Good morning and welcome to Tremont Mortgage Trust fourth quarter 2019 financial results conference call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] please note this event is being recorded.

I'd now like to turn the conference over to Jocelyn Fry, Manager of Investor Relations. Please go ahead. .

Thank you and good morning everyone. Thanks for joining us today with me on the call, our President and Chief Executive Officer, David Blackman, Chief Financial Officer and Treasurer, Doug Lanois, in just a moment they will provide details about our business and our performance for the fourth quarter of 2019.

We will then open the call to a question and answer session with sell side analysts. First, I would like to note that the recording and retransmission of today's conference call is strictly prohibited without the prior written consent of the company.

Also note that today's conference call contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other security laws.

These forward looking statements are based on Tremont's beliefs and expectations as of today, Wednesday, February 19th, 2020 and actual results may differ materially from those that we project.

The company undertakes no obligation to revise or publicly release the results of any revisions to the forward looking statements made in today's conference call.

Additional information concerning factors that could cause those differences is contained in our filings with the Securities and Exchange Commission or SEC, which can be accessed from our website, trmtreit.com or the SEC website. Investors are cautioned not to place undue reliance upon any forward-looking statements.

In addition, we will be discussing non-GAAP numbers during this call, including core earnings. For a reconciliation and net income determined in accordance with GAAP the core earnings please see this morning's quarterly earnings release, which is available on our website and now I will turn the call over to David. .

Thank you, Jocelyn and good morning. Welcome to the Tremont Mortgage Trust fourth quarter earnings call. On today's call I will review our loan origination activity since the third quarter and our strategic direction for 2020 and Doug will review our portfolio and financial results.

Heading into the fourth quarter, the trust had about $70 million of lending capacity from our second quarter capital raise into two loans that repaid early during the third quarter.

We originated loans for approximately half of our capacities during the fourth quarter and originated loans for the balance of our capacity in January and February of this year.

The two transitional bridge loans closed during the fourth quarter were for total commitments of $33 million of which $31 million was funded at closing and $2 million was retained for future funding requirements. These two loans are secured by 576 bed student housing community and an 87,000 square foot office building.

Subsequent to year end, we closed two transitional bridge loans secured by an industrial property and a three building office campus with a lab component. These loans have a total commitment of $36.8 million of which $26.1 million was funded at closing and $10.7 million was retained for future funding requirements.

As a result of these four loan closings, the trust has a portfolio of 14 first mortgage full loans that fully committed our capital at $297 million of which $27 million remains unfunded. Turning to 2020, our strategic plan for 2020 is to asset manage our existing loans and reinvest capital if loans are repaid.

Our manager Tremont Realty Advisors recently established a separate managed account with $50 million of equity from the Portnoy family office that has been invested in transitional bridge loans consistent with the trust investment strategy.

As a result, our manager continues to maintain an active pipeline of quality middle market transitional bridge loans that should allow us to redeploy trust capital efficiently when loans are repaid. Our manager is exploring strategies to raise other private capital to grow this separate managed account business.

Besides the benefit of remaining active in the bridge loan markets, our manager's separate accounts business creates an opportunity to spread the reimbursement of shared service expenses over a broader base and reduce the trust operating expenses.

Based upon our current forecasts we expect the trust to begin realizing shared service expense synergies in the first quarter of 2020 with a potential positive impact to core earnings of $0.05 to $0.07 cents per share for the full year 2020.

Turning to the dividend, in January, we declared a distribution of $0.22 cents per share consistent with what we paid in November, 2019. For the full year the trust paid distributions to common shareholders of $0.77 cents per share compared to 2019 core earnings of $0.83 cents per share or a 93% payout ratio.

As we look ahead to 2020 and assuming shared service expense synergies, the reinstatement of TRA's management fee beginning in the third quarter and no early loan repayments we expect to have a modest shortfall in core earnings to cover the trust current distribution rates.

We currently believe the shortfall is manageable but expect to monitor the shortfall with the Board on a quarterly basis. I will now turn the call over to Doug to review our portfolio and financial results. Doug. .

Thank you David and good morning everyone. Let's begin with a review of the income statements. Our fourth quarter core earnings was $1.4 million or $0.17 per weighted average, diluted share a year over year improvement of $0.09 cents per share.

This increase is largely attributable to our growth in loans held for investment from seven loans totaling $135.8 million at the end of 2018 to 12 loans totaling $242.1 million at the end of 2019.

When compared to third quarter core earnings of $0.26 per share there was a $0.09 cents per share decrease in the fourth quarter, which was well within our expectations. As announced on last quarter's call third quarter core earnings benefited from a non-recurring pre-payment premium of $449,000 from early repayment of two loans.

