Seven Hills Realty Trust 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with our condensed consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q and in our 2024 Annual Report. OVERVIEW (dollars in thousands, except share data) We are a Maryland REIT. 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. Tremont is registered with the Securities and Exchange Commission, or SEC, as an investment adviser under the Investment Advisers Act of 1940, as amended. We believe that Tremont provides us with significant experience and expertise in investing in middle market transitional CRE. We operate our business in a manner that is consistent with our qualification for taxation as a REIT under the IRC. As such, we generally are not subject to U.S. federal income tax, provided that we meet certain distribution and other requirements. We also operate our business in a manner that permits us to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or the 1940 Act. Factors Affecting Operating Results 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 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 2024 Annual Report. Credit Risk . We are subject to the credit risk of our borrowers in connection with our investments. We seek to mitigate this risk by utilizing a comprehensive underwriting, diligence and investment selection process and by ongoing monitoring of our investments. Nevertheless, unanticipated credit losses could occur that may adversely impact our operating results. Changes in Fair Value of our Assets . We generally intend to hold our investments for their contractual terms, unless repaid earlier by the borrowers. We evaluate the credit quality of each of our loans at least quarterly. 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 record an allowance for credit losses by comparing the collateral's fair value to the amortized cost basis of the loan. For collateral-dependent loans for which foreclosure is probable, the related allowance for credit losses is determined using the fair value of the collateral compared to the loan's amortized cost. Availability of Leverage and Equity . We use leverage to make additional investments that may increase our returns. We may not be able to obtain the expected amount of leverage we desire or its cost may exceed our expectation and, consequently, the returns generated from our investments may be reduced. Our ability to further grow our loan portfolio over time will depend, to a significant degree, upon our ability to obtain additional capital. However, our access to additional capital depends on many factors including the price at which our common shares trade relative to their book value and market lending conditions. See "—Market Conditions" below. Market Conditions. CRE investors entered 2025 with cautious optimism. By the end of 2024, citing progress towards attaining its 2% inflation target, the Federal Open Market Committee, or FOMC, lowered the targeted federal funds rate by a combined 100 basis points, providing borrowers relief from a sustained period of elevated borrowing costs. Despite falling short of many borrowers’ expectations, the FOMC’s initial reduction gave borrowers a level of certainty and conviction around buy, sell or refinance decisions, and debt liquidity continued to return to the market. 14 Tab le of Contents Despite increasing delinquency rates within certain segments of the market, in particular for recent vintage multifamily loans, property fundamentals overall have continued to improve. Supply and demand imbalances, specifically for multifamily and industrial properties, have been showing signs of leveling off with property values trending upwards. Strong investor demand for CMBS and CRE collateralized loan obligations, or CLO, bonds and fresh allocations from life insurance companies and agency lenders such as Fannie-Mae and Freddie-Mac helped to drive credit spreads and borrowing costs downward, increasing financing activity for much of the quarter. The cautious optimism that was common in the markets earlier in the year has now begun to wane as investors direct their attention to the administration’s new trade policies and recent tariff announcements. Although we believe markets had already priced in a baseline level of tariffs, the ultimate scope and magnitude of the announced rates were unexpected, creating new uncertainty and capital markets volatility. The FOMC’s dual mandate to ensure price stability and to maximize employment is again in focus. An increased risk of an economic recession may lead to job losses and the FOMC may need to