What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-04-29 compared with 2023-10-31 · 97 added, 175 removed, 246 unchanged (53% of the section changed)

14 unchanged sentences

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.

Our operating results are also impacted by general CRE market conditions and unanticipated defaults by our borrowers.

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 2023 Annual Report.

15 unchanged sentences

Market Conditions .

During 2023, the CRE industry continued to experience extreme volatility.

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 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 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.

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.

Federal Reserve, or the FOMC, increased the federal funds rate by 525 basis points over a 16-month period beginning in March 2022.

The pace of the interest rate increases in 2022 and 2023 coupled with macroeconomic and geopolitical uncertainty negatively impacted CRE acquisition and financing transaction activity.

By the end of the year, CRE investors seemed cautiously optimistic that inflation had peaked, that the U.S.

economy was likely headed for a “soft-landing” and that the FOMC would be poised to reduce the federal funds rate by 125 to 150 basis points as a result of five or six rate cuts in 2024.

Despite this cautious optimism heading into 2024, overall CRE investment and transaction volume continued to decline over the first quarter of 2024 as investors chose to delay sale or refinancing decisions with the anticipation of lower interest rates in the future.

Since that time, the narrative on declining interest rates has shifted.

economy continues to be strong and recent employment reports, coupled with stronger than expected inflationary measures, suggest that the FOMC will likely consider fewer rate cuts in 2024 than originally anticipated, if any.

As such, it is becoming apparent that CRE investors will likely have to adapt to a “higher for longer” interest rate environment.

This could negatively impact property values and put further strain on borrowers seeking to refinance debt that was originated in a much lower interest rate environment.

With lower prospects for near term interest rate reductions, property fundamentals and durability of cash flows will be in greater focus and will have a greater impact on refinancing activity going forward.

Those CRE owners that are more reliant on rate reductions to qualify for a refinance are more likely to be forced to sell properties, while borrowers with well performing, lower leveraged cash flowing assets will have greater optionality with regards to financing options.

Despite strong U.S.

economic growth, certain segments of the CRE industry are beginning to encounter erosion in operating fundamentals.

Despite strong employment figures, the U.S.

office market continues to suffer from the post pandemic shift in work habits and weak demand for office space in general.

Retail assets, particularly needs based and grocery anchored retail, continue to benefit from a strong consumer and employment market.

The apartment and industrial sectors remain the most coveted property types amongst lenders and investors, but have recently started to experience challenges due to excess supply.

The lack of affordable housing in the United States and the rent versus buy dynamic favor the apartment sector.

New industrial development has slowed considerably but continues to benefit from strong demand.

Although new development absorption may take longer than originally expected, both sectors are expected to eventually reach equilibrium and rents will begin to increase again.

Despite current market conditions and headwinds facing the CRE industry, we believe the CRE lending market remains well positioned to handle these challenges given that there is ample liquidity available to borrowers with well performing properties.

National banks have curtailed lending activity somewhat, but regional and local banks are continuing to evaluate transactions for borrowers with healthy balance sheets.

The CMBS market has started to see increased activity given recent spread tightening, while the larger, more established CRE collateralized loan obligation lenders are increasing new originations for eventual securitization.

Life insurance companies continue to expand their product offerings to borrowers, offering both low leverage, fixed rate term debt as well as floating rate transitional loans, which were once reserved for banks and alternative lenders, like us.

This has resulted in greater optionality for borrowers and increased competition amongst lenders to finance quality properties in today’s environment.

Changes in Interest Rates.

12 unchanged sentences

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

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.

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

As of March 31, 2024, SOFR was 5.33%, 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.

Size of Portfolio .

10 unchanged sentences

Non-GAAP Financial Measures

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.

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.

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, 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.

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

4 unchanged sentences

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, 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.

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.

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, 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

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:

6 unchanged sentences

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:

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Shareholders' equity $ 271,558 $ 271,248

6 unchanged sentences

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

As of March 31, 2024 and December 31, 2023, the unaccreted purchase discount was $1,202 and $2,347, respectively.

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

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.

For further information on our adoption of ASU No.

2016-13, see Notes 2 and 3 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

As of March 31, 2024 and December 31, 2023, our allowance for credit losses for our loan portfolio and unfunded loan commitments was $6,525 and $5,828, respectively.

