As of June 30, 2023, we were in compliance with all covenants and other terms under our Secured Financing Facilities.

In July 2023, we amended and restated the UBS Master Repurchase Agreement.

The amended and restated UBS Master Repurchase Agreement made certain changes to the agreement and related fee letter, including extending the stated maturity date to February 18, 2025.

For further information regarding our Secured Financing Facilities, see Note 5 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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

Three Months Ended March 31, 2023 Compared to Three Months Ended December 31, 2022:

Three Months Ended June 30, 2023 Compared to Three Months Ended March 31, 2023:

Three Months Ended

March 31, 2023 December 31, 2022 Change % Change

June 30, 2023 March 31, 2023 Change % Change

INCOME FROM INVESTMENTS:

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interest and related expenses (7,927) (7,694) (233) 3.0 %

Income from investments, net 9,347 9,288 59 0.6 %

Income from loan investments, net 8,941 9,347 (406) (4.3 %)

Revenue from real estate owned 149 — 149 n/m

Total revenue 9,090 9,347 (257) (2.7 %)

OTHER EXPENSES:

Base management fees 1,074 1,072 2 0.2 %

Incentive fees 192 — 192 n/m

General and administrative expenses 1,281 796 485 60.9 %

Reimbursement of shared services expenses 628 643 (15) (2.3 %)

Reversal of credit losses (987) — (987) n/m

Provision for (reversal of) credit losses 1,026 (987) 2,013 (204.0 %)

Expenses from real estate owned 218 — 218 n/m

Total other expenses 4,419 1,524 2,895 190.0 %

Income before income taxes 4,671 7,823 (3,152) (40.3 %)

Income tax expense (20) (6) (14) n/m

Income tax expense (27) (20) (7) 35.0 %

Net income $ 4,644 $ 7,803 $ (3,159) (40.5 %)

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Interest and related income .

The increase in interest and related income was primarily the result of higher benchmark interest rates, partially offset by loan repayments.

The weighted average benchmark interest rate was 4.77% as of March 31, 2023 as compared to 4.29% as of December 31, 2022.

The decrease in interest and related income was primarily the result of loan repayments, partially offset by higher benchmark interest rates and one new loan origination during the three months ended June 30, 2023.

The weighted average benchmark interest rate was 5.21% as of June 30, 2023 as compared to 4.77% as of March 31, 2023.

Purchase discount accretion.

The decrease in purchase discount accretion was primarily the result of less amounts outstanding on acquired loans during the three months ended March 31, 2023 as compared to the three months ended December 31, 2022.

The decrease in purchase discount accretion was primarily the result of less amounts outstanding on loans acquired in the Merger during the three months ended June 30, 2023 as compared to the three months ended March 31, 2023.

Interest and related expenses.

The increase in interest and related expenses was primarily the result of higher benchmark interest rates.

The weighted average benchmark interest rate was 4.75% as of March 31, 2023 as compared to 4.33% as of December 31, 2022, partially offset by loan repayments.

The increase in interest and related expenses was primarily the result of higher benchmark interest rates, partially offset by repayments.

The weighted average benchmark interest rate was 5.15% as of June 30, 2023 as compared to 4.75% as of March 31, 2023.

Revenue from real estate owned.

Revenue from real estate owned represents revenue from the operations of an office property located in Yardley, PA that was transferred to real estate owned through a deed in lieu of foreclosure in June 2023.

Incentive fees.

In accordance with our management agreement, we recognized management incentive fees payable to Tremont for the three months ended June 30, 2023.

We did not incur management incentive fees for the three months ended March 31, 2023.

General and administrative expenses .

The increase in general and administrative expenses was primarily due to increases in professional fees during the three months ended March 31, 2023 as compared to the three months ended December 31, 2022.

The increase in general and administrative expenses was primarily due to an increase in share based compensation resulting from shares awarded to our Trustees during the three months ended June 30, 2023 as compared to the three months ended March 31, 2023.

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, 2022 to increase our estimate of costs for the usage of shared services from RMR for the year ended December 31, 2022 to reflect actual costs incurred.

Reversal of credit losses.

The reversal of credit losses represents the decrease in the allowance for credit losses on our loan portfolio and unfunded commitments.

The decrease in the allowance for credit losses during the three months ended March 31, 2023 was primarily attributable to favorable changes in the current macroeconomic outlook, most notably in near-term CRE pricing forecasts, and loan repayments.