consider lowering the target federal funds rate, a potentially welcome outcome for leveraged property owners. Alternatively, widespread tariffs, if prolonged, may contribute to greater inflation, which could cause the FOMC to consider maintaining or even increasing rates to slow potential, long-term inflationary pressures. With close to $2 trillion in CRE debt scheduled to mature over the next two years, property owners may face difficult decisions if market volatility persists. At the beginning of the year, borrowers believed they had a clear view on the path of short-term rates while 5 and 10-year U.S. Treasury yields remained somewhat elevated. Today, it is much less clear what the FOMC’s intentions are going forward and what the outlook is for short-term interest rates in the current economic climate. As for longer term interest rates, the 5 and 10-year U.S. Treasury yields continue to be elevated and quite volatile, making it difficult for borrowers that must refinance maturing loans to lock in long-term fixed rates in this environment. Despite the fact that many uncertainties exist today, we continue to believe that the CRE debt markets, property owners and lenders are well positioned to handle these uncertain times and conditions as we move deeper into 2025. Changes in Interest Rates. With respect to our business operations, increases in interest rates, in general, may cause: (a) the coupon rates on our variable rate investments to reset, perhaps on a delayed basis, to higher rates; (b) it to become more difficult and costly for our borrowers, which may negatively impact their ability to repay our investments; and (c) the interest expense associated with our variable rate borrowings to increase. Conversely, decreases in interest rates, in general, may cause: (a) the coupon rates on our variable rate investments to reset, perhaps on a delayed basis, to lower rates; (b) it to become easier and more affordable for our borrowers to refinance, and as a result, repay our loans, but may negatively impact our future returns if any such repayment proceeds were to be reinvested in lower yielding investments; and (c) the interest expense associated with our variable rate borrowings to decrease. The interest income on our loans and interest expense on our borrowings float with benchmark rates, such as SOFR. Because we generally intend to leverage approximately 75% of the amount of our investments, as benchmark rates increase above the floors of our loans, our income from investments, net of interest and related expenses, will increase. Decreases in benchmark rates are mitigated by interest rate floor provisions in all but one of our loan agreements with borrowers, ranging from 0.10% to 5.20%; therefore, changes to income from investments, net, may not move proportionately with the increase or decrease in benchmark rates. As of March 31, 2025, SOFR was 4.32%, and as a result, one of our loan investments had an active interest rate floor. Size of Portfolio . The size of our loan portfolio, as measured both by the aggregate principal balance and the number of our CRE loans and our other investments, is also an important factor in determining our operating results. Generally, if the size of our loan portfolio grows, the amount of interest income we receive would increase and we may achieve certain economies of scale and diversify risk within our loan portfolio. A larger portfolio, however, may result in increased expenses; for example, we may incur additional interest expense or other costs to finance our investments. Also, if the aggregate principal balance of our loan portfolio grows but the number of our loans or the number of our borrowers does not grow, we could face increased risk by reason of the concentration of our investments. 15 Tab le of Contents Prepayment Risk. We are subject to risk that our loan investments will be repaid at an earlier date than anticipated, which may reduce the returns realized on those loans as less interest income may be received over time. Additionally, we may not be able to reinvest the principal repaid timely and/or at a similar or higher yield of the original loan investment. We seek to limit this risk by structuring our loan agreements with fees required to be paid to us upon prepayment of a loan within a specified period of time before the loan’s maturity; however, unanticipated prepayments could negatively impact our operating results. Our Loan Portfolio The table below details overall statistics for our loan portfolio as of March 31, 2025 and December 31, 2024: As of March 31, 2025 As of December 31, 