Additionally, the $53.6 million of capital proceeds we received from the repayment was not fully redeployed during the quarter, resulting in lower interest income in the fourth quarter.

Interest income from investments for the quarter was $3.6 million reflecting fourth quarter interest payments on 10 loans and partial quarter interest payments on the two loans that closed late in the fourth quarter.

Interest and related expenses incurred from borrowings on our master repurchase facility was approximately $1.5 million, leaving us with income from investments of $2.1 million for the quarter and presented in our supplemental financial package.

Our weighted average all in yield on our investments as of December 31, 2019 is LIBOR plus 424 basis points, and our weighted average LIBOR floor is 215 basis points. Our expenses in the fourth quarter totaled approximately $815,000 and include G&A expenses of $468,000 of which $44,000 was non-cash stock compensation expense.

We expect that our 2019 G&A will remain relatively level and is an appropriate run rate for 2020. Reimbursed shared services expenses amounted to $347,000 in the fourth quarter.

As David mentioned, we expect that our shared services expense levels will decrease in 2020 as a result of our manager originating and managing investments for center street finance. We also expect that the reduced shared services expenses will partially offset the impact of the reinstatement of the management fee on July 1, 2020.

That fee was waived by our manager for the period July 1, 2018 through to 30th 2020 and amounted to savings of $319,000 and $1.1 million for the quarter and full year respectively.

Now turning to our balance sheet, at the end of the fourth quarter, we had $8.7 million in cash and cash equivalents, our loans held for investment at quarter end totaled $242.1 million, an increase of $34.6 million from last quarter. At quarter end we had $17.3 million in unfunded loan commitments.

During the quarter we borrowed an additional $34.3 million on our master repurchase agreement to fund two loans and advances on existing loans resulting in a balance of $164.7 million.

As of December 31st, we had $213.5 million of total capacity on our master repurchase facility, of which $47.9 million is undrawn and 15.8 million is available from existing pledged loans. As of today's call, the balance of our master repurchase agreement is $195.1 million and we have fully committed our capital with $297 million of loan commitments.

Operator, this concludes our prepared remarks. We will now take questions from sale side research analysts. .

[Operator Instructions] The first question is from Steve Delaney from JMP securities. Please go ahead. .

Thank you. Good morning David and first I want to commend you and your team on the progress made in 2019 as evidenced by core earnings more than doubling in the fourth quarter, year over year. Good presentation in terms of laying out your situation. I think we understand what fully invested means. And thank you, Doug for putting us in the ballpark.

I had come up with like 270 million on a funded basis compared to your total commitments. So I should take it just to clarify. No repayments seen so far in the first quarter this year.

And can you comment on whether you expect any between now and March 31?.

Well, this is Doug. Thank you. We have not received any from any of borrowers, so no we don't actually have any expectation of that during the quarter. We do have a couple of loans that have expiration dates this year. But at this point we don't expect any early repayments. .

Okay. And as far as volatility around the size of the portfolio, it sounds like what you're, what you're saying is you're maxed out, if you get a pay off, you'll be in a position to try to reinvest those proceeds.

But you know, as you sit today, you know, a portfolio that would somewhat average, you know, somewhere between 270-290 is probably what we could be looking at..

Yeah, I think that's fair. I mean obviously given where our stock prices is right now, we're not in a position to try to raise additional common equity. We do continue to try to think of other potential ways that we might be able to raise accretive capital, permanent accretive capital. Maybe something like a preferred or something like that.

But right now we don't have a -- we don't have that in our business plan, nor have we modeled that for 2020..

Okay. And the space management fee waiver, it looks like quarterly that's going to increase costs by maybe $0.04 cents per quarter.

Would you, for modeling purposes, would you advise us to go ahead, and just assume that that is going to pick up starting in the third that is going to be reflected in the third quarter?.

Yeah, it's David, at this point we have not had conversations with the Board about continuing that waiver. So I think you should, you should plan on the reinstatement on July 1. .

Okay. And it looks like from the timing of your dividend announcements, you know, whatever the Board decides about the dividend, you know, given the current earnings being under the dividend especially with the $0.04 cents per quarter coming.

We will, can we expect to hear about that first quarter dividend sometime in April?.

Yes. I think that's fair. Steve. I think as think about it right now from a management perspective and what we would recommend to the Board. We are comfortable from a cashflow perspective, with distribution remaining the same for the first quarter.

But again, I think we need to evaluate that quarterly with the board given how tight cash flow is relative to the current distribution rate. .

Yeah. And the yield, obviously the market yield of 14% is almost, you know, almost twice not quite twice the commercial mortgage REIT peer group. So you certainly would seem to me, it's just given where the yield is, you certainly could have some flexibility there. Thank you. Thank you both for your comments. .

[Operator Instructions] The next question is from Brock Vandervliet from UBS. Please go ahead. .

Hey guys, this is Vilas Abraham for Brock. Thanks for the question.

Just on the shared service is the costs going down, can you just give some color on the cadence of that? Is that a step down in Q1 or does that gradually decline over the year?.

It will gradually decline. It will step down based upon Center Street Finance origination cadence as well as its total loan outstandings. .

Got you. Okay. And then, you know, just done, you know, loan spread. They seem to be holding in. Can you speak to that and also, specifically you can to that Dublin, Ohio loan, look like the all in yield was much higher than that coupon rate. Color there would be great too..

Sure this is Doug. You're correct. We found that our loan spreads have held over the last several quarters, you know, different than much earlier in the year where there was a lot more pressure on loan spreads. Our existing portfolio at year end had a coupon rate of L+ 359 and the prior quarter was L+ 360.

So we've, we've said they have know relatively well. Um, you know, the, the difficulty here is that L's been going down. LIBOR's been reducing. So, and we have a healthy weighted average LIBOR floor 215, but as loans roll off we will see some pressure there. With regard to the Dublin Ohio property, that's a office and lab space.

There's a large component of future funding on that, possibly $10 million and the all in yield is calculated on the balance of the loan at the time of the calculation. So as we advance additional funds, the all in yield will come down some. We also had a pretty healthy spread on that 375 over LIBOR so that helps also..

Okay. I guess lastly from, a core net interest spread perspective you mentioned that there should be some expected repayments this year, not necessarily prepayments. As you get those proceeds and redeploy them.

Is that going to be in a neutral, in a dilutive, accretive to where the core spread has been the last few quarters?.

Well again I think that right now we benefit from a very strong LIBOR floor in our loans and we typically are able to negotiate a LIBOR floor that's at the time we make our deals sign up an application with the borrower and about 25 basis points below the existing LIBOR rates, with LIBOR having reduced.

I think that's where we're going to see a little bit of erosion. .

Spreads are really pretty stable right now. Where we run risk as we look at our forecast for the year is a less advantageous LIBOR floor, with a reducing LIBOR. .

Okay. Okay. Got it. So any benefit say from lower financing as LIBOR goes down does not necessarily going to be fully realized just because, with the assets that's going to have some pressure there even with the floors that's fair. .

Well we'll, we'll realize it on our existing loans. It's just as we re-invest capital from repaid loans where we'll have pressure. So we'll also benefit if LIBOR doesn't decline based upon the forecast that you can see on Bloomberg cause that's typically what we use in our model. .

Okay. All right. Thanks guys. .

The next question is from Jason Stewart from Jones Trading. Please go ahead. .

Hey, good morning. Thanks for taking the question.

On the origination platform have you explored joint ventures or is it your expectation that the separate account business is sort of up to the magnitude of scale where it'll except the platforms and now that it's up and running the origination that the platforms spins off?.

Yeah. We have not really explored joint ventures given the current size of our portfolio. We feel that there's a better opportunity to explore additional private capital either as a separate managed account or you invest side by side with our current partner. .

Okay.

And then with regards to private versus the public capital platforms, are you as agnostic is RMR agnostic to the direction of capital raising there or is there a preference one way or the other?.

I think we would like to grow Tremont Mortgage Trust, and we do spend time thinking about ways we could grow that. Right now clearly equity, common equity markets aren't available to us. I think if we felt that we could grow, the trust, that would be our preference, but we're also happy to continue to expand the platform privately..

Got it. Thanks for taking the questions. .

The next question comes from Kaili Wang from Citi. Please go ahead. .

Thank you.

On the CECL front do you have an estimate on the incremental reserve on line?.

Well, Kaili this is Doug Lanois. We're not subject to that this year. Actually because we're a small reporting company, we would begin in 2023 and so we haven't done that analysis in and we'll be interested to see how our peers into it. .

Got it. Okay. And just wondering if you could comment on the general competitive environment, how would you characterize the competitive environment today versus a year ago? And what would you say about the number of sitters at the table today versus a year ago. Thanks. .

Hey Kaili, that's a good question. I would say that there continues to be a lot of capital in the market dedicated to the lending business. I wouldn't necessarily say though it is increased such that the competitive environment has changed.

It's still very competitive.But as we talked about, spreads have remained relatively stable and we're really competing on relationships and our ability to execute, and feel like we've done a pretty good job of that. .

This concludes our question and answer session. I would like to turn the conference back over to David Blackman for any closing remarks. .

Thank you, Jason, and thank you for joining us this morning. That will conclude our call. .

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..