Our Loan Portfolio

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

The table below details overall statistics for our loan portfolio as of March 31, 2024 and December 31, 2023:

As of March 31, 2024 As of December 31, 2023

Number of loans 21 24

16 unchanged sentences

Loan Portfolio Details

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

The table below details our loan portfolio as of March 31, 2024:

# Location Property Type Origination Date Committed Principal Amount Principal

6 unchanged sentences

4 Brandywine, MD Retail 03/29/2022 42,500 42,200 S + 3.85% S + 4.26% 03/29/2027 62 % 3

5 West Bloomfield, MI Retail 12/16/2021 42,500 37,800 S + 3.85% S + 4.66% 12/16/2024 59 % 3

5 Auburn, AL Multifamily 05/11/2023 37,500 37,500 S + 3.25% S + 4.08% 11/11/2026 67 % 2

2 unchanged sentences

8 Downers Grove, IL Office 09/25/2020 30,000 29,500 S + 4.25% S + 4.64% 11/25/2024 67 % 3

9 Anaheim, CA Hotel 11/29/2023 29,000 29,000 S + 4.00% S + 4.56% 11/29/2028 55 % 2

10 Las Vegas, NV Multifamily 06/10/2022 28,950 25,333 S + 3.30% S + 4.08% 06/10/2027 60 % 3

1 unchanged sentence

12 Plano, TX Office 07/01/2021 27,385 26,537 S + 4.75% S + 5.14% 07/01/2026 78 % 3

13 Fayetteville, GA Industrial 10/06/2023 25,250 25,250 S + 3.35% S + 3.73% 10/06/2028 55 % 3

14 Carlsbad, CA Office 10/27/2021 24,750 24,417 S + 3.25% S + 3.58% 10/27/2026 78 % 4

15 Fontana, CA Industrial 11/18/2022 24,355 22,000 S + 3.75% S + 4.29% 11/18/2026 72 % 3

Louis, MO Office 12/19/2018 23,866 23,866 S + 3.25% S + 3.74% 12/19/2023 72 % 2

16 Downers Grove, IL Office 12/09/2021 23,530 23,530 S + 4.25% S + 4.58% 12/09/2026 72 % 3

17 Bellevue, WA Office 11/05/2021 21,000 20,000 S + 3.85% S + 4.19% 11/05/2026 68 % 4

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

18 Portland, OR Multifamily 07/09/2021 19,688 19,688 S + 3.57% S + 3.95% 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

19 Scottsdale, AZ Hotel 09/27/2023 17,250 17,250 S + 4.25% S + 4.65% 09/27/2028 57 % 2

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

23 Delray Beach, FL Retail 03/18/2022 16,000 15,603 S + 4.25% S + 4.90% 03/18/2026 56 % 3

24 Westminster, CO Office 05/25/2021 15,750 15,750 S + 3.75% S + 4.24% 05/25/2026 66 % 2

21 Portland, OR Multifamily 07/30/2021 13,400 13,400 S + 3.57% S + 3.96% 07/30/2026 71 % 3

26 Allentown, PA Industrial 01/24/2020 9,133 9,133 S + 3.50% S + 4.03% 01/24/2025 67 % 3

Total/weighted average $ 628,891 $ 590,632 S + 3.77% S + 4.21% 68 % 3.0

2 unchanged sentences

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

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”.

As of March 31, 2024, we had $628,891 in aggregate loan commitments, consisting of a diverse portfolio, geographically and by property type, of 21 first mortgage loans.

As of March 31, 2024, 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.

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

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.

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.

As of March 31, 2024 and April 25, 2024, all of our borrowers 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 March 31, 2024.

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.

2 unchanged sentences

Financing Activities

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

The table below is an overview of our Secured Financing Facilities as of March 31, 2024:

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

4 unchanged sentences

Total $ 422,592 $ 272,408 $ 695,000 $ 590,632

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

Carrying Value

Balance at June 30, 2023 $ 452,690

Borrowings 35,081

Repayments (14,680)

Deferred fees (113)

Amortization of deferred fees 359

Balance at September 30, 2023 $ 473,337

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

The table below details our Secured Financing Facilities activities during the three months ended March 31, 2024:

Carrying Value

Balance at December 31, 2023 $ 454,422

Borrowings 63,206

Repayments (33,224)

1 unchanged sentence

Amortization of deferred fees 325

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.

Balance at March 31, 2024 $ 421,171

As of March 31, 2024, outstanding advancements under our Secured Financing Facilities had a weighted average interest rate of 7.50% per annum, excluding associated fees and expenses.

As of March 31, 2024 and April 25, 2024, we had a $422,592 aggregate outstanding principal balance under our Secured Financing Facilities.

As of March 31, 2024, we were in compliance with all covenants and other terms under our Secured Financing Facilities.