The decrease in reimbursement of shared services expenses was primarily the result of an adjustment recognized during the three months ended June 30, 2023 to decrease our estimated usage of shared services from RMR for the year ending December 31, 2023.

Provision for credit losses.

The provision for credit losses represents the increase in the allowance for credit losses on our loan portfolio and unfunded commitments.

The increase in the allowance for credit losses during the three months ended June 30, 2023 was primarily attributable to unfavorable changes in the current macroeconomic outlook, most notably in CRE pricing forecasts, partially offset by a recovery in our previously recorded allowance for credit losses for our loan secured by an office property in Yardley, PA that was transferred to real estate owned through a deed in lieu of foreclosure in June 2023.

Expenses from real estate owned.

Expenses from real estate owned represent expenses from the operations of an office property located in Yardley, PA that was transferred to real estate owned through a deed in lieu of foreclosure in June 2023.

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

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

Three Months Ended

March 31, 2023 December 31, 2022

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

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022:

Six Months Ended June 30,

2023 2022 Change % Change

INCOME FROM INVESTMENTS:

Interest and related income $ 31,677 $ 18,448 $ 13,229 71.7 %

Purchase discount accretion 2,232 7,571 (5,339) (70.5 %)

interest and related expenses (15,621) (4,744) (10,877) 229.3 %

Income from loan investments, net 18,288 21,275 (2,987) (14.0 %)

Revenue from real estate owned 149 — 149 n/m

Total revenue 18,437 21,275 (2,838) (13.3 %)

OTHER EXPENSES:

Base management fees 2,146 2,126 20 0.9 %

Incentive fees 192 — 192 n/m

General and administrative expenses 2,077 2,176 (99) (4.5 %)

Reimbursement of shared services expenses 1,271 1,148 123 10.7 %

Provision for credit losses 39 — 39 n/m

Expenses from real estate owned 218 — 218 n/m

Other transaction related costs — 37 (37) (100.0 %)

Total other expenses 5,943 5,487 456 8.3 %

Income before income taxes 12,494 15,788 (3,294) (20.9 %)

Income tax expense (47) (84) 37 (44.0 %)

Net income $ 12,447 $ 15,704 $ (3,257) (20.7 %)

Weighted average common shares outstanding - basic and diluted 14,594 14,514 80 0.6 %

Net income per common share - basic and diluted $ 0.85 $ 1.08 $ (0.23) (21.0) %

n/m - not meaningful

Interest and related income .

The increase in interest and related income was primarily the result of higher benchmark interest rates and interest on three loans originated since July 1, 2022, partially offset by six loan repayments since July 1, 2022.

The weighted average benchmark interest rate was 5.21% as of June 30, 2023 as compared to 1.32% as of June 30, 2022.

Purchase discount accretion.

The decrease in purchase discount accretion was primarily the result of less amounts outstanding on loans acquired in the Merger during the six month period ended June 30, 2023 as compared to the six month period ended June 30, 2022.

Interest and related expenses.

The increase in interest and related expenses was primarily the result of higher benchmark interest rates, partially offset by a lower average outstanding balance under our Secured Financing Facilities during the six months ended June 30, 2023, as compared to the six months ended June 30, 2022.

The weighted average benchmark interest rate was 5.15% as of June 30, 2023 as compared to 1.47% as of June 30, 2022.

Revenue from real estate owned.

Incentive fees.

In accordance with our management agreement, we recognized management incentive fees payable to Tremont for the six months ended June 30, 2023.

We did not incur management incentive fees for the six months ended June 30, 2022.

General and administrative expenses .

The decrease in general and administrative expenses was primarily due to decreases in professional fees, partially offset by an increase in share based compensation during the six months ended June 30, 2023 as compared to the six months ended June 30, 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 increase in reimbursement of shared services expenses was primarily the result of higher usage of shared services from RMR.

Provision for credit losses.

The provision for credit losses represents the increase in the allowance for credit losses on our loan portfolio and unfunded commitments.

The increase in the allowance for credit losses during the six months ended June 30, 2023 was primarily attributable to unfavorable changes in the current macroeconomic outlook, most notably in CRE pricing forecasts, partially offset by a recovery in our previously recorded allowance for credit losses for our loan secured by an office property in Yardley, PA that was transferred to real estate owned through a deed in lieu of foreclosure in June 2023.

Expenses from real estate owned.

Other transaction related costs.

