What changed in this filing

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Item 1A. Risk Factors

2024-02-20 compared with 2023-02-13 · 57 added, 42 removed, 659 unchanged (13% of the section changed)

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Consistent with the foregoing, the risks we face include, but are not limited to, the following:

• we operate in a highly competitive market for investment opportunities, may not obtain sufficient additional capital, and may be adversely affected by Tremont's diligence processes, any defaults on our loan investments, the rate of prepayments on our loan investments, changes in interest rates, including as a result of the expected phase out of LIBOR, or changes in credit spreads due to the size of our loan portfolio;

• we operate in a highly competitive market for investment opportunities, may not obtain sufficient additional capital, and may be adversely affected by Tremont's diligence processes, any defaults on our loan investments, the rate of prepayments on our loan investments, changes in interest rates or changes in credit spreads due to the size of our loan portfolio;

• unfavorable market, economic, CRE and capital market conditions may have a material adverse effect on our investment returns, ability to grow our investment portfolio, results of operations, financial condition and ability to pay distributions to our shareholders;

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• loans secured by properties in transition or requiring significant renovation involve a greater risk of loss than loans secured by stabilized properties;

• the CRE loans that we originate or acquire are subject to the ability of the property owner to generate net operating income from the underlying property, as well as the risks of defaults and foreclosure, which may be impacted by current economic conditions, including inflation, rising or sustained high interest rates, supply chain challenges, labor availability, geopolitical instability and economic downturn, among other factors;

current economic conditions, including inflation, rising or sustained high interest rates, supply chain challenges, labor availability, geopolitical instability and economic downturn, among other factors;

• we are subject to the covenants and conditions contained in our Master Repurchase Agreements and in our facility loan agreement and security agreement with BMO Harris Bank N.A., or BMO, or the BMO Loan Program Agreement, which may restrict our operations and ability to make investments and distributions.

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federal income tax purposes;

• we are subject to various risks related to our ownership of certain real property;

• REIT distribution requirements could adversely affect us and our shareholders;

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Furthermore, competition for our target investments may result in less attractive terms for us and lower returns on our investments or our failing to make investments.

As a result of this competition, desirable loans and investments in our target investments may be limited in the future and we may not be able to take advantage of attractive lending and investment opportunities from time to time.

We can provide no assurance that we will be able to identify and originate loans or make investments that are consistent with our investment objectives.

We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations.

There can be no assurance that any current relationships with such parties will continue (whether on currently applicable terms or otherwise) or that we will be able to establish relationships with other such persons in the future if desired and on terms favorable to us.

Unfavorable market, economic, CRE and capital market conditions may have a material adverse effect on our investment returns, ability to grow our investment portfolio, results of operations, financial condition and ability to pay distributions to our shareholders.

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Current and future economic conditions in the United States may affect the demand for real estate and real estate financing, real estate values, CRE transaction and leasing activity, rents, capital market stability and liquidity and capital costs.

Current economic conditions, including rising interest rates, inflation, reduced availability of financing or financing on favorable terms and increased CRE financing costs, have resulted in a reduction in CRE transaction volume and adversely impacted CRE lending, including alternative CRE lenders like us.

Current economic conditions, including high interest rates, inflation, reduced availability of financing or financing on favorable terms and increased CRE financing costs, have resulted in a reduction in CRE transaction volume and adversely impacted CRE lending, including alternative CRE lenders like us.

If these conditions continue or worsen, or if other adverse market conditions arise, CRE transaction activity, capital market stability, financing availability and financing costs for CRE lending may be further negatively impacted.

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If these risks are realized, they may have a material adverse effect on our investment returns, ability to grow our investment portfolio, results of operations, financial condition and ability to pay distributions to our shareholders.

Additionally, events leading to limited liquidity, defaults, non-performance or other adverse developments that affect one industry, such as the financial services industry, or concerns or rumors about any events of these kinds, have in the past and may in the future lead to market-wide liquidity problems, may spread to other industries, and could negatively affect our business.

For example, in response to the rapidly declining financial condition of regional banks Silicon Valley Bank (“SVB”) and Signature Bank (“Signature”), the California Department of Financial Protection and Innovation and the New York State Department of Financial Services closed SVB and Signature on March 10, 2023 and March 12, 2023, respectively, and the Federal Deposit Insurance Corporation (the “FDIC”) was appointed as receiver for SVB and Signature.

Although the U.S.

Department of the Treasury, the Federal Reserve and the FDIC have taken measures to stabilize the financial system, uncertainty and liquidity concerns in the broader financial services industry remain.

