What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-10-31 compared with 2023-07-31 · 103 added, 102 removed, 318 unchanged (39% of the section changed)

33 unchanged sentences

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.

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 and elected to maintain a federal funds target rate in the range of 5.25% to 5.50% at its September 2023 meeting, it maintained the stance that further rate increases may be necessary.

Ongoing inflationary pressures and higher interest rates 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 continue to negatively impact CRE acquisition and financing transaction activity.

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.

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

Life insurance companies, which remained relatively active throughout the most recent interest rate hike cycle, are finding it more difficult to underwrite loans given the significant increase in the benchmark 10-year U.S.

Treasury yield, resulting in further reductions in leverage ratios coupled with already increased credit spreads.

Although concerns about the capital adequacy and liquidity of the banking sector caused by the failures of certain banks in March 2023 have waned, the regional banks continue to carefully monitor loan portfolio performance and have generally not opted to increase their CRE exposure at this time.

Banks that are actively lending are generally reserving their lending capital for existing, well capitalized bank clients.

Floating rate lenders that utilize CRE collateralized loan obligations to finance their businesses continue to be negatively impacted by credit spreads in the secondary market.

Fixed rate CMBS lenders have become even more challenged by the recent significant increase in the 10-year U.S.

Treasury yield, which results in a higher cost of capital to the borrower necessitating lower advance rates.

For those lenders that are actively originating new loans, multifamily and industrial properties continue to be the favored asset classes with lenders competing to lend on high quality transactions.

Despite 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 while the office sector continues to be an ongoing concern for many lenders and borrowers, certain favored property types, such as multifamily, industrial, grocery-anchored retail and hotels 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.

CRE transaction activity should improve as market uncertainty and volatility subside and buyers and sellers adjust their pricing and return expectations, in light of a potentially prolonged elevated interest rate environment.

Changes in Interest Rates.

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

As of 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.

As of September 30, 2023, SOFR was 5.32%, 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.

All of our pre-existing contracts have been amended to replace LIBOR with SOFR.

Size of Portfolio .

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

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

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

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 of real estate owned and related intangible assets, if any;

(d) unrealized gains, losses and other similar non-cash items that are included in net income for the period of the calculation (regardless of whether such items are included in or deducted from net income or in other comprehensive income under GAAP), if any;

and (e) one-time events pursuant to changes in GAAP and certain non-cash items, if any.

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

(b) non-cash equity compensation expense;

(c) unrealized gains, losses and other similar non-cash items that are included in net income for the period of the calculation (regardless of whether such items are included in or deducted from net income or in other comprehensive income under GAAP), if any;

and (d) one-time events pursuant to changes in GAAP and certain non-cash items, if any.

Distributable Earnings are reduced for realized losses on loan investments when amounts are deemed uncollectable.

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The table below calculates our book value per common share:

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Shareholders' equity $ 270,281 $ 271,579

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

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

As of September 30, 2023 and December 31, 2022, the unaccreted purchase discount was $3,396 and $6,703, respectively.

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

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

As of September 30, 2023, our allowance for credit losses for our loan portfolio and unfunded loan commitments was $5,328.

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 June 30, 2023 and December 31, 2022:

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

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

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

Number of loans 26 27

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Loan Portfolio Details

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

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

# Location Property Type Origination Date Committed Principal Amount Principal

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10 Las Vegas, NV Multifamily 06/10/2022 28,950 25,015 S + 3.30% S + 4.03% 06/10/2027 60 % 3

11 Fountain Inn, SC Industrial 07/13/2023 27,500 24,300 S + 4.25% S + 4.78% 07/13/2026 76 % 3

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

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16 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

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

18 Dublin, OH Office 02/18/2020 20,507 20,507 S + 5.25% S + 4.77% 08/16/2024 33 % 2

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

20 Ames, IA Multifamily 11/15/2021 18,000 17,926 S + 3.80% S + 4.13% 11/15/2026 71 % 2

21 Scottsdale, AZ Hotel 09/27/2023 17,250 17,250 S + 4.25% S + 4.56% 09/27/2028 57 % 3

22 Sandy Springs, GA Retail 09/23/2021 16,488 15,285 S + 3.75% S + 4.10% 09/23/2026 72 % 3

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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 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”.