Other transaction related costs for the six months ended June 30, 2022 include expenses related 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 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 Six Months Ended

June 30, 2023 March 31, 2023 June 30, 2023 June 30, 2022

Net income $ 4,644 $ 7,803 $ 12,447 $ 15,704

Incentive fees 192 — 192 —

Non-cash equity compensation expense 579 120 699 630

Non-cash accretion of purchase discount (1,047) (1,185) (2,232) (7,571)

Reversal of credit losses (987) —

Provision for (reversal of) credit losses 1,026 (987) 39 —

Distributable Earnings $ 5,394 $ 5,751 $ 11,145 $ 8,763

Other transaction related costs (1)

Revenue from real estate owned (149) — (149) —

Expenses from real estate owned 218 — 218 —

Adjusted Distributable Earnings $ 5,463 $ 5,751 $ 11,214 $ 8,800

Weighted average common shares outstanding - basic and diluted 14,605 14,582 14,594 14,514

1 unchanged sentence

Distributable Earnings per common share - basic and diluted $ 0.37 $ 0.39 $ 0.76 $ 0.60

Factors Affecting Operating Results

Our results of operations are impacted by a number of factors and primarily depend on the interest income from our investments and the financing and other costs associated with our business.

Our operating results are also impacted by general CRE market conditions generally and in the sectors relating to our loans and unanticipated defaults by our borrowers, if any.

Credit Risk .

We are subject to the credit risk of our borrowers in connection with our investments.

We seek to mitigate this risk by utilizing a comprehensive underwriting, diligence and investment selection process and by ongoing monitoring of our investments.

Nevertheless, unanticipated credit losses could occur that may adversely impact our operating results.

Changes in Fair Value of our Assets .

We generally intend to hold our investments for their contractual terms, unless repaid earlier by the borrowers.

We evaluate the credit quality of each of our loans at least quarterly.

For collateral-dependent loans for which foreclosure is probable, the related allowance for credit losses is determined using the fair value of the collateral compared to the loan's amortized cost.

Availability of Leverage and Equity .

We use leverage to make additional investments that may increase our returns.

We may not be able to obtain the expected amount of leverage we desire or its cost may exceed our expectation and, consequently, the returns generated from our investments may be reduced.

Our ability to further grow our loan portfolio over time will depend, to a significant degree, upon our ability to obtain additional capital.

However, our access to additional capital depends on many factors including the price at which our common shares trade relative to their book value and market lending conditions.

See "—Market Conditions" below.

Market Conditions.

In response to inflationary pressures the Federal Open Market Committee of the U.S.

Federal Reserve has increased the federal funds rate by 450 basis points since March 2022 and has indicated that there may be additional increases.

These inflationary pressures and interest rate increases have contributed and continue to contribute to macroeconomic uncertainty and volatility in the United States and in the CRE debt markets.

Additionally, increased borrowing costs and concerns of a possible economic recession have resulted in tighter underwriting standards and an overall decline in CRE transactions.

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 continued to originate new loans.

However, concerns about the capital adequacy and liquidity of the banking sector caused by recent failures of certain banks in March 2023 may result in decreased lending activity from such traditional sources.

Lenders that rely on secondary markets to finance their lending activities have also experienced 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 and a corresponding decrease in the demand for CRE CLO bonds.

As a result, some lenders who originate and sell loans into the CRE CLO market as a means of financing have chosen to wait to issue bonds until market volatility subsides and credit spreads stabilize.

In addition to tighter underwriting standards and increased overall borrowing costs, lenders may experience certain challenges from increasing interest rates on floating rate loan portfolios.

While rising interest rates generally result in increased income on floating rate portfolios, the borrowers of floating rate loans may find it more difficult to service their debt.

Floating rate lenders often require borrowers to obtain interest rate caps or swaps to help mitigate this risk.

These challenges could cause floating rate portfolio amounts overall to decrease and/or losses to be incurred if borrowers are unable to obtain interest rate caps or swaps or service their debt and, as a result, could offset the increase in interest income generated from higher benchmark rates.

Despite the current market conditions and headwinds experienced in the overall CRE lending market, we believe certain alternative lenders, like us, are uniquely positioned to face these challenges.

We believe there will be significant opportunities for alternative lenders that do not finance their lending activities through the use of CMBS or CRE CLOs, and with available liquidity, to capitalize on challenges that traditional lenders may experience.

Capital remains available for investment in CRE assets, and certain favored assets, such as multifamily and industrial, continue to transact.