What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-02-18 compared with 2024-02-20 · 115 added, 114 removed, 332 unchanged (41% 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 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.

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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, 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 2023, many CRE debt providers were less willing, or able, to extend credit to borrowers.

Limited transaction activity due to interest rate volatility made it difficult for lenders to value and underwrite transactions.

Companies that did extend credit did so at lower leverage levels, often at higher credit spreads, and with repeat or proven borrowers.

Although concerns about capital adequacy and liquidity in the banking sector have waned following the failure of certain banks in March 2023, regional banks have generally not opted to increase CRE exposure.

Banks that are actively lending are generally doing so to existing well capitalized clients.

Securitized lenders were the most affected during last year’s interest rate volatility.

Floating rate and fixed rate CMBS lenders continue to be negatively impacted by a volatile interest rate environment.

Lower CRE CLO, and CMBS issuance in 2023 has created pent up demand for newly originated CRE loans in the secondary market heading into 2024.

In December 2023, the FOMC chose to maintain the federal funds target rate in the 5.25% to 5.50% range, citing a slowdown in economic activity and easing inflation.

Treasuries also rallied in the fourth quarter and the yield on the 10-Year U.S.

Treasury dropped by over 100bps.

CRE investors seem cautiously optimistic that inflation has peaked, and that lower interest rate volatility will lead to more transaction volume in 2024.

Despite the optimism, challenges persist for the CRE industry.

Although the FOMC has paused rate increases, CRE investors and lenders may now need to adapt to a sustained higher interest rate environment.

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

This could be particularly problematic in the office sector where values appear to have decreased more substantially than other property types in part due to lower utilization rates.

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

Significant capital remains available for investment in CRE assets.

While office remains out of favor for many lenders and borrowers, opportunities remain in favored property types, such as multifamily, industrial, grocery-anchored retail and hotels.

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

economy was likely headed for a “soft-landing” and the FOMC was poised to reduce the federal funds rate by 125 to 150 basis points by year end.

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 first half of 2024.

In September 2024, citing progress toward its 2% inflation target, the FOMC lowered the targeted federal funds rate by 50 basis points, providing CRE owners initial relief from high borrowing costs and reduced uncertainty regarding the timing and magnitude of future rate cuts.

The FOMC then followed with two additional 25 basis point reductions by year end.

Although the 100-basis point reduction fell short of expectations, the reduction in overall borrowing costs helped spur CRE refinancing activity through the fourth quarter of 2024, and we believe there is a renewed appetite amongst most lenders to increase CRE loan origination volume in 2025.

The CMBS financing market was a key provider of debt liquidity to the CRE industry in 2024.

Increasing demand from bond investors has translated into tighter credit spreads, particularly for 5-year loans which have become more popular among borrowers anticipating further interest rate reductions at the longer end of the yield curve.

Life insurance companies continue to expand their product offerings, providing 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, particularly smaller regional banks, continues to be impacted by increased regulations and capital charges related to legacy CRE and construction loan portfolios.

However, larger banks have continued to work through these challenges and have found ways to begin to increase CRE exposure, including on a direct basis and through warehouse lines of credit to debt funds and mortgage REITs, like us.

Agency lenders, such as Fannie-Mae and Freddie-Mac, continue to provide liquidity to the multifamily market.

Volatility in long-term interest rates, however, has resulted in increased competition for multifamily loans from CMBS/conduit providers, life-insurance companies and alternative lenders.

Despite an increase in delinquencies on loans financed by the CRE-CLO market in 2024, concerns about collateral and loan performance have waned.

CLO bond investors continue to demonstrate an appetite for these bonds which has resulted in increased competition for new, quality multifamily loans to package and sell, driving down spreads and borrowers’ interest expense.

In addition to lower interest rates and increased liquidity from CRE debt providers, property fundamentals continue to stabilize as supply/demand imbalances across most property sectors continue to normalize.

office market continues to navigate the impact of the post COVID-19 Pandemic remote workplace dynamics, and corporations are increasingly requiring return-to-office mandates.

Additionally, fewer construction starts should improve the supply/demand imbalance in the office market.

Retail assets, particularly needs based and grocery anchored retail, have benefited from a strong consumer market and a healthy job market.

New supply in the industrial sector resulted in downward pressure on rent growth during 2024, but fewer new construction starts, strong consumer demand and onshoring of manufacturing is expected to bring equilibrium to the sector by the end of 2025.

As for the multifamily market, the lack of affordable housing in the United States and the rent versus own dynamic continue to favor the sector.

While there has been oversupply in certain markets and a subsequent decline in rents, it is expected that for most markets, the supply/demand imbalance will be short lived, and once equilibrium is reached, rent-growth will return.