As of September 30, 2023, we had $720,397 in aggregate loan commitments, consisting of a diverse portfolio, geographically and by property type, of 26 first mortgage loans.

As of September 30, 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”.

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.

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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.

In October 2023, we originated a $25,250 loan secured by two self-storage properties in Georgia and received repayment proceeds totaling $62,299, including repayments on two loans secured by office properties in St.

Louis, MO and Dublin, OH totaling $44,373 and one loan secured by a student housing property in Ames, IA for $17,926.

As of September 30, 2023 and October 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 September 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 June 30, 2023:

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

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

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Total $ 474,866 $ 220,134 $ 695,000 $ 657,965

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

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

Carrying Value

Balance at March 31, 2023 $ 433,385

Balance at June 30, 2023 $ 452,690

Borrowings 35,081

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Amortization of deferred fees 359

Balance at June 30, 2023 $ 452,690

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

Balance at September 30, 2023 $ 473,337

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

Carrying Value

4 unchanged sentences

Amortization of deferred fees 1,002

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.

Balance at September 30, 2023 $ 473,337

As of September 30, 2023, outstanding advancements under our Secured Financing Facilities had a weighted average interest rate of 7.41% per annum, excluding associated fees and expenses.

As of September 30, 2023 and October 27, 2023, we had a $474,866 and $446,461, respectively, aggregate outstanding principal balance under our Secured Financing Facilities.

As of September 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.

In August 2023, we amended the related fee letter to increase the maximum amount of available advancements under the UBS Master Repurchase Facility to $205,000.

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

Three Months Ended September 30, 2023 Compared to Three Months Ended June 30, 2023:

Three Months Ended

June 30, 2023 March 31, 2023 Change % Change

September 30, 2023 June 30, 2023 Change % Change

INCOME FROM INVESTMENTS:

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Income from loan investments, net 9,233 8,941 292 3.3 %

Revenue from real estate owned 149 — 149 n/m

Revenue from real estate owned 565 149 416 279.2 %

Total revenue 9,798 9,090 708 7.8 %

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Base management fees 1,077 1,074 3 0.3 %

Incentive fees 192 — 192 n/m

Incentive fees 469 192 277 144.3 %

General and administrative expenses 941 1,281 (340) (26.5 %)

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Provision for (reversal of) credit losses (1,338) 1,026 (2,364) (230.4 %)

Expenses from real estate owned 218 — 218 n/m

Expenses from real estate owned 516 218 298 136.7 %

Total other expenses 2,307 4,419 (2,112) (47.8 %)

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Net income per common share - basic and diluted $ 0.51 $ 0.32 $ 0.19 59.4 %

n/m - not meaningful

Interest and related income .

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 loans acquired in the Merger during the three months ended June 30, 2023 as compared to the three months ended March 31, 2023.

The increase in interest and related income was primarily the result of higher benchmark interest rates and two new loan originations during the three months ended September 30, 2023.

The weighted average benchmark interest rate was 5.39% as of September 30, 2023 as compared to 5.21% as of June 30, 2023.

Interest and related expenses.

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.

The increase in interest and related expenses was primarily the result of higher benchmark interest rates and an increase in advances made to us under our Secured Financing Facilities.

The weighted average benchmark interest rate was 5.33% as of September 30, 2023 as compared to 5.15% as of June 30, 2023.

Revenue from real estate owned.

1 unchanged sentence

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.

We recognize management incentive fees payable to Tremont in accordance with our management agreement.

The increase in management incentive fees was due to higher "core earnings," as defined in our management agreement, as of September 30, 2023 as compared to June 30, 2023.

General and administrative expenses .

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.

The decrease in general and administrative expenses was primarily due to a decrease in share based compensation resulting from shares awarded to our Trustees during the three months ended June 30, 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 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.

Provision for (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 September 30, 2023 was primarily attributable to a reversal of credit losses of $740 for estimated costs to sell related to the reclassification of the property located in Yardley, PA from held for sale to held for investment, favorable changes in the current macroeconomic outlook, most notably in CRE pricing forecasts, and loan repayments.