Additionally, should there be additional systemic pressure on the financial system and capital markets, there can be no assurances of the response of any government or regulator, and any response may not be as favorable to industry participants as the measures currently being pursued.

In addition, highly publicized issues related to the U.S.

and global capital markets in the past have led to significant and widespread investor concerns over the integrity of the capital markets.

The current situation related to SVB, Signature and other regional banks could in the future lead to further rules and regulations for public companies, banks, financial institutions and other participants in the U.S.

and global capital markets, and complying with the requirements of any such rules or regulations may be burdensome.

Even if not adopted, evaluating and responding to any such proposed rules or regulations could result in increased costs and require significant attention from Tremont.

We have a limited operating history investing in mortgage loans and have made a limited number of target investments to date.

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As of December 31, 2023, our portfolio consisted of 24 first mortgage loans.

The number of loans in which we are invested may be higher or lower depending on the amount of our assets under management at any given time, market conditions and the extent to which we employ leverage, and will likely fluctuate over time.

As a result, the aggregate returns we realize may be adversely affected if any of our investments performs poorly, we need to write down the value of any of our investments or any of our investments is repaid prior to maturity and we are not able to timely redeploy the proceeds in a manner that provides us with comparable returns.

The impact of these adverse effects on our aggregate returns may be greater than if our portfolio consisted of a larger number of loans because an impacted loan may comprise a larger proportion of our loan portfolio.

Additionally, our investments could be concentrated in relatively few loans and/or relatively few property types.

If our portfolio of target investments is concentrated in certain property types that are subject to higher risk of foreclosure, or secured by properties concentrated in a limited number of geographic locations, downturns relating generally to such region or type of asset may result in defaults on a number of our investments within a short time period, which may reduce our net income and the value of our common shares and accordingly reduce our ability to pay dividends to our shareholders.

The lack of liquidity of our loan investments may adversely affect our business.

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Estimates of the costs of and timing for completing property improvements may be inaccurate.

For instance, during the COVID-19 pandemic, costs of construction materials increased due to inflation relating to supply chain issues and labor availability.

In addition, subsequent leasing of the property may take longer to complete and cost more than expected.

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Outside consultants, legal advisors, accountants and investment banks may be involved in the diligence process to varying degrees depending on the type of potential investment.

Nonetheless, Tremont’s diligence may not reveal all of the risks associated with our investments.

Selecting and evaluating material due diligence matters is subjective by nature, and there is no guarantee that the criteria utilized or judgment exercised by Tremont will reflect the beliefs, values, internal policies or preferred practices of any particular investor or align with the beliefs or values or preferred practices of other commercial real estate debt investors or with market trends.

Tremont’s diligence may also not reveal all of the risks associated with our investments.

We evaluate our potential investments based upon criteria Tremont deems appropriate for the relevant investment.

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This could potentially increase our financing costs and reduce our liquidity or require us to sell assets at an inopportune time or price.

There can be no assurance that we will be able to obtain additional bank credit facilities or repurchase agreements on favorable terms, or at all.

If we cannot obtain additional capital after we invest our current available cash and borrowing availability under our Secured Financing Facilities, our future investable funds may be limited to proceeds we receive from repayments of our loan investments, and from interest payments we receive, from borrowers or from other investments we may make.

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• changes in laws and regulations, including fiscal policies, zoning ordinances and environmental legislation and the related costs of compliance;

• acts of God, earthquakes, hurricanes, health epidemics, pandemics and other public health safety events or concerns, such as the COVID-19 pandemic, and other natural disasters, or acts of war, terrorism, social unrest or civil disturbances, in each case which may result in uninsured or underinsured losses.

• acts of God, earthquakes, hurricanes, health epidemics, pandemics and other public health safety events or concerns, such as the COVID-19 pandemic, and other natural disasters, or acts of war, sabotage, terrorism, social unrest or civil disturbances, in each case which may result in uninsured or underinsured losses.

We may need to foreclose on loans that are in default, which could result in losses.

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• adverse weather, natural disasters and adverse impacts from climate change;

• acts of God, earthquakes, hurricanes, pandemics or other public health safety events or concerns, such as the COVID-19 pandemic, and other natural disasters, climate change, or acts of war, terrorism, social unrest and civil disturbances, in each case which may result in uninsured or underinsured losses;

• acts of God, earthquakes, hurricanes, pandemics or other public health safety events or concerns, such as the COVID-19 pandemic, and other natural disasters, climate change, or acts of war, sabotage, terrorism, social unrest and civil disturbances, in each case which may result in uninsured or underinsured losses;

• changes in government regulations, such as rent control;

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We cannot predict the degree to which economic conditions generally, and the conditions for CRE and CRE debt financing in particular, will improve or decline.

Current economic conditions, including inflation, rising interest rates, supply chain challenges, labor availability, geopolitical instability and economic downturn, have materially adversely impacted CRE transaction activity and valuations and have caused disruptions in the CRE lending market.

Current economic conditions, including inflation, high interest rates, supply chain challenges, labor availability, geopolitical instability and economic downturn, have materially adversely impacted CRE transaction activity and valuations and have caused disruptions in the CRE lending market.

If these conditions continue or worsen, or if further declines in the performance of the U.S.

or global economies or in real estate debt markets are realized, we may experience a material adverse effect on us and our business, results of operations and financial condition.

We are subject to various risks related to the ownership of certain real property.

Real property we may own in the future but do not use in the ordinary course of our operations subjects us to risks particular to CRE property.

We have in the past owned, and may own in the future, certain properties as a result of foreclosure of loans secured by such properties.

Tenants of properties we may own may elect to not renew their leases, or to renew them for less space than they currently occupy, which could increase vacancy, place downward pressure on occupancy, rental rates and income and property valuation.

All of these factors could have a material adverse effect on any income we could generate, or expenses we could incur, from the ownership of such properties.

Moreover, our ability to sell CRE is affected by public perception that banks are inclined to accept large discounts from market value in order to quickly liquidate properties.

Any material decrease in market prices may lead to CRE write-downs, with a corresponding expense in our statement of operations.

Write-downs on CRE or an inability to sell CRE properties could have a material adverse effect on our future business, results of operations, financial condition and the value of our common stock.

Furthermore, the management and resolution of CRE increases our costs and requires significant commitments of time from our management and directors, which can be detrimental to the performance of their other responsibilities.

REIT distribution requirements may adversely impact our ability to carry out our business plan.

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Accordingly, we may not be able to retain sufficient cash to fund our operations, repay our debts or make investments.

We may be unable to raise reasonably priced capital because of reasons related to our business, market perceptions of our prospects, the terms of our debt, the extent of our leverage or for reasons beyond our control, such as capital market volatility, rising interest rates and other market conditions.

Because the earnings we are permitted to retain are limited by the rules governing REIT qualification and taxation, if we are unable to raise reasonably priced capital, we may not be able to carry out our business plan.

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In efforts to combat rising inflation, the Federal Open Market Committee of the U.S.

Federal Reserve (the “FOMC”) has raised interest rates multiple times since March 2022 and has indicated an expectation that it will continue to raise interest rates in 2023.

Federal Reserve (the “FOMC”) has raised interest rates multiple times since March 2022 and may continue to raise interest rates in 2024.

Changes in interest rates may materially and negatively affect us in several ways, including:

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• Changes in interest rates may affect our ability to make investments as well as borrower default rates.

In a period of rising interest rates, our interest income on our loan investments will increase;

In a period of rising or sustained high interest rates, our interest income on our loan investments will increase;

however, defaults on our loan investments may also increase.

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Also, as interest rates increase, the cost of interest rate caps could also increase, which may limit borrowers’ ability to afford the loan or increase the risk of default.

Additionally, rising interest rates may reduce our ability to make investments, as fixed rate financing may be more attractive to potential borrowers or they may forgo or delay obtaining financing.

Additionally, rising or sustained high interest rates may reduce our ability to make investments, as fixed rate financing may be more attractive to potential borrowers or they may forgo or delay obtaining financing.

Our operating results depend in large part on differences between the income from our investments, net of credit losses and financing costs.

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Sales of our common shares may cause a decline in the market value of our common shares.

The phase out or transitioning of LIBOR may negatively impact our business, financial results and cash flows.

Certain of our loan agreements entered into prior to January 1, 2022 require the borrowers to pay us interest at floating rates based upon LIBOR.

LIBOR was phased out for new contracts as of December 31, 2021.

Our pre-existing contracts have been or are expected to be amended to replace LIBOR with SOFR prior to June 30, 2023, the date LIBOR is expected to no longer be available.

Our loan agreements entered into with our borrowers prior to January 1, 2022 generally provide that if LIBOR is not able to be determined, the interest rates under our loan agreements with borrowers would be amended to replace LIBOR with an alternative benchmark rate (which may include SOFR or another rate based on SOFR) that will approximate the existing interest rate as calculated in accordance with LIBOR.

Certain of TRMT’s loan agreements with its borrowers that we assumed upon consummation of the Merger generally provide that if LIBOR is not able to be determined, interest will be calculated using a floating base rate equal to the greater of the Federal Funds Rate plus 50 basis points or the Prime Rate.

We expect that for then existing loan agreements that we entered into prior to January 1, 2022, we and our borrowers will amend our loan agreements by the time LIBOR is no longer available to replace LIBOR with an alternative benchmark rate (which may include SOFR or another rate based on SOFR) that will approximate the existing interest rate as calculated in accordance with LIBOR.

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

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

Despite our current expectations, we cannot be sure that the changes to the determination of interest under our agreements would approximate LIBOR.

On July 29, 2021, the Alternative Reference Rates Committee, or the ARRC, a committee of private market participants convened by the U.S.

Federal Reserve Board and the Federal Reserve Bank of New York, formally recommended the SOFR as an alternative to LIBOR.

There are significant differences between LIBOR and SOFR, such as LIBOR being an unsecured lending rate while SOFR is a secured lending rate, and SOFR is an overnight rate while LIBOR reflects term rates at different maturities.

If our LIBOR-based borrowings are converted to SOFR, the differences between LIBOR and SOFR, plus the recommended spread adjustment, could result in higher interest costs for us, which may have a negative impact on our operating results.

Although SOFR is the ARRC’s recommended replacement rate, it is also possible that lenders may instead choose alternative replacement rates that may differ from LIBOR in ways similar to SOFR or in other ways that would result in higher interest costs for us.

In addition, the elimination of LIBOR and/or changes to another index could result in mismatches with the interest rate of investments that we are financing, and the overall financial markets may be disrupted as a result of the phase-out or replacement of LIBOR.

Third party expectations relating to ESG factors may impose additional costs and expose us to new risks.

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We also generally obtain insurance directly on any property we acquire.

However, there are certain types of losses, generally losses of a catastrophic nature, such as those caused by hurricanes, flooding, climate change, volcanic eruptions and earthquakes, among other things, losses as a result of outbreaks of pandemics, or losses from terrorism or acts of war, that may be uninsurable or not commercially insurable.

However, there are certain types of losses, generally losses of a catastrophic nature, such as those caused by hurricanes, flooding, climate change, volcanic eruptions and earthquakes, among other things, losses as a result of pandemics or disease outbreaks, or losses from terrorism, sabotage or acts of war, that may be uninsurable or not commercially insurable.

We may not obtain, or require borrowers to obtain, certain types of insurance if it is deemed commercially unreasonable.

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Jordan, our other Managing Trustee, is a director and the president and chief executive officer of Tremont and an officer of RMR Inc.

Lorenzini, our President, is an officer of RMR and an officer and employee of Tremont.

Sy, our Chief Financial Officer and Treasurer, is an officer and employee of RMR and an officer of Tremont.

Portnoy, Jordan and Lorenzini and Ms.

Sy have duties to RMR and to Tremont, as well as to us, and we do not have their undivided attention.

Lorenzini, our President and Chief Investment Officer, is an officer of RMR and an officer and employee of Tremont.

Fernando Diaz, our Chief Financial Officer and Treasurer, is an officer and employee of RMR and an officer of Tremont.

Portnoy, Jordan, Lorenzini and Diaz have duties to RMR and to Tremont, as well as to us, and we do not have their undivided attention.

They and other RMR personnel may have conflicts in allocating their time and resources between us and RMR and other companies to which RMR or its subsidiaries provide services.

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as of December 31, 2023, Mr.

Portnoy beneficially owned, in aggregate, 13.4% of our outstanding common shares (including through Tremont and ABP Trust), 6.1% of AlerisLife Inc.’s outstanding common stock (including through ABP Trust), 1.1% of Diversified Healthcare Trust’s outstanding common shares, 1.2% of Industrial Logistics Properties Trust’s outstanding common shares, 1.5% of Office Properties Income Trust’s outstanding common shares, 1.1% of Service Properties Trust’s outstanding common shares and 4.4% of TravelCenters of America Inc.’s outstanding common shares (including through RMR).

Portnoy beneficially owned, in aggregate, 13.5% of our outstanding common shares (including through Tremont and ABP Trust), 9.8% of Diversified Healthcare Trust’s outstanding common shares, 1.5% of Office Properties Income Trust’s outstanding common shares, 1.3% of Industrial Logistics Properties Trust’s outstanding common shares, and 1.1% of Service Properties Trust’s outstanding common shares.

Our executive officers may also own equity investments in other companies to which Tremont, RMR or their subsidiaries provide management services.

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Termination of our management agreement without a cause event will be difficult and costly.