Interest rate cuts in the latter half of 2024 have resulted in CRE investors again being cautiously optimistic heading into 2025.

Over $2 trillion in CRE debt is expected 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 we expect will translate into more lending activity.

Looking forward, it is unclear how geopolitical uncertainty, and the new presidential administration, may impact the commercial real estate sector, but we believe that the CRE lending market remains well positioned for 2025.

Changes in Interest Rates.

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

As of December 31, 2023, SOFR was 5.35%, which exceed 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 December 31, 2024, SOFR was 4.33%, and as a result, one of our loan investments had an active interest rate floor.

Size of Portfolio .

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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.

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 U.S.

generally accepted accounting principles, or 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.

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.

generally accepted accounting principles, or 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 TRMT then held for investment and that we acquired as a result of the Merger over the consideration we paid in the Merger and our allowance for credit losses for our loan portfolio and unfunded loan commitments.

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

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

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

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

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 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:

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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.

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.

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 loan.

Adjusted Book Value per Common Share

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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 December 31, 2023 and 2022, the unaccreted purchase discount was $2,347 and $6,703, 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 December 31, 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 December 31, 2023, our allowance for credit losses for our loan portfolio and unfunded loan commitments was $5,828.

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 Note 2 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

As of December 31, 2024 and 2023, our allowance for credit losses for our loan portfolio and unfunded loan commitments was $8,908 and $5,828, respectively.

For further information on our adoption of our allowance for credit losses, see Note 2 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

Our Loan Portfolio

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1 Olmsted Falls, OH Multifamily 01/28/2021 $ 54,575 $ 52,050 S + 4.00% S + 4.30% 01/28/2026 63 % 3

2 Dallas, TX Office 08/25/2021 50,000 43,510 S + 3.25% S + 3.61% 08/25/2026 72 % 4

2 Passaic, NJ Industrial 09/08/2022 47,000 43,808 S + 3.85% S + 4.22% 09/08/2027 69 % 3

3 Dallas, TX Office 08/25/2021 46,811 43,511 S + 3.25% S + 3.27% 08/25/2026 72 % 4

4 Boston, MA Hotel 12/16/2024 45,000 39,800 S + 3.95% S + 4.39% 12/16/2029 49 % 3

5 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 + 3.96% 11/11/2026 67 % 2

6 Starkville, MS Multifamily 03/22/2022 37,250 36,919 S + 4.00% S + 4.32% 03/22/2027 70 % 3

6 Oxford, MS Multifamily 11/26/2024 42,000 42,000 S + 2.95% S + 3.35% 11/26/2029 75 % 2

7 Farmington Hills, MI Multifamily 05/24/2022 30,520 29,443 S + 3.15% S + 3.52% 05/24/2027 75 % 3

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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 25,185 S + 3.30% S + 4.03% 06/10/2027 60 % 3

10 Fountain Inn, SC Industrial 07/13/2023 27,500 24,300 S + 4.25% S + 4.85% 07/13/2026 76 % 2

11 Plano, TX Office 07/01/2021 27,385 26,569 S + 3.75% S + 3.76% 07/01/2026 78 % 4

12 Las Vegas, NV Multifamily 06/10/2022 25,992 25,448 S + 3.30% S + 4.07% 06/10/2027 60 % 3

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

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15 Fontana, CA Industrial 11/18/2022 24,355 22,000 S + 3.75% S + 4.09% 11/18/2026 72 % 3

16 Los Angeles, CA Industrial 06/28/2024 23,800 21,940 S + 3.40% S + 3.83% 06/28/2029 58 % 3

17 Downers Grove, IL Office 12/09/2021 23,530 23,530 S + 4.25% S + 4.54% 12/09/2026 72 % 3

18 Bellevue, WA Office 11/05/2021 21,000 20,000 S + 3.85% S + 4.01% 11/05/2026 68 % 4

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

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

20 Delray Beach, FL Retail 03/18/2022 16,700 15,602 S + 4.25% S + 4.95% 03/18/2026 56 % 3

19 Newport News, VA Multifamily 04/25/2024 17,757 14,759 S + 3.15% S + 3.87% 04/25/2029 71 % 3

20 Sandy Springs, GA Retail 09/23/2021 16,488 15,286 S + 3.75% S + 4.05% 09/23/2026 72 % 2

22 Westminster, CO Office 05/25/2021 15,750 15,750 S + 3.75% S + 4.30% 05/25/2026 66 % 2

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

24 Allentown, PA Industrial 01/24/2020 8,952 8,952 S + 3.50% S + 3.93% 01/24/2025 67 % 3

21 Lake Mary, FL Hotel 09/06/2024 16,000 16,000 S + 4.00% S + 4.41% 09/06/2029 68 % 3

Total/weighted average $ 641,213 $ 610,811 S + 3.72% S + 4.10% 67 % 3.1

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As of December 31, 2024, we had $641,213 in aggregate loan commitments, consisting of a diverse portfolio, geographically and by property type, of 21 first mortgage loans.

