What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-10-28 compared with 2024-07-29 · 108 added, 94 removed, 308 unchanged (40% of the section changed)

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We are a Maryland REIT.

Our business strategy is focused on originating and investing in floating rate first mortgage loans in the $15,000 to $75,000 range, secured by middle market and transitional CRE properties that have values up to $100,000.

Our business strategy is focused on originating and investing in floating rate first mortgage loans that range from $15,000 to $75,000, secured by middle market and transitional CRE properties that have values up to $100,000.

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

Our mortgage loans are classified as loans held for investment in our condensed consolidated balance sheets.

Tremont is registered with the Securities and Exchange Commission, or SEC, as an investment adviser under the Investment Advisers Act of 1940, as amended.

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Market Conditions .

Heading in to 2024, CRE investors seemed cautiously optimistic that inflation had peaked, that the U.S.

Heading into 2024, CRE investors seemed cautiously optimistic that inflation had peaked, that the U.S.

economy was likely headed for a “soft-landing” and that the Federal Open Market Committee of the U.S.

Federal Reserve, or 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.

With the anticipation of lower interest rates in the future, investors chose to delay sale or refinancing decisions and overall CRE investment and transaction volume remained tepid well into the second quarter of 2024.

However, despite recent economic data indicating slowing U.S.

economic growth, including lower retail sales, consumer spending and a slight increase in the unemployment rate, the FOMC has made it clear that inflation remains elevated and that it intends to keep the federal funds rate steady at 5.25% to 5.50% until it is confident that inflation is on pace to reach its longer-term objective of 2%.

With no clear sight on the timing or magnitude of a future interest rate cut, CRE investors continue to adjust to a “higher for longer” interest rate environment.

CRE owners that were counting on interest rate reductions but are not well capitalized to invest additional capital to deleverage and qualify for a refinance, are more likely to be forced to sell properties to repay debt, likely at distressed prices.

Recent increases in CMBS and CRE collateralized loan obligation delinquency rates signal that the prolonged period of elevated interest rates is starting to impact these borrowers and their ability to refinance lower cost debt at current interest rates.

For borrowers capable of investing additional equity into their properties, or for borrowers with well performing, cash flowing assets, there appear to be numerous financing options at their disposal.

CMBS activity increased through the first half of 2024.

Strong demand from bond buyers has allowed borrowers to take advantage of tightening credit spreads for 10-year and 5-year loans, the latter of which has become more popular for both bond investors and borrowers.

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.

The banking sector continues to be impacted by legacy CRE exposure and increased capital charges imposed by regulators but have become more active by evaluating new loans for strategic, long-term clients.

Agency lenders Fannie-Mae and Freddie-Mac are active but are also facing increased competition from CMBS/conduit providers, life-insurance companies and alternative lenders, like us.

Oversupply issues in certain multifamily markets have put downward pressure on rents, making it more difficult to qualify for agency financing.

Given that multifamily properties are generally coveted by most lenders, competition amongst lenders to provide financing on this sector has continued to increase.

Certain segments of the CRE industry are beginning to experience a deterioration in operating fundamentals.

Federal Reserve, or the FOMC, was poised to reduce the federal funds rate by 125 to 150 basis points through a series of rate cuts in 2024.

With the anticipation of lower interest rates in the future, investors delayed sale or refinancing decisions, which resulted in tepid CRE investment and transaction volume during the third quarter of 2024.

In September 2024, citing progress toward its 2% inflation target, the FOMC lowered the targeted federal funds rate by 50 basis points, to a range of 4.75% to 5.00%, the first reduction since March 2020.

This first rate cut in over four years by the FOMC provided CRE owners relief from the recent high borrowing costs and uncertainty regarding the timing and magnitude of future rate cuts.

The September federal funds rate cut and updated projections by the FOMC for future rate cuts has provided CRE investors a renewed sense of optimism that both financing and investment sale transaction activity will accelerate in the fourth quarter of 2024 and into 2025.

With additional clarity on the intentions of the FOMC and the direction of future interest rates, CRE owners are better positioned to make sale or refinance decisions and opt between floating or fixed rate financing options.

CRE owners are also now more likely to qualify for new financing, instead of having to sell properties at distressed prices, to repay debt.

Borrowers with well performing cash flowing properties will continue to benefit from numerous financing options.

The CMBS financing market, a key provider of debt liquidity to the CRE industry, has seen increased activity through the first half of 2024.

Strong demand from bond buyers has allowed borrowers to take advantage of tightening credit spreads for 10-year and 5-year loans, the latter of which has become more popular among bond investors and borrowers.