We may not terminate our management agreement without a cause event during its initial term through December 31, 2023.

Our Independent Trustees will review Tremont’s performance and the management fees annually and, following the initial term ending December 31, 2023, our management agreement may be terminated annually without a cause event upon the affirmative vote of at least two-thirds of our Independent Trustees based upon a determination that:

Our Independent Trustees will review Tremont’s performance and the management fees annually and, our management agreement may be terminated annually without a cause event upon the affirmative vote of at least two-thirds of our Independent Trustees based upon a determination that:

(1) Tremont’s performance is unsatisfactory and materially detrimental to us;

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We will be required to provide Tremont with prior written notice of any such termination by not later than 180 days prior to the expiration of the term of the agreement.

Additionally, in the event our management agreement is terminated by us without a cause event or by Tremont for a material breach, we will be required to pay Tremont a termination fee equal to (i) three times the sum of (a) the average annual base management fee and (b) the average annual incentive fee, in each case paid or payable to Tremont during the twenty-four (24) month period immediately preceding the most recently completed calendar quarter prior to the date of termination or, if such termination occurs prior to December 31, 2023, the base management fee and the incentive fee will be annualized for such two year period based on such fees earned by Tremont from January 5, 2021 through the most recently completed calendar quarter prior to the termination date, plus (ii) $1.6 million.

Additionally, in connection with the Merger and the termination of TRMT’s management agreement with Tremont, we agreed that certain of the expenses Tremont had paid pursuant to such management agreement will be included in the “Termination Fee” under and as defined in our existing management agreement with Tremont.

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In addition, if we lose or revoke our qualification for taxation as a REIT under the IRC for a taxable year, we will generally be prevented from requalifying for taxation as a REIT for the next four taxable years.

Foreclosures may impact our ability to qualify as a REIT and minimize tax liabilities.

In 2023 we assumed legal title to a property through a deed in lieu of foreclosure and, in the future as and when necessary or desirable, we may acquire title to additional real property in full or partial settlement of loan obligations through foreclosure or by deed in lieu of foreclosure.

When we acquire a property in this fashion, we consider the impact that taking ownership of such property has on our ability to continue to qualify to be taxed as a REIT as well as any tax liabilities attributable to our operation of such property as a REIT.

In some cases, operation of real property will not generate qualifying rents from real property for purposes of the REIT gross income tests absent special structuring (e.g., gross income from operation of a hotel).

In appropriate cases, however, we may be eligible to make an election with the IRS to treat property that we take possession of in a foreclosure (or deed in lieu of foreclosure) as “foreclosure property.” If, and for so long as, such property qualifies as “foreclosure property” within the meaning of the REIT rules, gross income from such property (even if not normally qualifying REIT gross income) is nevertheless treated as qualifying for purposes of both REIT gross income tests and, in addition, gain from the sale of such property will not be subject to the 100% prohibited transaction tax for dealer sales.

Whereas our net income is generally free of corporate-level income tax because we operate as a REIT, our net income with respect to a property for which we have made a foreclosure property election that would not otherwise be qualifying gross income for purposes of the REIT gross income tests will be subject to corporate income tax.

In addition, the IRS might argue that a particular property did not qualify for a foreclosure property election or that its status as foreclosure property terminated prematurely, possibly causing us to fail one or both REIT gross income tests or causing any gain from sale of such property to be subject to the prohibited transaction tax.

REIT distribution requirements could adversely affect us and our shareholders.

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There is a general market perception that REIT shares outperform in low interest rate environments and underperform in rising interest rate environments when compared to the broader market.

In efforts to combat rising inflation, the FOMC raised interest rates multiple times since March 2022 and has indicated an expectation that it will continue to raise interest rates in 2023.

In efforts to combat rising inflation, the FOMC raised interest rates multiple times since March 2022 and may continue to raise interest rates in 2024.

In addition, the U.S.

and global economies have been experiencing high inflation, constrained labor availability, supply chain challenges, global instability and economic downturn.

and global economies have continued to experience high inflation, constrained labor availability, supply chain challenges, global instability and economic downturn.

These conditions have negatively impacted REIT share prices and, if they continue or worsen, may have further adverse impacts on the market value of our securities.

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Funding distributions to our shareholders from our future borrowings or asset sales may constitute a return of capital to our investors, which would have the effect of reducing our shareholders’ bases in our common shares.

Unresolved Staff Comments

Our principal executive and administrative offices are located in leased space at Two Newton Place, 255 Washington Street, Newton, MA 02458-1634.

We do not own any real property.

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 1A. Risk Factors