2024 Number of loans 23 21 Total loan commitments $ 690,913 $ 641,213 Unfunded loan commitments (1) $ 29,524 $ 30,402 Principal balance $ 661,389 $ 610,811 Carrying value $ 652,589 $ 601,842 Weighted average coupon rate 8.07 % 8.24 % Weighted average all in yield (2) 8.46 % 8.62 % Weighted average floor 2.16 % 2.12 % Weighted average maximum maturity (years) (3) 2.6 2.6 Weighted average risk rating 2.9 3.1 Weighted average LTV (4) 67 % 67 % (1) Unfunded loan commitments are primarily used to finance property improvements and leasing capital, and are generally funded over the term of the loan. (2) All in yield represents the yield on a loan, including amortization of deferred fees over the initial term of the loan and excluding any purchase discount accretion. (3) Maximum maturity assumes all borrower loan extension options have been exercised, which options are subject to the borrower meeting certain conditions. (4) LTV represents the initial loan amount divided by the underwritten in-place value of the underlying collateral at closing. 16 Tab le of Contents Loan Portfolio Details The table below details our loan portfolio as of March 31, 2025: # Location Property Type Origination Date Committed Principal Amount Principal Balance Coupon Rate All in Yield (1) Maximum Maturity (date) (2) LTV (3) Risk Rating First mortgage loans 1 Olmsted Falls, OH Multifamily 01/28/2021 $ 54,575 $ 54,575 S + 4.00% S + 4.29% 01/28/2026 63 % 2 2 Passaic, NJ Industrial 09/08/2022 47,000 44,767 S + 3.85% S + 4.28% 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 + 4.78% 03/29/2027 62 % 3 6 Oxford, MS Multifamily 11/26/2024 42,000 42,000 S + 2.95% S + 3.35% 11/26/2029 75 % 2 7 San Marcos, TX Multifamily 01/14/2025 31,200 28,005 S + 3.25% S + 3.68% 01/14/2030 62 % 3 8 Farmington Hills, MI Multifamily 05/24/2022 30,520 29,501 S + 3.15% S + 3.52% 05/24/2027 75 % 3 9 Downers Grove, IL (4) Office 09/25/2020 30,000 29,500 S + 5.00% S + 5.31% 05/23/2025 67 % 4 10 Anaheim, CA Hotel 11/29/2023 29,000 29,000 S + 4.00% S + 4.56% 11/29/2028 55 % 2 11 Fountain Inn, SC Industrial 07/13/2023 27,500 24,300 S + 4.25% S + 4.85% 07/13/2026 76 % 1 12 Plano, TX Office 07/01/2021 27,385 26,569 S + 3.75% S + 3.76% 07/01/2026 78 % 4 13 Las Vegas, NV Multifamily 06/10/2022 25,992 25,448 S + 3.30% S + 4.07% 06/10/2027 60 % 3 14 Fayetteville, GA Industrial 10/06/2023 25,250 25,250 S + 3.35% S + 3.73% 10/06/2028 55 % 3 15 Carlsbad, CA Office 10/27/2021 24,750 24,417 S + 3.25% S + 3.26% 10/27/2026 78 % 4 16 Fontana, CA Industrial 11/18/2022 24,355 22,000 S + 3.75% S + 4.09% 11/18/2026 72 % 3 17 Los Angeles, CA Industrial 06/28/2024 23,800 22,218 S + 3.40% S + 3.83% 06/28/2029 58 % 3 18 Downers Grove, IL Office 12/09/2021 23,530 23,530 S + 4.25% S + 4.54% 12/09/2026 72 % 3 19 Bellevue, WA (5) Office 11/05/2021 21,000 20,000 S + 3.85% S + 3.89% 11/05/2026 68 % 4 20 Waco, TX Multifamily 03/06/2025 18,500 18,500 S + 3.35% S + 3.75% 03/06/2030 73 % 3 21 Newport News, VA Multifamily 04/25/2024 17,757 15,012 S + 3.15% S + 3.86% 04/25/2029 71 % 3 22 Sandy Springs, GA Retail 09/23/2021 16,488 15,286 S + 3.75% S + 4.05% 09/23/2026 72 % 1 23 Lake Mary, FL Hotel 09/06/2024 16,000 16,000 S + 4.00% S + 4.41% 09/06/2029 68 % 2 Total/weighted average $ 690,913 $ 661,389 S + 3.69% S + 4.08% 67 % 2.9 (1) All in yield represents the yield on a loan, including amortization of deferred fees over the initial term of the loan and excluding any purchase discount accretion. (2) Maximum maturity assumes all borrower loan extension options have been exercised, which options are subject to the borrower meeting certain conditions. (3) LTV represents the initial loan amount divided by the underwritten in-place value of the underlying collateral at closing. (4) In April 2025, the borrower exercised a 30 day extension option which extended the maturity date of the loan to May 23, 2025. (5) In April 2025, the coupon rate was reduced from SOFR + 3.85% to SOFR + 2.85% and the maturity date was extended by three years to April 7, 2028. As of March 31, 2025, we had $690,913 in aggregate loan commitments, consisting of a diverse portfolio, geographically and by property type, of 23 first mortgage loans. As of March 31, 2025, we had five loans representing approximately 22% 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 March 31, 2025, 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 March 31, 2025, 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 March 31, 2025, this loan had an amortized cost of $24,413 and a risk rating of 4. 17 Tab le of Contents In February 2025, we amended the agreement governing our loan secured by an office property in Downers Grove, IL, which extended the term of the loan by 60 days to April 25, 2025 with an option to extend the loan for an additional 30 days. In April 2025, the borrower exercised its option to extend the loan by 30 days to May 23, 2025. As of March 31, 2025, this loan had an amortized cost of $29,642 and a risk rating of 4. In April 2025, we amended the agreement governing our loan secured by an office property in Bellevue, WA. As part of this amendment, the borrower was required to contribute $1,625 to cash reserves, the coupon rate was reduced from SOFR + 3.85% to SOFR + 2.85% and the maturity date was extended by three years to April 7, 2028. As of March 31, 2025, this loan had an amortized cost of $19,999 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 March 31, 2025 and April 24, 2025, 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, 2025. 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. For further information regarding our loan portfolio and risk rating policy, see Note 3 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1, "—Factors Affecting our Operating Results" and "Warning Concerning Forward-Looking Statements" elsewhere in this Quarterly Report on Form 10-Q and the risk factors identified in Part I, Item 1A, “Risk Factors”, of our 2024 Annual Report. Financing Activities The table below is an overview of our Secured Financing Facilities as of March 31, 2025: Facility Maturity Date Principal Balance Unused Capacity Maximum Facility Size Collateral Principal Balance UBS Master Repurchase Facility 02/18/2026 $ 181,989 $ 68,011 $ 250,000 $ 269,609 Citibank Master Repurchase Facility 09/27/2026 93,314 121,686 215,000 145,773 BMO Facility Various 103,855 46,145 150,000 146,471 Wells Fargo Master Repurchase Facility 03/11/2026 62,868 62,132 125,000 81,036 Total $ 442,026 $ 297,974 $ 740,000 $ 642,889 The table below details our Secured Financing Facilities activities during the three months ended March 31, 2025: Carrying Value Balance at December 31, 2024 $ 417,796 Borrowings 22,404 Deferred fees (92) Amortization of deferred fees 366 Balance at March 31, 2025 $ 440,474 As of March 31, 2025, outstanding advancements under our Secured Financing Facilities had a weighted average interest rate of 6.52% per annum, excluding associated fees and expenses. As of March 31, 2025 and April 24, 2025, we had a $442,026 aggregate outstanding principal balance under our Secured Financing Facilities. As of March 31, 2025, 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. 18 Tab le of Contents RESULTS OF OPERATIONS (amounts in thousands, except per share data) Three Months Ended March 31, 2025 Compared to Three Months Ended December 31, 2024: Three Months Ended March 31, 2025 December 31, 2024 Change % Change INCOME FROM INVESTMENTS: Interest and related income $ 14,322 $ 13,948 $ 374 2.7 % Less: interest and related expenses (7,437) (6,836) (601) 8.8 % Income from loan investments, net 6,885 7,112 (227) (3.2 %) Revenue from real estate owned 709 563 146 25.9 % Total revenue 7,594 7,675 (81) (1.1 %) OTHER EXPENSES: Base management fees 1,079 1,084 (5) (0.5 %) Incentive fees 18 68 (50) (73.5 %) General and administrative expenses 963 847 116 13.7 % Reimbursement of shared services expenses 550 630 (80) (12.7 %) Reversal of credit losses (153) (450) 297 (66.0 %) Expenses from real estate owned 594 611 (17) (2.8 %) Total other expenses 3,051 2,790 261 9.4 % Income before income taxes 4,543 4,885 (342) (7.0 %) Income tax expense (11) (6) (5) 83.3 % Net income $ 4,532 $ 4,879 $ (347) (7.1 %) Weighted average common shares outstanding - basic and diluted 14,757 14,756 1 — % Net income per common share - basic and diluted $ 0.30 $ 0.33 $ (0.03) (9.1 %) Interest and related income . The increase in interest and related income was primarily the result of greater outstanding principal balances, partially offset by a decrease in the weighted average coupon rates under our loan investment portfolio during the three months ended March 31, 2025. The weighted average principal balance was approximately $641,000 for the three months ended March 31, 2025 compared to approximately $603,000 for the three months ended December 31, 2024. The weighted average coupon rate was 8.07% as of March 31, 2025 compared to 8.24% as of December 31, 2024. Interest and related expenses. The increase in interest and related expenses was primarily the result of greater outstanding principal balances, partially offset by a decrease in the weighted average coupon rates under our Secured Financing Facilities during the three months ended March 31, 2025. The weighted average principal balance was approximately $432,000 for the three months ended March 31, 2025 compared to approximately $411,000 for the three months ended December 31, 2024. The weighted average coupon rate was 6.52% as of March 31, 2025 compared to 6.62% as of December 31, 2024. 