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

Three Months Ended March 31, 2024 Compared to Three Months Ended December 31, 2023:

Three Months Ended

September 30, 2023 June 30, 2023 Change % Change

March 31, 2024 December 31, 2023 Change % Change

INCOME FROM INVESTMENTS:

10 unchanged sentences

Reimbursement of shared services expenses 691 683 8 1.2 %

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

Expenses from real estate owned 516 218 298 136.7 %

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

Income before income taxes 7,491 4,671 2,820 60.4 %

Income tax expense (18) (27) 9 (33.3 %)

Net income $ 7,473 $ 4,644 $ 2,829 60.9 %

Weighted average common shares outstanding - basic and diluted 14,640 14,605 35 0.2 %

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

Interest and related income .

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 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.

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.

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 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.

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.

Provision for credit losses 697 500 197 39.4 %

Expenses from real estate owned 645 559 86 15.4 %

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.

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

Nine Months Ended September 30,

2023 2022 Change % Change

INCOME FROM INVESTMENTS:

Interest and related income $ 48,814 $ 30,098 $ 18,716 62.2 %

Purchase discount accretion 3,307 9,167 (5,860) (63.9 %)

interest and related expenses (24,600) (10,191) (14,409) 141.4 %

Income from loan investments, net 27,521 29,074 (1,553) (5.3 %)

Revenue from real estate owned 714 — 714 n/m

Total revenue 28,235 29,074 (839) (2.9 %)

OTHER EXPENSES:

Base management fees 3,223 3,190 33 1.0 %

Incentive fees 661 — 661 n/m

General and administrative expenses 3,018 3,118 (100) (3.2 %)

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

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

Expenses from real estate owned 734 — 734 n/m

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

Total other expenses 4,126 4,058 68 1.7 %

Income before income taxes 5,236 5,942 (706) (11.9 %)

Income tax expense (65) (107) 42 (39.3 %)

Income tax (expense) benefit

(3) 103 (106) (102.9 %)

Net income $ 5,233 $ 6,045 $ (812) (13.4 %)

1 unchanged sentence

Net income per common share - basic and diluted $ 0.35 $ 0.41 $ (0.06) (14.6 %)

n/m - not meaningful

Interest and related income .

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.

The decrease in interest and related income was primarily the result of lower outstanding principal balances under our loan investment portfolio during the three months ended March 31, 2024.

The weighted average aggregate principal balance of our loan investments was approximately $613,000 for the three months ended March 31, 2024 as compared to approximately $646,000 for the three months ended December 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 nine month period ended September 30, 2023 as compared to the nine month period ended September 30, 2022.

The increase in purchase discount accretion was primarily due to accelerated accretion of a loan prepayment during the three months ended March 31, 2024.

Interest and related expenses.

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.

The decrease in interest and related expenses was primarily the result of lower outstanding principal balances under our Secured Financing Facilities during the three months ended March 31, 2024.

The weighted average principal balance was approximately $439,000 for the three months ended March 31, 2024 as compared to approximately $448,000 for the three months ended December 31, 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 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.

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

The decrease in management incentive fees was due to lower "core earnings," as defined in our management agreement, for the three months ended March 31, 2024 as compared to the three months ended December 31, 2023.

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

The increase in general and administrative expenses was primarily due to increases in share based compensation, partially offset by decreases in professional fees during the three months ended March 31, 2024 as compared to the three months ended December 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 increase in reimbursement of shared services expenses was primarily the result of higher usage of shared services from RMR.

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.

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 March 31, 2024 was primarily attributable to declining values for CRE and unfavorable CRE pricing forecasts used in our CECL model.

Expenses from real estate owned.

Other transaction related costs.

Other transaction related costs for the nine months ended September 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 increase in expenses from real estate owned was primarily due to increases in depreciation and utility expense.

Income tax (expense) benefit.

Income tax (expense) benefit represents income taxes paid or payable by us or refunded or refundable to 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 Nine Months Ended

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

Reconciliation of Net Income to Distributable Earnings

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

Three Months Ended

March 31, 2024 December 31, 2023

Net income $ 5,233 $ 6,045

1 unchanged sentence

Non-cash accretion of purchase discount (1,145) (821)

Provision for (reversal of) credit losses

(1,338) 1,026 (1,299) —

Provision for credit losses

Depreciation and amortization of real estate owned 357 289

1 unchanged sentence

Distributable Earnings $ 5,568 $ 6,312

Other transaction related costs (2)

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

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

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

Weighted average common shares outstanding - basic and diluted 14,675 14,673

1 unchanged sentence

Distributable Earnings per common share - basic and diluted $ 0.38 $ 0.43

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

(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.