As of December 31, 2023, we had three loans representing approximately 14% of the amortized cost of our loan portfolio with a loan risk rating of “4” or “higher risk”.

As of December 31, 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”.

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 December 31, 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 December 31, 2024, this loan had an amortized cost of $26,635 and a risk rating of 4.

In November 2024, we amended the agreement governing our loan secured by an office property in Carlsbad, CA.

As part of this amendment, the borrower was required to contribute $1,100 to cash reserves and the maturity date was extended by two years to October 27, 2026.

As of December 31, 2024, this loan had an amortized cost of $24,412 and a risk rating of 4.

In November 2024, we amended the agreement governing our loan secured by an office property in Bellevue, WA.

As part of this amendment, the maturity date was extended by 90 days to February 5, 2025.

Subsequently, in January 2025, the maturity date was extended by 60 days to April 7, 2025.

As of December 31, 2024, this loan had an amortized cost of $19,997 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.

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 Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

As of December 31, 2024 and February 13, 2025, 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 December 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.

Therefore, certain of our borrowers’ business plans will likely take longer to execute than initially expected, and 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.

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.

Some of the factors that have impacted us and could continue to impact us are outlined in Part I, Item 1A, "Risk Factors" of this Annual Report on Form 10-K.

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Our secured financing agreements at December 31, 2024 consisted of agreements that govern our Wells Fargo Master Repurchase Facility, our Citibank Master Repurchase Facility, our BMO Facility and our UBS Master Repurchase Facility.

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.

In September 2024, we amended our Citibank Master Repurchase Agreement.

The amendment to the 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 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.

In December 2024, we amended the fee letter to our UBS Master Repurchase Agreement to extend the stated maturity date to February 18, 2026 and increase the maximum facility size to $250,000.

For further information regarding our Secured Financing Facilities, see Note 5 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

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

Citibank Master Repurchase Facility 03/15/2025 $ 91,115 $ 123,885 $ 215,000 $ 142,465

UBS Master Repurchase Facility 02/18/2026 $ 181,989 $ 68,011 $ 250,000 $ 267,084

Citibank Master Repurchase Facility 09/27/2026 93,314 121,686 215,000 145,520

BMO Facility Various 103,855 46,145 150,000 145,234

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Income from loan investments, net 32,993 36,947 (3,954) (10.7) %

Revenue from real estate owned 1,288 — 1,288 n/m

Revenue from real estate owned 2,281 1,288 993 77.1 %

Total revenue 35,274 38,235 (2,961) (7.7) %

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Base management fees 4,329 4,303 26 0.6 %

Incentive fees 968 — 968 n/m

Incentive fees 974 968 6 0.6 %

General and administrative expenses 3,902 3,947 (45) (1.1 %)

Reimbursement of shared services expenses 2,647 2,596 51 2.0 %

Reversal of credit losses (799) — (799) n/m

Expenses from real estate owned 1,293 — 1,293 n/m

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

Provision for (reversal of) credit losses 3,080 (799) 3,879 485.5 %

Expenses from real estate owned 2,489 1,293 1,196 92.5 %

Total other expenses 17,421 12,308 5,113 41.5 %

Income before income taxes 17,853 25,927 (8,074) (31.1 %)

Income tax benefit (expense) 38 (113) 151 (133.6 %)

Income tax (expense) benefit (33) 38 (71) (186.8 %)

Net income 17,820 25,965 (8,145) (31.4 %)

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Net income per common share - basic and diluted $ 1.20 $ 1.76 $ (0.56) (31.8 %)

n/m - not meaningful

Interest and related income .

The increase in interest and related income was primarily the result of higher benchmark interest rates during the year ended December 31, 2023.

The weighted average benchmark rate was 5.41% as of December 31, 2023 as compared to 4.29% as of December 31, 2022.

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

The weighted average principal balance was approximately $603,000 for the year ended December 31, 2024 compared to approximately $646,000 for the year 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 year ended December 31, 2023 as compared to the year ended December 31, 2022.

The decrease in purchase discount accretion was due to the purchase discount recorded as part of the Merger becoming fully accreted during the year ended December 31, 2024.

Interest and related expenses.