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. The increase in revenue from real estate owned was primarily due to higher operating expense reimbursement during the three months ended March 31, 2025 as compared to the three months ended December 31, 2024. 19 Tab le of Contents Base management and incentive fees. We recognize base management and incentive fees payable to Tremont in accordance with our management agreement. The decrease in base management and incentive fees was due to lower “core earnings”, as defined in our management agreement, during the three months ended March 31, 2025 as compared to the three months ended December 31, 2024. General and administrative expenses . The increase in general and administrative expenses was primarily due to trustee stock grants during the three months ended March 31, 2025. 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 lower usage of shared services from RMR during the three months ended March 31, 2025 as compared to the three months ended December 31, 2024. 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 March 31, 2025 was primarily attributable to certain of our loans nearing maturity and improved performance at certain of the collateral properties underlying our loans, partially offset by higher total loan commitments as of March 31, 2025 as compared to December 31, 2024, including future funding of our unfunded loan commitments. 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 decreases in maintenance expenses during the three months ended March 31, 2025 as compared to the three months ended December 31, 2024. 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. Net income. The decrease in net income was due to the changes noted above. Non-GAAP Financial Measures We present Adjusted Book Value per common share, Distributable Earnings and Distributable Earnings 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 book value per common share, net income, net income per common share or cash generated from operating activities and should not be considered as alternatives to book value per common share, 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 Adjusted Book Value per common share, Distributable Earnings and Distributable Earnings per common share may not be comparable to adjusted book value per common share, distributable earnings and distributable earnings per common share as reported by other companies. Adjusted Book Value per Common Share 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 our allowance for credit losses for our loan portfolio and unfunded loan commitments. Adjusted Book Value per common share does not represent book value per common share or alternative measures determined in accordance with GAAP. Our methodology for calculating Adjusted Book Value per common share may differ from the methodologies employed by other companies to calculate the same or similar supplemental capital adequacy measures; therefore, our Adjusted Book Value per common share may not be comparable to the adjusted book value per common share reported by other companies. 20 Tab le of Contents The table below calculates our book value per common share and Adjusted Book Value per common share, which is a non-GAAP financial measure: March 31, 2025 December 31, 2024 Shareholders' equity $ 268,945 $ 269,278 Total outstanding common shares 14,907 14,903 Book value per common share 18.04 18.07 Allowance for credit losses per common share (1) 0.59 0.60 Adjusted Book Value per common share $ 18.63 $ 18.67 (1) Excludes the impact of our allowance for credit losses. As of March 31, 2025 and December 31, 2024, our allowance for credit losses for our loan portfolio and unfunded loan commitments was $8,755 and $8,908, respectively. Distributable Earnings In order to maintain our qualification for taxation as a REIT, we are generally required to distribute substantially all of our taxable income, subject to certain adjustments, to our shareholders. 