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 2025 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 primarily 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 2025 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. During the first quarter of 2026, CRE market conditions reflected a continuation of the stabilization trends that emerged in the second half of 2025. CRE transaction activity continued to show signs of recovery early this quarter, supported by improving property‑level fundamentals, substantial liquidity in debt capital markets and increased confidence in underwriting assumptions. The relative value of CRE debt investments today compared to alternative corporate or private debt investments continues to drive demand from lenders, including banks, securitized lenders, life insurance companies, private debt funds and mortgage REITs. This increased competition amongst lenders has led to a tightening of credit spreads and lower overall borrowing costs for CRE debt investors across all property sectors. 15 Table of Contents More recent geopolitical developments in the Middle East have the potential to affect U.S. economic conditions and has complicated the outlook for U.S. monetary policy. The potential for future Federal Open Markets Committee, or FOMC, interest rate cuts in the near term is lower today than at the beginning of the year. However, the FOMC has indicated it intends to remain patient as it evaluates the potential impact of these events on oil prices and, in turn, U.S. economic growth and labor market conditions. To date, demand for CRE debt in the U.S. has not been materially impacted by geopolitical events and there continues to be a significant amount of maturing CRE debt to be refinanced in the coming year. While the duration and ultimate economic impact of the Middle East conflict remain uncertain, continued volatility in energy prices and financial markets could influence inflation trends, interest‑rate expectations, and economic growth, all of which may affect commercial real estate investment conditions in 2026. 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 up to 80% 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 0.25% to 4.34% with a weighted average floor of 2.83%; therefore, changes to income from investments, net, may not move proportionately with the increase or decrease in benchmark rates. As of March 31, 2026, SOFR was 3.66%, and as a result, seven 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. 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. 16 Table of Contents Our Loan Portfolio The table below details overall statistics for our loan portfolio as of March 31, 2026 and December 31, 2025: As of March 31, 2026 As of December 31, 2025 Number of loans 26 24 Total loan commitments $ 775,958 $ 724,458 Unfunded loan commitments (1) $ 43,955 $ 36,873 Principal balance $ 732,003 $ 687,585 Carrying value $ 720,601 $ 676,908 Weighted average coupon rate 7.44 % 7.52 % Weighted average all in yield (2) 7.84 % 7.92 % Weighted average floor 2.83 % 2.81 % Weighted average maximum maturity (years) (3) 2.6 2.6 Weighted average risk rating 2.8 2.8 Weighted average LTV (4) 66 % 66 % (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. 17 Table of Contents Loan Portfolio Details The table below details our loan portfolio as of March 31, 2026: # 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 (4) Multifamily 01/28/2021 $ 54,575 $ 54,575 S + 4.00% S + 4.15% 04/15/2026 63 % 1 2 Passaic, NJ Industrial 09/08/2022 47,000 45,260 S + 3.85% S + 4.42% 09/08/2027 69 % 4 3 Dallas, TX Office 08/25/2021 46,811 44,217 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 Oxford, MS Student Housing 11/26/2024 42,000 42,000 S + 2.95% S + 3.35% 11/26/2029 75 % 1 6 College Park, MD Student Housing 11/12/2025 37,320 28,327 S + 2.95% S + 3.45% 11/12/2030 43 % 3 7 Revere, MA Hotel 07/01/2024 37,000 37,000 S + 3.95% S + 5.14% 07/01/2029 73 % 3 8 New York, NY Mixed Use 09/05/2025 34,500 34,500 S + 3.20% S + 4.02% 09/05/2030 70 % 2 9 San Marcos, TX Student Housing 01/14/2025 31,200 28,811 S + 3.25% S + 3.67% 01/14/2030 62 % 2 10 Atlanta, GA Medical Office 02/05/2026 30,500 25,500 S + 3.95% S + 4.42% 02/05/2031 66 % 3 11 Anaheim, CA Hotel 11/29/2023 29,000 29,000 S + 4.00% S + 4.05% 11/29/2028 55 % 2 12 San Antonio, TX Industrial 06/13/2025 28,000 22,800 S + 3.40% S + 3.88% 06/13/2030 62 % 3 13 Plano, TX Office 07/01/2021 27,385 26,569 S + 3.75% S + 3.76% 07/01/2026 78 % 4 14 Downers Grove, IL Office 09/25/2020 27,000 26,500 S + 5.00% S + 5.15% 05/22/2026 67 % 3 15 Wayne, PA Industrial 07/18/2024 27,000 25,252 S + 4.25% S + 4.72% 07/18/2029 62 % 3 16 Fayetteville, GA Self Storage 10/06/2023 25,250 25,250 S + 3.35% S + 3.73% 10/06/2028 55 % 3 17 Carlsbad, CA Office 10/27/2021 24,750 24,417 S + 3.25% S + 3.26% 10/27/2026 78 % 4 18 Los Angeles, CA Self Storage 06/28/2024 23,800 23,092 S + 3.40% S + 3.82% 06/28/2029 58 % 3 19 Downers Grove, IL Office 12/09/2021 23,530 23,530 S + 4.25% S + 4.51% 12/09/2026 72 % 3 20 Fontana, CA Industrial 11/18/2022 22,080 20,470 S + 3.75% S + 4.03% 11/18/2026 72 % 3 21 Bellevue, WA Office 11/05/2021 21,000 20,817 S + 2.85% S + 2.85% 04/07/2029 68 % 4 22 Palm Desert, CA Retail 02/25/2026 19,500 15,190 S + 3.60% S + 4.12% 02/25/2031 72 % 3 23 Waco, TX Student Housing 03/06/2025 18,500 18,500 S + 3.35% S + 3.75% 03/06/2030 73 % 3 24 Boise, ID Multifamily 06/26/2025 18,000 18,000 S + 3.50% S + 4.28% 06/26/2030 79 % 3 25 Newport News, VA Multifamily 04/25/2024 17,757 15,126 S + 3.15% S + 3.85% 04/25/2029 71 % 3 26 Scottsdale, AZ Hotel 03/06/2026 17,500 17,500 S + 3.85% S + 4.44% 03/06/2031 63 % 3 Total/weighted average $ 775,958 $ 732,003 S + 3.63% S + 4.03% 66 % 2.8 (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) This loan was repaid in April 2026. As of March 31, 2026, we had $775,958 in aggregate loan commitments, consisting of a diverse portfolio, geographically and by property type, of 26 first mortgage loans. As of March 31, 2026, 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”. We have no “5” or “loss likely” rated loans. 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, 2026, this loan had an amortized cost of $20,817 and a risk rating of 4. In May 2025, we amended the agreement governing our loan secured by an office property in Downers Grove, IL. As part of this amendment, the borrower repaid $3,000 of the outstanding principal balance and the maturity date was extended by one year to May 22, 2026. As of March 31, 2026, this loan had an amortized cost of $26,650 and a risk rating of 3. 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 the execution of their business plans for the underlying collateral, among other things. 18 Table of Contents As of March 31, 2026 and April 24, 2026, 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, 2026. 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 2025 Annual Report. Financing Activities The table below is an overview of our Secured Financing Facilities as of March 31, 2026: Facility Maturity Date Principal Balance Carrying Value Unused Capacity Maximum Facility Size Collateral Principal Balance UBS Master Repurchase Facility 02/18/2028 $ 142,417 $ 141,837 $ 107,583 $ 250,000 $ 208,538 Wells Fargo Master Repurchase Facility 03/13/2028 104,305 103,708 145,695 250,000 136,658 Citibank Master Repurchase Facility 09/27/2026 135,715 135,513 79,285 215,000 200,409 BMO Facility Various 85,032 84,759 64,968 150,000 114,323 Total $ 467,469 $ 465,817 $ 397,531 $ 865,000 $ 659,928 In February 2026, we amended our master repurchase agreement with UBS to extend the stated maturity date to February 18, 2028. In February 2026, we amended our master repurchase agreement with Wells Fargo and made certain changes to the agreement, including extending the stated maturity date to March 13, 2028 and increasing the maximum facility size by $125,000 to $250,000. The table below details our Secured Financing Facilities activities during the three months ended March 31, 2026: Carrying Value Balance at December 31, 2025 $ 487,657 Borrowings 31,725 Repayments (52,531) Deferred fees (1,422) Amortization of deferred fees 388 Balance at March 31, 2026 $ 465,817 As of March 31, 2026, outstanding advancements under our Secured Financing Facilities had a weighted average interest rate of 5.84% per annum, excluding associated fees and expenses. As of March 31, 2026 and April 24, 2026, we had a $467,469 and $463,157, respectively, aggregate outstanding principal balance under our Secured Financing Facilities. As of March 31, 2026, 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. 19 Table of Contents RESULTS OF OPERATIONS (amounts in thousands, except per share data) Three Months Ended March 31, 2026 Compared to Three Months Ended December 31, 2025: Three Months Ended March 31, 2026 December 31, 2025 Change % Change INCOME FROM INVESTMENTS: Interest and related income $ 14,839 $ 14,217 $ 622 4.4 % Less: interest and related expenses (7,182) (7,526) 344 4.6 % Income from loan investments, net 7,657 6,691 966 14.4 % Revenue from real estate owned 682 613 69 11.3 % Total revenue 8,339 7,304 1,035 14.2 % OTHER EXPENSES: Base management fees 1,305 1,129 176 15.6 % Incentive fees — 41 (41) (100.0 %) General and administrative expenses 886 799 87 10.9 % Reimbursement of shared services expenses 574 582 (8) (1.4 %) Provision for (reversal of) credit losses 603 (593) 1,196 201.7 % Expenses from real estate owned 580 544 36 6.6 % Total other expenses 3,948 2,502 1,446 57.8 % Income before income taxes 4,391 4,802 (411) (8.6 %) Income tax expense (6) (8) 2 25.0 % Net income $ 4,385 $ 4,794 $ (409) (8.5 %) Weighted average common shares outstanding - basic and diluted 22,398 16,578 5,820 35.1 % Net income per common share - basic and diluted $ 0.19 $ 0.29 $ (0.10) (34.5 %) Interest and related income . The increase in interest and related income was primarily due to a higher weighted average principal balance due to loan origination activity during the three months ended March 31, 2026 as compared to the three months ended December 31, 2025, offset by declines in the SOFR index rate. The weighted average principal balance of our loan investments was approximately $712,000 for the three months ended March 31, 2026 compared to approximately $656,000 for the three months ended December 31, 2025. The weighted average coupon rate was approximately 7.33% during the three months ended March 31, 2026 compared to approximately 7.60% during the three months ended December 31, 2025. Interest and related expenses. The decrease in interest and related expenses was primarily the result of a lower weighted average SOFR index rate during the three months ended March 31, 2026 as compared to the three months ended December 31, 2025 and the repayment of $40,931 under our Secured Financing Facilities related to our investment loan secured by a multifamily property in Olmsted Falls, OH in January 2026, partially offset by increased borrowings under our Secured Financing Facilities related to loan origination activity. The weighted average coupon rate was approximately 5.86% during the three months ended March 31, 2026 compared to approximately 6.08% during the three months ended December 31, 2025. 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 reimbursements during the three months ended March 31, 2026 as compared to the three months ended December 31, 2025. 20 Table of Contents Base management fees. We recognize base management fees payable to Tremont in accordance with our management agreement. The increase in base management fees was due to higher “equity” as defined in our management agreement. Incentive fees. We recognize management incentive fees payable to Tremont in accordance with our management agreement. The decrease in management incentive fees was due to higher “equity” and lower “core earnings”, each as defined in our management agreement, for the 12 month period ended March 31, 2026. General and administrative expenses . The increase in general and administrative expenses was primarily due to higher legal costs during the three months ended March 31, 2026 as compared to the three months ended December 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. Provision for (reversal of) credit losses. The provision for credit losses represents the change in the allowance for credit losses on our loan portfolio and unfunded commitments. The increase in the allowance for credit losses during the three months ended March 31, 2026 reflects an increased loan investment balance as of March 31, 2026 and increased allowances for certain of our office loans, partially offset by loans nearing maturity. 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 increase in expenses from real estate owned was primarily due to higher utility expenses during the three months ended March 31, 2026 as compared to the three months ended December 31, 2025. 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 and net income per common share - basic and diluted. The decrease in net income was due to the changes noted above. Additionally, net income per common share - basic and diluted includes the effect of the issuance of 7,532,861 common shares through the Rights Offering in December 2025. Non-GAAP Financial Measures We present Adjusted Book Value, 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, 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, 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 U.S. generally accepted accounting principles, or GAAP, a measure of our capital adequacy, 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 capital adequacy or performance measures; therefore, our reported Adjusted Book Value, Adjusted Book Value per common share, Distributable Earnings, and Distributable Earnings per common share may not be comparable to adjusted book value, 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 and 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. The table below calculates our book value, Adjusted Book Value and Adjusted Book Value per common share: 21 Table 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, 2026 December 31, 2025 Shareholders' equity $ 326,982 $ 328,651 Allowance for credit losses (1) 9,714 9,111 Adjusted Book Value $ 336,696 $ 337,762 Total outstanding common shares 22,596 22,584 Book value per common share $ 14.47 $ 14.55 Adjusted Book Value per common share $ 14.90 $ 14.96 (1) Amounts include our allowance for credit losses for our loan portfolio and our unfunded commitments. The allowance for credit losses for our unfunded commitments is included in accounts payable, accrued liabilities and other liabilities in our consolidated balance sheets. 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. 22 Table of Contents 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, 2026 December 31, 2025 Net income $ 4,385 $ 4,794 Non-cash equity compensation expense 207 216 Non-cash accretion of purchase discount (145) (37) Provision for (reversal of) credit losses 603 (593) Depreciation and amortization of real estate owned 253 247 Distributable Earnings $ 5,303 $ 4,627 Weighted average common shares outstanding - basic and diluted 22,398 16,578 Net income per common share - basic and diluted $ 0.19 $ 0.29 Distributable Earnings per common share - basic and diluted $ 0.24 $ 0.28 LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands, except per share data) Liquidity is a measure of our ability to meet 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 2025 Annual Report. Pursuant to the terms of the agreements governing our Master Repurchase Facilities, or our Master Repurchase Agreements, with Citibank, UBS and Wells Fargo, 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%. 23 Table of Contents 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, 2026 2025 Cash and cash equivalents at beginning of period $ 123,471 $ 70,750 Net cash provided by (used in): Operating activities 5,022 3,686 Investing activities (43,633) (49,901) Financing activities (28,254) 17,102 Cash and cash equivalents at end of period $ 56,606 $ 41,637 The increase in cash provided by operating activities for the 2026 period compared to the 2025 period was primarily due to higher net interest income resulting from an increased loan portfolio size and favorable changes in working capital. The decrease in cash used in investing activities was primarily due to higher loan repayment activity, partially offset by higher loan origination activity during the 2026 period. The change in cash provided by financing activities to cash used in financing activities was primarily due to higher repayments on our Secured Financing Facilities in the 2026 period. Distributions During the three months ended March 31, 2026, we declared and paid regular quarterly distributions to our common shareholders totaling $6,327, or $0.28 per common share, using cash on hand. On April 9, 2026, we declared a regular quarterly distribution of $0.28 per common share, or $6,327, to shareholders of record on April 21, 2026. We expect to pay this distribution to our common shareholders on or about May 14, 2026 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. Rights Offering In November 2025, we commenced the Rights Offering, pursuant to which we issued transferable rights to our shareholders of record as of November 10, 2025. The record date shareholders received one transferable right for each outstanding common share they owned on the record date, which entitled them to purchase one new common share for every two rights held. The Rights Offering was fully backstopped by Tremont. In December 2025, we completed the Rights Offering, in which 7,532,861 common shares were issued at $8.65 per share, generating net proceeds of $61,494, after offering costs. For further information regarding distributions, see Note 9 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q 24 Table of Contents Contractual Obligations and Commitments Our contractual obligations and commitments as of March 31, 2026 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) $ 43,955 $ 7,595 $ 36,360 $ — $ — Principal payments on Secured Financing Facilities (2) 467,469 295,924 171,545 — — Interest payments on Secured Financing Facilities (3) 27,597 18,698 8,899 — — Lease related costs (4) 222 222 — — — $ 539,243 $ 322,439 $ 216,804 $ — $ — (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, 2026 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, 2026 were the outstanding balances under our Secured Financing Facilities. 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. 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, 2026, we had a $382,437 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. 25 Table of Contents As of March 31, 2026, we had a $85,032 aggregate outstanding principal balance under the BMO Facility. As of March 31, 2026, 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 2025 Annual Report, our definitive Proxy Statement for our 2026 Annual Meeting of Shareholders and our other filings with the SEC. In addition, see the section captioned “Risk Factors” of our 2025 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 2025 Annual Report. There have been no significant changes in our critical accounting estimates since the year ended December 31, 2025. 26 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.