The increase in interest and related expenses was primarily the result of higher benchmark interest rates during the year ended December 31, 2023.

The weighted average benchmark rate was 5.36% as of December 31, 2023 as compared to 4.33% as of December 31, 2022.

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

The weighted average principal balance was approximately $411,000 for the year ended December 31, 2024 compared to approximately $447,000 for the year ended December 31, 2023.

Revenue from real estate owned.

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

Incentive fees.

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, during the year ended December 31, 2023.

Base management and incentive fees.

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

The increase in base management and incentive fees was due to higher “core earnings”, as defined in our management agreement, during the year ended December 31, 2024.

General and administrative expenses .

The increase in general and administrative expenses was primarily due to an increase in share based compensation during the year ended December 31, 2023.

The decrease in general and administrative expenses was primarily due to a decrease in professional fees during the year ended December 31, 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.

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 as compared to our initial allowance upon adoption of ASU 2016-02 on January 1, 2023.

The decrease in the allowance for credit losses during the year ended December 31, 2023 was primarily attributable to 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, partially offset by unfavorable changes in the current macroeconomic outlook, most notably in CRE pricing forecasts.

The increase in reimbursement of shared services expenses was primarily the result of higher usage of shared services from RMR during the year ended December 31, 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 year ended December 31, 2024 was primarily attributable to declining values for CRE and unfavorable CRE pricing forecasts used in our current expected credit loss, or CECL, model and increased provisions for certain of 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.

Other transaction related costs.

Other transaction related costs for the year ended December 31, 2022 include expenses related to the Merger.

Income tax benefit (expense).

Income tax benefit for the year ended December 31, 2023 is a result of income taxes refunded or refundable to us in certain jurisdictions where we are subject to state income taxes.

Income tax (expense) benefit.

Income tax expense for the year ended December 31, 2024 is a result of income taxes paid or payable by us in certain jurisdictions where we are subject to state income taxes.

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

Reconciliation of Net Income to Distributable Earnings and Adjusted Distributable Earnings

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

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:

Year Ended December 31,

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Non-cash accretion of purchase discount (2,347) (4,128)

Reversal of credit losses

Provision for (reversal of) credit losses 3,080 (799)

Depreciation and amortization of real estate owned 1,248 594

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Distributable Earnings $ 21,284 $ 22,901

Other transaction related costs (2)

Adjusted Distributable Earnings $ 22,901 $ 18,110

Weighted average common shares outstanding - basic and diluted 14,712 14,625

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Distributable Earnings per common share - basic and diluted $ 1.45 $ 1.57

Adjusted Distributable Earnings per common share - basic and diluted $ 1.57 $ 1.25

(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.

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

(2) Other transaction related costs include expenses related to the Merger.

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

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For further information regarding the risks associated with our loan portfolio, see Note 3 to our Consolidated Financial Statements included in Part IV, Item 15 and Part I, Item 1A, "Risk Factors" of this Annual Report on Form 10-K.

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

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 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 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.

Upon the repurchase of a purchased asset, we are required to pay UBS, Citibank or Wells Fargo, as applicable, the outstanding purchase price of the purchased asset, accrued interest and all accrued and unpaid expenses of UBS, Citibank or Wells Fargo, as applicable, relating to such purchased asset.

Upon the repurchase of a purchased asset, we are required to pay Citibank, UBS or Wells Fargo, as applicable, the outstanding purchase price of the purchased asset, accrued interest and all accrued and unpaid expenses of Citibank, UBS or Wells Fargo, as applicable, relating to such purchased asset.

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 has the discretion to make advancements at margins 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.

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$ 70,750 $ 87,855

The increase in cash provided by operating activities for 2023 compared to 2022 was primarily the result of higher benchmark interest rates during 2023 and our origination activities in 2022 and 2023.

The increase in cash provided by investing activities is primarily due to lower origination activity and higher loan repayments in 2023.

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

The decrease in cash provided by operating activities for 2024 compared to 2023 was primarily the result of lower net interest income earned on loan investments due to lower amounts invested, partially offset by favorable changes in working capital, higher interest income earned on cash balances invested and increased cash earned from our real estate owned.

The decrease in cash provided by investing activities was primarily due to increased fundings for our existing loan portfolio as borrowers carry out their business plans and decreased loan repayments in 2024 compared to 2023.

The increase in cash used in financing activities was primarily due to lower proceeds from our Secured Financing Facilities in 2024 compared to 2023.

Distributions

During the year ended December 31, 2024, we declared and paid distributions totaling $20,772, or $1.40 per common share, using cash on hand.

On January 11, 2024, we declared a regular quarterly distribution of $0.35 per common share, or $5,184, to shareholders of record on January 22, 2024, and we paid this distribution on February 15, 2024 using cash on hand.