In accordance with GAAP, exit fees payable with respect to 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)

3 unchanged sentences

For further information regarding the risks associated with our loan portfolio, see Note 3 to our 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 2023 Annual Report.

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

The initial purchase price paid by UBS or Citibank of each purchased asset is up to 75% of the lesser of the market value of the purchased asset or the unpaid principal balance of such purchased asset, subject to UBS’s or Citibank's approval.

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

The initial purchase price paid by UBS of each purchased asset is up to 80% of the lesser of the market value of the purchased asset or the unpaid principal balance of such purchased asset, subject to UBS's approval.

The initial purchase price paid by Citibank of each purchased asset is up to 75% of the lesser of the market value of the purchased asset or the unpaid principal balance of such purchased asset, subject to Citibank's approval.

The initial purchase price paid by Wells Fargo for each purchased asset is up to 75% or 80%, depending on the property type of the purchased asset’s real estate collateral, of the lesser of the market value of the purchased asset or the unpaid principal balance of such purchased asset, and subject to Wells Fargo’s approval.

1 unchanged sentence

The interest rates related to our Citibank, UBS and Wells Fargo purchased assets are calculated at SOFR plus a premium within a fixed range, determined by the debt yield and property type of the purchased asset’s real estate collateral.

UBS and Citibank each has the discretion to make advancements at margins higher than 75% and Wells Fargo has discretion to make advancements higher than 80%.

Citibank has the discretion to make advancements at margins higher than 75%, and UBS and Wells Fargo each have discretion to make advancements higher than 80%.

Loans issued under the BMO Facility are coterminous with the corresponding pledged mortgage loan investments, are not subject to margin calls and allow for up to an 80% advance rate, subject to certain loan to cost and LTV limits.

4 unchanged sentences

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

Nine Months Ended September 30,

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

Three Months Ended March 31,

Cash and cash equivalents at beginning of period $ 87,855 $ 71,067

Net cash provided by (used in):

2 unchanged sentences

Financing activities (38,835) (43,603)

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 decreased loan originations.

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.

Cash and cash equivalents at end of period $ 93,298 $ 84,308

The decrease in cash provided by operating activities for the 2024 period compared to the 2023 period was primarily the result of a lower average loan investment balance in the 2024 period, partially offset by higher benchmark interest rates.

The decrease in cash provided by investing activities is primarily due to decreased loan repayments in the 2024 period.

The decrease in cash used in financing activities is primarily due to decreased repayments on our Secured Financing Facilities during the 2024 period.

Distributions

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.

During the three months ended March 31, 2024, we declared and paid regular quarterly distributions to our common shareholders totaling $5,184, or $0.35 per common share, using cash on hand.

On April 11, 2024, we declared a regular quarterly distribution of $0.35 per common share, or $5,182, to shareholders of record on April 22, 2024.

We expect to pay this distribution to our common shareholders on or about May 16, 2024 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 September 30, 2023 were as follows:

Our contractual obligations and commitments as of March 31, 2024 were as follows:

Payment Due by Period

4 unchanged sentences

422,592 393,762 28,830 — —

Interest payments (3)

Interest payments on Secured Financing Facilities (3)

25,682 24,744 938 — —

4 unchanged sentences

(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 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.

(3) Projected interest payments are attributable only to our debt service obligations at existing rates as of March 31, 2024 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 September 30, 2023 were the outstanding balances under our Secured Financing Facilities.

Our principal debt obligations as of March 31, 2024 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.

5 unchanged sentences

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

Our BMO Loan Program Agreement provides for acceleration of all payment obligations due under the BMO Facility Loan Agreements 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.

As of March 31, 2024, we had a $334,825 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 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.

As of March 31, 2024, we had a $87,767 aggregate outstanding principal balance under the BMO Facility.

As of March 31, 2024, we were in compliance with all covenants and other terms under our Secured Financing Facilities.

Related Person Transactions

4 unchanged sentences

We may engage in additional transactions with related persons, including businesses to which RMR, Tremont or their respective subsidiaries provide management services.

Critical Accounting Policies

A summary of our critical accounting policies is included in Part II, Item 7 of our 2022 Annual Report.

There have been no material changes to our critical accounting policies described in our 2022 Annual Report other than the adoption of ASU No.

2016-13, as described in Note 2 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Quantitative and Qualitative Disclosures About Market Risk

1 unchanged sentence

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