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 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. We calculate Distributable Earnings and Distributable Earnings per common share as net income and net income per common share, respectively, computed in accordance with GAAP, including realized losses not otherwise included in net income determined in accordance with GAAP, and excluding: (a) depreciation and amortization of real estate owned and related intangible assets, if any; (b) non-cash equity compensation expense; (c) unrealized gains, losses and other similar non-cash items that are included in net income for the period of the calculation (regardless of whether such items are included in or deducted from net income or in other comprehensive income under GAAP), if any; and (d) one-time events pursuant to changes in GAAP and certain non-cash items, if any. Distributable Earnings are reduced for realized losses on loan investments when amounts are deemed uncollectable. 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 loan. The table below demonstrates how we calculate Distributable Earnings and Distributable Earnings per common share, which are non-GAAP financial measures, and provides a reconciliation of these non-GAAP financial measures to net income: Three Months Ended March 31, 2025 December 31, 2024 Net income $ 4,532 $ 4,879 Non-cash equity compensation expense 356 159 Reversal of credit losses (153) (450) Depreciation and amortization of real estate owned 269 279 Distributable Earnings $ 5,004 $ 4,867 Weighted average common shares outstanding - basic and diluted 14,757 14,756 Net income per common share - basic and diluted $ 0.30 $ 0.33 Distributable Earnings per common share - basic and diluted $ 0.34 $ 0.33 21 Tab le of Contents LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands, except per share data) Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to fund our lending commitments, repay or meet margin calls resulting from our borrowings, if any, fund and maintain our assets and operations, make distributions to our shareholders and fund other business operating requirements. Our sources of cash flows include cash on hand, payments of principal, interest and fees we receive on our investments, other cash we may generate from our business and operations, any unused borrowing capacity, including under our Secured Financing Facilities or other repurchase agreements or financing arrangements we may obtain, which may also include bank loans or public or private issuances of debt or equity securities, and proceeds from any sale of real estate owned. We believe that these sources of funds will be sufficient to meet our operating and capital expenses, pay our debt service obligations owed and make any distributions to our shareholders for the next 12 months and for the foreseeable future. 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 2024 Annual Report. 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 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. 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. Interest on advancements under the BMO Facility are calculated at SOFR plus a premium. Loans issued under the BMO Facility are secured by a security interest and collateral assignment of the underlying loans to our borrowers which are secured by real property underlying such loans. We are required to pay an upfront fee equal to a percentage of the aggregate amount of the facility loan, such percentage to be determined at the time of approval of the separate facility loan agreements with BMO, or the BMO Facility Loan Agreements. 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. The table below is a summary of our sources and uses of cash flows for the periods presented: Three Months Ended March 31, 2025 2024 Cash and cash equivalents at beginning of period $ 70,750 $ 87,855 Net cash provided by (used in): Operating activities 3,686 4,724 Investing activities (49,901) 39,554 Financing activities 17,102 (38,835) Cash and cash equivalents at end of period $ 41,637 $ 93,298 22 Tab le of Contents The decrease in cash provided by operating activities for the 2025 period compared to the 2024 period was primarily due to lower net interest income resulting from lower weighted average interest rates under our loan investment portfolio. The decrease in cash provided by investing activities was primarily due to increased loan originations and decreased loan repayments in the 2025 period. The increase in cash provided by financing activities was primarily due to decreased repayments on our Secured Financing Facilities and increased proceeds from our Secured Financing Facilities in the 2025 period. Distributions During the three months ended March 31, 2025, we declared and paid regular quarterly distributions to our common shareholders totaling $5,216, or $0.35 per common share, using cash on hand. On April 10, 2025, we declared a regular quarterly distribution of $0.35 per common share, or $5,217, to shareholders of record on April 22, 2025. We expect to pay this distribution to our common shareholders on or about May 15, 2025 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 March 31, 2025 were as follows: Payment Due by Period Total Less than 1 Year 1 - 3 Years 3 - 5 Years More than 5 years Unfunded loan commitments (1) $ 29,524 $ 12,353 $ 17,171 $ — $ — Principal payments on Secured Financing Facilities (2) 442,026 343,624 98,402 — — Interest payments on Secured Financing Facilities (3) 22,921 19,463 3,458 — — Lease related costs (4) 143 143 — — — $ 494,614 $ 375,583 $ 119,031 $ — $ — (1) The allocation of our unfunded loan commitments is based on the current loan maturity date to which the individual commitments relate. (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 March 31, 2025 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 real estate owned. Debt Covenants Our principal debt obligations as of March 31, 2025 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. Our Master Repurchase Agreements also provide that upon the repurchase of any then purchased asset, we are required to pay UBS, Citibank or Wells Fargo the outstanding purchase price of such purchased asset and accrued interest and any and all accrued and unpaid expenses of UBS, Citibank or Wells Fargo, as applicable, relating to such purchased asset. In connection with our Master Repurchase Agreements, we entered into our guarantees, or the Master Repurchase Guarantees, which require us to guarantee 25% of the aggregate repurchase price and 100% of losses in the event of certain bad acts, as well as any costs and expenses of UBS, Citibank and Wells Fargo, as applicable, related to our Master Repurchase Agreements. The Master Repurchase Guarantees contain financial covenants, which require us to maintain a minimum tangible net worth, a minimum liquidity and a minimum interest coverage ratio and to satisfy a total indebtedness to stockholders' equity ratio. 23 Tab le of Contents In connection with our facility loan program agreement and the security agreement with BMO, or the BMO Loan Program Agreement, we have agreed to guarantee certain of the obligations under the BMO Loan Program Agreement and the BMO Facility Loan Agreements pursuant to a limited guaranty from us to and for the benefit of the administrative agent for itself and such other lenders, or the BMO Guaranty. Specifically, the BMO Guaranty requires us to guarantee 25% of the then current outstanding principal balance of the facility loans and 100% of losses or the entire indebtedness in the event of certain bad acts as well as any costs and expenses of the administrative agent or lenders related to the BMO Loan Program Agreement. 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. 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, 2025, we had a $338,171 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 March 31, 2025, we had a $103,855 aggregate outstanding principal balance under the BMO Facility. As of March 31, 2025, we were in compliance with all covenants and other terms under our Secured Financing Facilities. Related Person Transactions We have relationships and historical and continuing transactions with Tremont, RMR, RMR Inc. and others related to them. For further information about these and other such relationships and related person transactions, see Notes 8 and 9 to the Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our 2024 Annual Report, our definitive Proxy Statement for our 2025 Annual Meeting of Shareholders and our other filings with the SEC. In addition, see the section captioned “Risk Factors” of our 2024 Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships. We may engage in additional transactions with related persons, including businesses to which RMR, Tremont or their respective subsidiaries provide management services. Critical Accounting Estimates The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reporting amounts. Actual results could differ from those estimates. Significant estimates in our condensed consolidated financial statements include revenue recognition, loans held for investment, allowance for credit losses and real estate owned. A discussion of our critical accounting estimates is included in our 2024 Annual Report. There have been no significant changes in our critical accounting estimates since the year ended December 31, 2024. 24 Tab le of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.