Life insurance companies continue to expand their product offerings to borrowers, with low leverage, fixed rate term debt for stabilized assets as well as floating rate capital for more transitional properties, which were once reserved for banks and alternative lenders, like us.

The banking sector continues to be impacted by legacy CRE exposure and increased capital charges imposed by regulators but have become more active of late, primary for new loans to strategic, long-term clients.

Agency lenders, Fannie-Mae and Freddie-Mac continue to be active lenders in the market;

however, they are facing increased competition from CMBS/conduit providers, life-insurance companies and alternative lenders, like us.

Overall, the debt capital markets remain liquid, and lenders continue to compete for quality financing opportunities.

Although CRE investors feel that the risk of a prolonged period of elevated interest rates is largely over, other challenges remain ahead.

Special servicing rates for CMBS and CRE-CLO financed loans continue to increase and lenders have become more willing to foreclose on borrowers unable to support underperforming properties.

Furthermore, certain segments of the CRE industry continue to experience a deterioration in operating fundamentals.

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

Retail assets, particularly needs based and grocery anchored retail, have benefited from a strong consumer and employment market, but recent reports of declining retail sales and weakening consumer demand may eventually have an impact on performance.

The industrial sector remains a preferred asset class among lenders and investors, however oversupply in certain markets and more measured corporate demand have impacted the pace of rent growth.

The industrial sector remains a preferred asset class among lenders and investors, but oversupply in certain markets and more measured corporate demand have impacted the pace of rent growth.

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

Oversupply in certain markets, however, has caused a slowdown, and in some markets a decline, in rent growth.

For most markets, it is expected that the imbalance between supply and demand will be short lived and once these markets reach equilibrium, rents will increase again.

Despite the 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.

For most markets, it is expected that the imbalance between supply and demand will be short lived and once they reach equilibrium, rent growth will return.

Over $2 trillion in CRE debt is scheduled to mature over the next two years.

These maturities, coupled with a lower and more stabilized interest rate environment, are likely to provide investors with greater investment opportunities which will spurn lending activity.

Looking forward, geopolitical uncertainty and the impact of the U.S.

presidential election may pose additional risks to the CRE industry, however, we believe that the CRE lending market remains well positioned to handle these challenges.

Changes in Interest Rates.

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

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

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

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

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

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

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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, 2024, SOFR was 5.34%, 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, 2024, SOFR was 4.85%, and as a result, one of our loan investments currently has an active interest rate floor.

Size of Portfolio .

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

This is generally at the time a loan is repaid, or in the case of foreclosure, when the underlying asset is sold, but may also be when, in our determination, it is nearly certain that all amounts due will not be collected.

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.

This is generally at the time a loan is repaid, or in the case of foreclosure, when the real estate assets are acquired, but may also be when, in our determination, it is nearly certain that all amounts due will not be collected.

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

Adjusted Book Value per Common Share

The table below calculates our book value per common share:

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

Shareholders' equity $ 269,506 $ 271,248

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(1) Excludes the impact of the unaccreted purchase discount resulting from the excess of the fair value of the loans TRMT then held for investment and that we acquired as a result of the Merger over the consideration we paid in the Merger.

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

As of June 30, 2024 and December 31, 2023, the unaccreted purchase discount was $420 and $2,347, respectively.

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

As of September 30, 2024, the purchase discount was fully accreted.

As of December 31, 2023, the unaccreted purchase discount was $2,347.

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

As of June 30, 2024 and December 31, 2023, our allowance for credit losses for our loan portfolio and unfunded loan commitments was $7,840 and $5,828, respectively.

As of September 30, 2024 and December 31, 2023, our allowance for credit losses for our loan portfolio and unfunded loan commitments was $9,358 and $5,828, respectively.

Our Loan Portfolio

The table below details overall statistics for our loan portfolio as of June 30, 2024 and December 31, 2023:

As of June 30, 2024 As of December 31, 2023

The table below details overall statistics for our loan portfolio as of September 30, 2024 and December 31, 2023:

As of September 30, 2024 As of December 31, 2023

Number of loans 20 24

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Loan Portfolio Details

The table below details our loan portfolio as of June 30, 2024:

The table below details our loan portfolio as of September 30, 2024:

# Location Property Type Origination Date Committed Principal Amount Principal

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4 Brandywine, MD Retail 03/29/2022 42,500 42,200 S + 3.85% S + 4.27% 03/29/2027 62 % 3

5 Auburn, AL Multifamily 05/11/2023 37,500 37,500 S + 3.25% S + 4.07% 11/11/2026 67 % 1

5 Starkville, MS Multifamily 03/22/2022 37,250 37,250 S + 4.00% S + 4.33% 03/22/2027 70 % 2

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12 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 + 3.57% 10/27/2026 78 % 4

13 Carlsbad, CA (4)

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

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

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

19 Portland, OR Multifamily 07/09/2021 19,688 19,688 S + 3.57% S + 3.94% 07/09/2026 75 % 3

18 Newport News, VA Multifamily 04/25/2024 17,757 14,629 S + 3.15% S + 3.89% 04/25/2029 71 % 3

19 Sandy Springs, GA Retail 09/23/2021 16,488 15,287 S + 3.75% S + 4.06% 09/23/2026 72 % 2

22 Portland, OR Multifamily 07/30/2021 13,400 13,400 S + 3.57% S + 3.95% 07/30/2026 71 % 3

20 Lake Mary, FL Hotel 09/06/2024 16,000 16,000 S + 4.00% S + 4.42% 09/06/2029 68 % 3

Total/weighted average $ 594,421 $ 557,545 S + 3.74% S + 4.12% 68 % 3.1

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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, 2024, we had $652,198 in aggregate loan commitments, consisting of a diverse portfolio, geographically and by property type, of 22 first mortgage loans.

As of June 30, 2024, we had five loans representing approximately 24% of the amortized cost of our loan portfolio with a loan risk rating of “4” or “higher risk”.

(4) In October 2024, the maturity of this loan was extended to January 27, 2025.

As of September 30, 2024, we had $594,421 in aggregate loan commitments, consisting of a diverse portfolio, geographically and by property type, of 20 first mortgage loans.

As of September 30, 2024, we had five loans representing approximately 26% of the amortized cost of our loan portfolio with a loan risk rating of “4” or “higher risk”.

In August 2024, we amended the agreement governing our loan secured by an office property in Dallas, TX.

As part of this amendment, the loan commitment was reduced by $3,189, the borrower was required to contribute $2,900 to cash reserves and the maturity date was extended by two years to August 25, 2026.

As of September 30, 2024, this loan had an amortized cost of $43,511 and a risk rating of 4.

In August 2024, we amended the agreement governing our loan secured by an office property in Plano, TX.

As part of this amendment, the coupon rate was reduced from SOFR + 4.75% to SOFR + 3.75% and the maturity date was extended by two years to July 1, 2026.

As of September 30, 2024, this loan had an amortized cost of $26,634 and a risk rating of 4.

All of the loans in our portfolio are structured with risk mitigation mechanisms, such as cash flow sweeps or interest reserves, to help protect us against investment losses.

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

As of June 30, 2024 and July 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 June 30, 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.

As of September 30, 2024 and October 24, 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 September 30, 2024.

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

As a result, they may become unable to pay their debt service obligations owed and due to us, which may result in an increased allowance for credit losses and/or recognition of income on a nonaccrual basis.

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Financing Activities

The table below is an overview of our Secured Financing Facilities as of June 30, 2024:

The table below is an overview of our Secured Financing Facilities as of September 30, 2024:

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

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Total $ 377,334 $ 317,666 $ 695,000 $ 541,545

The table below details our Secured Financing Facilities activities during the three months ended June 30, 2024:

The table below details our Secured Financing Facilities activities during the three months ended September 30, 2024:

Carrying Value

Balance at March 31, 2024 $ 421,171

Balance at June 30, 2024 $ 417,939

Borrowings 16,086

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Amortization of deferred fees 391

Balance at June 30, 2024 $ 417,939

The table below details our Secured Financing Facilities activities during the six months ended June 30, 2024:

Balance at September 30, 2024 $ 375,928

The table below details our Secured Financing Facilities activities during the nine months ended September 30, 2024:

Carrying Value

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Amortization of deferred fees 1,090

Balance at June 30, 2024 $ 417,939

As of June 30, 2024, outstanding advancements under our Secured Financing Facilities had a weighted average interest rate of 7.48% per annum, excluding associated fees and expenses.

As of June 30, 2024 and July 25, 2024, we had a $418,989 and $397,747, respectively, aggregate outstanding principal balance under our Secured Financing Facilities.

As of June 30, 2024, we were in compliance with all covenants and other terms under our Secured Financing Facilities.

Balance at September 30, 2024 $ 375,928

As of September 30, 2024, outstanding advancements under our Secured Financing Facilities had a weighted average interest rate of 7.25% per annum, excluding associated fees and expenses.

As of September 30, 2024 and October 24, 2024, we had a $377,334 aggregate outstanding principal balance under our Secured Financing Facilities.

As of September 30, 2024, we were in compliance with all covenants and other terms under our Secured Financing Facilities.

In September 2024, we amended our amended and restated master repurchase agreement with Citibank, or the Citibank Master Repurchase Agreement.

The amendment to the amended and restated Citibank Master Repurchase Agreement made certain changes to the agreement and related fee letter, including extending the stated maturity date to September 27, 2026.

In October 2024, we amended our master repurchase and securities contract with Wells Fargo, or the Wells Fargo Master Repurchase Agreement.

The amendment to the Wells Fargo Master Repurchase Agreement made certain changes to the agreement and related fee letter, including extending the stated maturity date to March 11, 2026.

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

Three Months Ended September 30, 2024 Compared to Three Months Ended June 30, 2024:

Three Months Ended

June 30, 2024 March 31, 2024 Change % Change

September 30, 2024 June 30, 2024 Change % Change

INCOME FROM INVESTMENTS:

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Interest and related income .

The increase in interest and related income was primarily the result of a prepayment premium received during the three months ended June 30, 2024, partially offset by a lower average outstanding principal balance for our loan investment portfolio.

The weighted average aggregate principal balance of our loan investments was approximately $601,000 for the three months ended June 30, 2024 as compared to approximately $613,000 for the three months ended March 31, 2024.

The decrease in interest and related income was primarily the result of a lower average outstanding principal balance for our loan investment portfolio as a result of loan repayments and a prepayment premium received during the three months ended June 30, 2024.

The weighted average aggregate principal balance of our loan investments was approximately $581,000 for the three months ended September 30, 2024 as compared to approximately $601,000 for the three months ended June 30, 2024.

Purchase discount accretion.

The decrease in purchase discount accretion was primarily due to accelerated accretion related to a loan prepayment during the three months ended March 31, 2024 and lower amounts outstanding on loans acquired in the Merger during the three months ended June 30, 2024 as compared to the three months ended March 31, 2024.

The decrease in purchase discount accretion was primarily due to the purchase discount recorded as part of the Merger becoming fully accreted during the three months ended September 30, 2024.

Interest and related expenses.

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 June 30, 2024.

The weighted average principal balance was approximately $422,000 for the three months ended June 30, 2024 as compared to approximately $439,000 for the three months ended March 31, 2024.

The decrease in interest and related expenses was primarily the result of lower outstanding principal balances under our Secured Financing Facilities as a result of loan repayments during the three months ended September 30, 2024.

The weighted average principal balance was approximately $393,000 for the three months ended September 30, 2024 as compared to approximately $422,000 for the three months ended June 30, 2024.

Revenue from real estate owned.

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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, for the three months ended June 30, 2024 as compared to the three months ended March 31, 2024.

The increase in management incentive fees was due to higher "core earnings," as defined in our management agreement, for the three months ended September 30, 2024 as compared to the three months ended June 30, 2024.

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, 2024 as compared to the three months ended March 31, 2024.

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, 2024.

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 to our estimate of costs for the usage of shared services from RMR during the three months ended September 30, 2024.

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, 2024 was primarily attributable to declining values for CRE and unfavorable CRE pricing forecasts used in our CECL model and increased provisions for certain of our office loans.

The increase in the allowance for credit losses during the three months ended September 30, 2024 was primarily attributable to declining values for CRE and unfavorable CRE pricing forecasts used in our CECL model and increased provisions for our office loans.

Expenses from real estate owned.

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

The decrease in expenses from real estate owned was primarily due to a decrease in depreciation expense.

The increase in expenses from real estate owned was primarily due to increases in maintenance expenses.

Income tax expense.

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

Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023:

Six Months Ended June 30,

Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023:

Nine Months Ended September 30,

2024 2023 Change % Change

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Reimbursement of shared services expenses 2,017 1,913 104 5.4 %

Provision for credit losses 2,012 39 1,973 n/m

Provision for (reversal of) credit losses 3,530 (1,299) 4,829 (371.7 %)

Expenses from real estate owned 1,878 734 1,144 155.9 %

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Interest and related income .

The increase in interest and related income was primarily the result of higher benchmark interest rates during the six months ended June 30, 2024, partially offset by lower outstanding principal balances under our loan investment portfolio.

The weighted average benchmark interest rate was 5.38% as of June 30, 2024 as compared to 5.21% as of June 30, 2023.

The weighted average principal balance was approximately $607,000 for the six months ended June 30, 2024 as compared to approximately $641,000 for the six months ended June 30, 2023.

The decrease in interest and related income was primarily the result of lower outstanding principal balances under our loan investment portfolio.

The weighted average principal balance was approximately $598,000 for the nine months ended September 30, 2024 as compared to approximately $646,000 for the nine months ended September 30, 2023.

Purchase discount accretion.

The decrease in purchase discount accretion was primarily the result of lower amounts outstanding on loans acquired in the Merger during the six months ended June 30, 2024 as compared to the six months ended June 30, 2023.

The decrease in purchase discount accretion was primarily due to the purchase discount recorded as part of the Merger becoming fully accreted during the nine months ended September 30, 2024.

Interest and related expenses.

The increase in interest and related expenses was primarily the result of higher benchmark interest rates, partially offset by lower outstanding principal balances under our Secured Financing Facilities during the six months ended June 30, 2024.

The weighted average benchmark interest rate was 5.32% as of June 30, 2024 as compared to 5.15% as of June 30, 2023.

The weighted average principal balance was approximately $431,000 for the six months ended June 30, 2024 as compared to approximately $440,000 for the six months ended June 30, 2023.

The increase in interest and related expenses was primarily the result of higher benchmark interest rates and higher spreads on advances under our Secured Financing Facilities, partially offset by lower outstanding principal balances under our Secured Financing Facilities during the nine months ended September 30, 2024.

The weighted average principal balance was approximately $418,000 for the nine months ended September 30, 2024 as compared to approximately $447,000 for the nine months ended September 30, 2023.

Revenue from real estate owned.

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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, for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023.

The increase in management incentive fees was due to higher "core earnings," as defined in our management agreement, for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 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 six months ended June 30, 2024 as compared to the six months ended June 30, 2023.

The increase in general and administrative expenses was primarily due to an increase in share based compensation, partially offset by decreases in professional fees during the nine months ended September 30, 2024 as compared to the nine months ended September 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 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, 2024 was primarily attributable to declining values for CRE and unfavorable CRE pricing forecasts used in our CECL model and increased provisions for certain of our office loans.

The increase in reimbursement of shared services expenses was primarily the result of higher usage of shared services from RMR during the nine months ended September 30, 2024.

Provision for (reversal of) credit losses.

The provision for (reversal of) 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 nine months ended September 30, 2024 was primarily attributable to declining values for CRE and unfavorable CRE pricing forecasts used in our CECL model and increased provisions for our office loans.

Expenses from real estate owned.

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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 Six Months Ended

June 30, 2024 March 31, 2024 June 30, 2024 June 30, 2023

Three Months Ended Nine Months Ended

September 30, 2024 June 30, 2024 September 30, 2024 September 30, 2023

Net income $ 3,479 $ 4,229 $ 12,941 $ 19,920

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

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Cash and cash equivalents at end of period $ 82,197 $ 60,530

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 was primarily due to decreased loan repayments in the 2024 period.

The decrease in cash used in financing activities was primarily due to lower proceeds from our Secured Financing Facilities in the 2024 period.

The increase in cash provided by operating activities for the 2024 period compared to the 2023 period was primarily the result of increased interest income earned on cash balances invested and a prepayment premium received in the 2024 period.

The increase in cash provided by investing activities was primarily due to increased loan repayments and decreased loan originations in the 2024 period.

The decrease in cash used in financing activities was primarily due to increased repayments and lower proceeds from our Secured Financing Facilities in the 2024 period.

Distributions

During the six months ended June 30, 2024, we declared and paid regular quarterly distributions to our common shareholders totaling $10,366, or $0.35 per common share, using cash on hand.

On July 11, 2024, we declared a regular quarterly distribution of $0.35 per common share, or $5,190, to shareholders of record on July 22, 2024.

We expect to pay this distribution to our common shareholders on or about August 15, 2024 using cash on hand.

During the nine months ended September 30, 2024, we declared and paid regular quarterly distributions to our common shareholders totaling $15,556, or $1.05 per common share, using cash on hand.

On October 16, 2024, we declared a regular quarterly distribution of $0.35 per common share, or $5,216, to shareholders of record on October 28, 2024.

We expect to pay this distribution to our common shareholders on or about November 14, 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 June 30, 2024 were as follows:

Our contractual obligations and commitments as of September 30, 2024 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, 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.

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

Our principal debt obligations as of September 30, 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.

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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 June 30, 2024, we had a $331,222 aggregate outstanding principal balance under our Master Repurchase Facilities.

As of September 30, 2024, we had a $273,479 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, 2024, we had a $87,767 aggregate outstanding principal balance under the BMO Facility.

As of June 30, 2024, we were in compliance with all covenants and other terms under our Secured Financing Facilities.

As of September 30, 2024, we had a $103,855 aggregate outstanding principal balance under the BMO Facility.

As of September 30, 2024, we were in compliance with all covenants and other terms under our Secured Financing Facilities.

Related Person Transactions

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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