Expenses from real estate owned.

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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.

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

Six Months Ended June 30,

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

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022:

Nine Months Ended September 30,

2023 2022 Change % Change

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Reimbursement of shared services expenses 1,913 1,742 171 9.8 %

Provision for credit losses 39 — 39 n/m

Reversal of credit losses (1,299) — (1,299) n/m

Expenses from real estate owned 734 — 734 n/m

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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.

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

The weighted average benchmark interest rate was 5.39% as of September 30, 2023 as compared to 2.76% as of September 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.

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

The increase in interest and related expenses was primarily the result of higher benchmark interest rates during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022.

The weighted average benchmark interest rate was 5.33% as of September 30, 2023 as compared to 2.96% as of September 30, 2022.

Revenue from real estate owned.

1 unchanged sentence

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.

In accordance with our management agreement, we recognized management incentive fees payable to Tremont for the nine months ended September 30, 2023 due to higher "core earnings," as defined in our management agreement.

We did not incur management incentive fees for the nine months ended September 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.

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 nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.

Reimbursement of shared services expenses.

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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.

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 nine months ended September 30, 2023 was primarily attributable to favorable changes in the current macroeconomic outlook, most notably in CRE pricing forecasts, 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 and loan repayments.

Expenses from real estate owned.

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Other transaction related costs.

Other transaction related costs for the six months ended June 30, 2022 include expenses related to the Merger.

Other transaction related costs for the nine months ended September 30, 2022 include expenses related to the Merger.

Income tax expense.

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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

Three Months Ended Nine Months Ended

September 30, 2023 June 30, 2023 September 30, 2023 September 30, 2022

Net income $ 7,473 $ 4,644 $ 19,920 $ 20,880

Incentive fees 192 — 192 —

Non-cash equity compensation expense 271 579 970 889

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Provision for (reversal of) credit losses

(1,338) 1,026 (1,299) —

Depreciation and amortization of real estate owned 305 — 305 —

Exit fees collected on loans acquired in Merger (1)

Distributable Earnings $ 5,636 $ 5,202 $ 16,589 $ 12,706

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Revenue from real estate owned (565) (149) (714) —

Expenses from real estate owned 218 — 218 —

Expenses from real estate owned, net of depreciation and amortization 211 218 429 —

Adjusted Distributable Earnings $ 5,282 $ 5,271 $ 16,304 $ 12,743

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Adjusted Distributable Earnings per common share - basic and diluted $ 0.36 $ 0.36 $ 1.12 $ 0.88

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

(1) Exit fees collected on loans acquired in the Merger represent fees collected upon repayment of loans for which no income has previously been recognized in Distributable Earnings.

In accordance with GAAP, exit fees on loans acquired in the Merger were accreted as a component of the purchase discount and were excluded from Distributable Earnings as a non-cash item.

Accordingly, these exit fees have been recognized in Distributable Earnings upon collection.

(2) Other transaction related costs for the nine months ended September 30, 2022 include expenses related to the Merger.

LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands, except per share data)

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to fund our lending commitments, repay or meet margin calls resulting from our borrowings, if any, fund and maintain our assets and operations, make distributions to our shareholders and fund other business operating requirements.

Our sources of cash flows include cash on hand, payments of principal, interest and fees we receive on our investments, other cash we may generate from our business and operations and any unused borrowing capacity, including under our Secured Financing Facilities or other repurchase agreements or financing arrangements we may obtain, which may also include bank loans or public or private issuances of debt or equity securities.

Our sources of cash flows include cash on hand, payments of principal, interest and fees we receive on our investments, other cash we may generate from our business and operations, any unused borrowing capacity, including under our Secured Financing Facilities or other repurchase agreements or financing arrangements we may obtain, which may also include bank loans or public or private issuances of debt or equity securities, and proceeds from any sale of real estate owned.

We believe that these sources of funds will be sufficient to meet our operating and capital expenses, pay our debt service obligations owed and make any distributions to our shareholders for the next 12 months and for the foreseeable future.