On January 16, 2025, we declared a regular quarterly distribution of $0.35 per common share, or $5,216, to shareholders of record on January 27, 2025.

We expect to pay this distribution on February 20, 2025 using cash on hand.

For further information regarding distributions, see Note 7 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

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GAAP also requires that the excess of contractual cash flows over cash flows expected to be collected (non-accretable difference) not be recognized as an adjustment of yield, loss accrual or valuation allowance.

Subsequent increases in cash flows expected to be collected from such loans generally will be recognized

prospectively through adjustment of the loan’s yield over its remaining life.

Subsequent increases in cash flows expected to be collected from such loans generally will be recognized prospectively through adjustment of the loan’s yield over its remaining life.

Decreases in cash flows expected to be collected will be recorded through our provision for credit losses.

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Measurement of Credit Losses on Financial Instruments , which replaces the “incurred loss” model for recognizing credit losses with a forward-looking “expected loss” model that generally will result in the earlier recognition of credit losses.

The measurement of current expected credit losses, or CECL, is based upon historical experience, current conditions, and reasonable and supportable forecasts incorporating forward-looking information that affect the collectability of the reported amount.

2016-13 is applicable to financial assets measured at amortized cost and off-balance sheet credit exposures, such as unfunded loan commitments.

The allowance for credit losses required under ASU No.

2016-13 is a valuation account that is deducted from the related loans’ amortized cost basis in our consolidated balance sheets.

We measure our allowance for credit losses using the CECL model, which is based upon historical experience, current conditions, and reasonable and supportable forecasts incorporating forward-looking information that affect the collectability of the reported amount.

The allowance for credit losses is a valuation account that is deducted from the related loans’ amortized cost basis in our consolidated balance sheets.

Our loans typically include commitments to fund incremental proceeds to borrowers over the life of the loan;

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Given the lack of historical loss data related to our loan portfolio, we estimate our expected losses using an analytical model that considers the likelihood of default and loss given default for each individual loan.

This analytical model incorporates data from a third party database with historical loan loss information for commercial mortgage-backed securities, or CMBS, and commercial real estate, or CRE, loans since 1998.

We estimate the allowance for credit losses for our loan portfolio, including unfunded loan commitments, at the individual loan level.

Significant inputs to the model include certain loan specific data, such as loan to value, or LTV, property type, geographic location, occupancy, vintage year, remaining loan term, net operating income, expected timing and amounts of future loan fundings, and macroeconomic forecast assumptions, including the performance of CRE assets, unemployment rates, interest rates and other factors.

We utilize the model to estimate credit losses over a reasonable and supportable economic forecast period, followed by a straight-line reversion period to average historical losses.

This analytical model incorporates data from a third party database with historical loan loss information for commercial mortgage-backed securities, or CMBS, and CRE loans since 1998.

Significant inputs to the model include certain loan specific data, such as LTV, property type, geographic location, occupancy, vintage year, remaining loan term, net operating income, expected timing and amounts of future loan fundings, and macroeconomic forecast assumptions, including the performance of CRE assets, unemployment rates, interest rates and other factors.

We utilize the model to estimate credit losses over a reasonable and supportable economic forecast period of 12 months, followed by a straight-line reversion period of six months to average historical losses.

Average historical losses are established using a population of third party historical loss data that approximates our portfolio as of the measurement date.

We evaluate the estimated allowance for each of our loans individually and we consider our internal loan risk rating as the primary credit quality indicator underlying our assessment.

If a loan is determined to be collateral dependent (because the repayment of the loan is expected to be provided substantially through the operation or sale of the underlying collateral property) and the borrower is experiencing financial difficulties, but foreclosure is not probable, we may elect to apply a practical expedient to determine the loan's allowance for credit losses by comparing the collateral's fair value, less costs to sell, if applicable, to the amortized cost basis of the loan.

We have elected to exclude accrued interest receivable from amortized cost and not to measure an allowance for credit losses on accrued interest receivable.

Accrued interest receivables are generally written off when payments are 120 days past due.

Such amounts are reversed against interest income and no further interest will be recorded until it is collected.

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

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Real Estate Owned.

Upon acquisition, real estate owned is recognized at the lesser of the fair value of the property and the amortized cost of the loan secured by the property at the time of acquisition.

Upon acquisition, real estate owned is recognized at the fair value of the property at the time of acquisition.

We allocate the purchase price to land, building and improvements and intangibles based on determinations of the relative fair values of these assets assuming the properties are vacant.

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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-K

Item 7. Management’s Discussion and Analysis