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

Six Months Ended June 30,

Nine Months Ended September 30,

Cash, cash equivalents and restricted cash at beginning of period $ 71,067 $ 26,295

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Cash, cash equivalents and restricted cash at end of period $ 60,530 $ 76,437

The increase in cash provided by operating activities for the 2023 period compared to the 2022 period was primarily the result of higher benchmark interest rates, partially offset by the impact of loan repayments and decreased loan originations.

The increase in cash provided by investing activities is primarily due to higher loan repayments and decreased loan originations in the 2023 period.

The decrease in cash used in investing activities is primarily due to decreased loan originations in the 2023 period.

The increase in cash used in financing activities is primarily due to decreased proceeds received from our Secured Financing Facilities during the 2023 period and an increase in distributions to our common shareholders for the 2023 period, partially offset by decreased repayments on our Secured Financing Facilities during the 2023 period.

Distributions

During the six months ended June 30, 2023, we declared and paid regular quarterly distributions to our common shareholders totaling $10,295, or $0.70 per common share, using cash on hand.

On July 13, 2023, we declared a regular quarterly distribution of $0.35 per common share, or $5,161, to shareholders of record on July 24, 2023.

We expect to pay this distribution to our common shareholders on or about August 17, 2023 using cash on hand.

During the nine months ended September 30, 2023, we declared and paid regular quarterly distributions to our common shareholders totaling $15,455, or $1.05 per common share, using cash on hand.

On October 12, 2023, we declared a regular quarterly distribution of $0.35 per common share, or $5,185, to shareholders of record on October 23, 2023.

We expect to pay this distribution to our common shareholders on or about November 16, 2023 using cash on hand.

For further information regarding distributions, see Note 7 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Contractual Obligations and Commitments

Our contractual obligations and commitments as of June 30, 2023 were as follows:

Our contractual obligations and commitments as of September 30, 2023 were as follows:

Payment Due by Period

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

(3) Projected interest payments are attributable only to our debt service obligations at existing rates as of June 30, 2023 and are not intended to estimate future interest costs which may result from debt prepayments, additional borrowings, new debt issuances or changes in interest rates.

(3) Projected interest payments are attributable only to our debt service obligations at existing rates as of September 30, 2023 and are not intended to estimate future interest costs which may result from debt prepayments, additional borrowings, new debt issuances or changes in interest rates.

(4) Lease related costs include capital expenditures used to improve tenants' spaces pursuant to lease agreements or leasing related costs, such as brokerage commissions, related to the Yardley, PA property.

Debt Covenants

Our principal debt obligations as of June 30, 2023 were the outstanding balances under our Secured Financing Facilities.

Our principal debt obligations as of September 30, 2023 were the outstanding balances under our Secured Financing Facilities.

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

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In addition, the BMO Guaranty contains financial covenants that require us to maintain a minimum tangible net worth and a minimum liquidity and to satisfy a total indebtedness to stockholders’ equity ratio.

As of June 30, 2023, we had a $369,610 aggregate outstanding principal balance under our Master Repurchase Facilities.

As of September 30, 2023, we had a $373,839 aggregate outstanding principal balance under our Master Repurchase Facilities.

Our Master Repurchase Agreements are structured with risk mitigation mechanisms, including a cash flow sweep, which would allow UBS, Citibank and Wells Fargo, as applicable, to control interest payments from our borrowers under our loans that are financed under our respective Master Repurchase Facilities, and the ability to accelerate dates of repurchase and institute margin calls, which may require us to pay down balances associated with one or more of our loans that are financed under our Master Repurchase Facilities.

As of June 30, 2023, we had a $84,855 aggregate outstanding principal balance under the BMO Facility.

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

As of September 30, 2023, we had a $101,027 aggregate outstanding principal balance under the BMO Facility.

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

Related Person Transactions

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and others related to them.

For further information about these and other such relationships and related person transactions, see Notes 8 and 9 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our 2022 Annual Report, our definitive Proxy Statement for our 2023 Annual Meeting of Shareholders and our other filings with the SEC.

For further information about these and other such relationships and related person transactions, see Notes 8 and 9 to the Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our 2022 Annual Report, our definitive Proxy Statement for our 2023 Annual Meeting of Shareholders and our other filings with the SEC.

In addition, see the section captioned “Risk Factors” of our 2022 Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis