Good morning and welcome to Tremont Mortgage Trust First Quarter 2020 Financial Results Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded.

I'd now like to turn the conference over to Christopher Ranjitkar, Senior Director of Marketing and Corporate Communications. Please go ahead sir..

Thank you and good morning everyone. Thanks for joining us today. With me on the call, our President and Chief Executive Officer, David Blackman and Chief Financial Officer and Treasurer, Doug Lanois. In just a moment they will provide details about our business and our performance for the first quarter of 2020.

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, Monday, May 4, 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 of net income determined in accordance with GAAP to core earnings please see this morning's quarterly earnings release, which is available on our website.

Before I turn the call over to David, I would like to note that as a result of the closure of non-essential businesses in Massachusetts we are conducting this call from three separate locations which could impact our audio and could cause delays during question-and-answer session.

David?.

Thank you, Christopher and good morning. Welcome to the first quarter earnings call for Tremont Mortgage Trust. During the first quarter we closed two first mortgage whole loans with aggregate loan commitments of $36.8 million that fully committed our investment capital.

One refinanced a parking garage in downtown Allentown, Pennsylvania that is master leased to an investment grade company and the other refinanced a 513,000 square foot office and lab complex in suburban Columbus, Ohio.

As a reminder our investment portfolio does not include any securities and consists completely of transitional bridge first mortgage whole loans with approximately $297 million in aggregate commitments.

As a result of fully committing our investment capital and the economic shock brought on by the COVID-19 pandemic that substantially closed non-essential businesses across the U.S. our attention is acutely focused on asset managing our loan portfolio.

We had all but one of our borrowers pay April debt service and as a result we have one borrower in default. However, we have not received a margin call from Citigroup, our repurchase facility lender.

As you will note in our disclosures released this morning we have executed a loan amendment with a defaulted borrower but they had failed to submit to us the rent they collected in April which is a condition precedent for the amendment to become effective. We believe this payment is imminent which will cure the defaults.

This fact combined with the 11% aggregate debt yield generated from our loans, the Citi loan position, which is 200 basis points greater than the required minimum has kept us in good standing with Citi.

Notwithstanding our strong core earnings for the first quarter, the uncertain impact of the COVID-19 economic shock will have on our borrowers led us to believe it was prudent to conserve cash by reducing our distribution to $0.01 per share until such time as the economy stabilizes and the impact of our borrower tenant rent deferral has subsided.

As a reminder our manager which is a wholly owned subsidiary of RMR owns 19.4% of our outstanding shares and it's also waiving its management fee from June 2018 until July 2020. We appreciate the patience of our shareholders as we take a long-term view of managing through what is likely a challenging economic recession.

In light of the current situation, we thought it would be helpful to review our existing loan portfolio to help each of you better understand how we have structured our loans with interest reserves and cash flow sweeps in the normal course to mitigate the risk of debt service shortfalls and business plans executing more slowly than anticipated.

We have 14 first mortgage whole loans with approximately $297 million in aggregate loan commitments. One loan is secured by full-service hotel representing 8% of our total commitments. The loan is in a cash flow suite and the borrower is working in a cooperative manner to keep the loan current.

We view this as one of our higher risk loans but also believe the integrity of the borrower is a huge strength in the current situation. Three loans representing 17% of our total commitments are secured by neighborhood retail centers where the business plan is to complete leasing of inline space or to renew anchor tenants.

Two of the three loans are performing but all the borrowers are experiencing a level of stress as a number of tenants in non-essential businesses have requested rent relief. Two of the loans are in a cash flow sweep and have interest reserves to pay debt service.

One of these loans which has an interest reserve and is in a cash flow sweep is full recourse to a financially strong sponsor. This is a loan in default that we expect to cure by our executed loan amendment and the payment to us of the April rent collected by the borrower.

Five loans representing 34% of our total commitments are secured by office properties where the business plans are to provide tenant improvement capital to complete sponsors leasing plan. Three of the loans are in a cash flow sweep and one has an interest reserve.

Two of the office buildings are located in Houston and Louisiana and have exposure to tenants in the energy sector. The sponsors for these loans are working with tenants experiencing financial hardship to provide rent assistance and support for CARES Act stimulus.

However, both of these loans are structured with interest reserves that can be used to pay debt service. The balance of our loans representing 41% of our total commitments are secured by lower risk multi-family communities, industrial buildings and a master lease parking garage.

Even though these property types are experiencing less financial distress from the current economic shock, several of the loans are structured with interest reserves should the business plans not execute as timely as expected.

So while you can see there are some property types securing our loans that are exposed to pressure from the current economic shock, we have employed interest reserves and cash flow sweeps to help mitigate the risk of debt service shortfalls and business plans that may execute more slowly than anticipated.

Likewise we have changed our loan ratings to more closely aligned with the risk we now see in the portfolio. The changes result in our loan portfolio weighted average risk rating increasing from 2.9 at year end to 3.3 as of the end of the first quarter.

We have not taken any load impairments or loan loss reserves for the quarter and in no way does the risk rating modifications change our optimism that we will work closely with our borrowers and Citi to manage through the financial challenges that have arisen from the COVID-19 pandemic.

I’ll now turn the call over to Doug to review our financial results.

Doug?.

Thank you David and good morning everyone. Let's begin with a review of the statement of operations. Our first quarter core earnings was $1.7 million or $0.21 per weighted average diluted share compared to $0.17 per share in the fourth quarter of 2019.

Interest income from investments for the quarter was $4.3 million reflecting full quarter interest payments on 12 loans and partial quarter interest payments on the two loans that closed in the first quarter.

Interest and related expenses incurred from borrowings on our master repurchase facility was approximately $1.8 million leaving us with income from investments of $2.5 million for the quarter.

As presented in our supplemental financial package our weighted average all-in yield on our investments as of March 31, 2020 is a LIBOR plus 429 basis points and our weighted average LIBOR floor is 211 basis points.

Our expenses in the first quarter totaled approximately $861,000 and include G&A expenses of $540,000 of which $42,000 was non-cash stock compensation expense. Excluding the reinstatement of our management fee in the third quarter, we expect that our first quarter G&A is an appropriate quarterly run rate for 2020.

Reimbursed shared service expenses amounted to $321,000 in the first quarter. As we mentioned, last quarter we expect shared services expense to decrease over time as our manager allocates some of these expenses to other managed companies.

Now turning to our balance sheet at the end of the first quarter, we had $10.2 million in cash and cash equivalents. Our loans held for investment at quarter end totaled $271.5 million, an increase of $29.4 million from last quarter. At quarter end we had $24.8 million in unfunded loan commitments.

During the quarter we borrowed an additional $30.8 million on our master repurchase agreement to fund two new loans and advances on existing loans resulting in a balance of $195.6 million.

As of March 31, we had $213.5 million of total capacity on our master repurchase facility of which $17.1 million is undrawn including $7 million that is below the maximum leverage from existing pledged loans. Operator this concludes our prepared remarks. We will now take questions from sell-side research analysts..

Thank you. [Operator Instructions] Our first question will come from Jason Stewart with Jones Trading. Please go ahead..

Hi good morning, thank you. I appreciate the additional color on the portfolio.

Could you give us the total percentage of loans that are in cash sweep as at the end of the quarter?.

That's a good question, Jason. I actually haven’t calculated that percentage. Doug, you calculated that percentage? I thought about it more in terms of the numbers..

Yes. I don't have the percentage. I can tell you that we have – we’ve 8 loans currently in a cash sweep..

Okay.

And when we think about reserves, interest reserves what's your typical requirement for payment coverage there?.

Well, typically what we've done is as part of the loan we have structured an interest reserve that can be used to help supplement debt service if the cash flow from the property isn't sufficient. In some cases, it's up to the borrower to draw those proceeds. In other cases, we may have to write to advance those on their behalf.

It's also worth noting Jason that some of the loans we actually closed into cash flow sweeps for one reason or another while the borrower executed its business plan. So it's not, these loans aren't in cash flow sweeps as a result of our defaults but in most cases the debt service coverage ratio being below a certain threshold..

All right. That makes sense.

And then one more for me when you think about, I guess maybe two, when you look at the underlying pick a property whether it's retail or office maybe retail is a better example, have you gotten any color from borrowers on their collections from their portfolios that are backing these loans?.

Yes. I mean we've been in active dialogue with all of our borrowers. They've let us know the percentage of tenants or the number of tenants that they might have in their assets that are in need of some types of assistance or release. So yes, we had conversations with all of our sponsors regarding that..

And I guess is there anything you could share with us maybe retail being a specific example? I mean we've heard pretty wide numbers from mid 20s to mid 70s in terms of collection rates in those types of portfolios? Any color you could pass along?.

Yes. I think as we look at the neighborhood shopping centers those centers that have in line space that are made up of restaurants, nail salons, barber shops, they have all struggled in April to collect sufficient revenue to pay rent. Most of our anchor tenants they're either grocery stores, drugstores or other types of larger tenants are doing fine.

So I would say that on average our borrowers in the retail phase are collecting anywhere between 40% and 60% of rents at this point. A number of them have tenants that have qualified for PCC loans and are getting relief from the CARES Act which is going to be helpful..

All right. Okay, that's helpful. Last one for me and then I will let somebody else jump in.

When you think about the sponsor RMR, the manager, the workout groups the amount of assets that you have behind these should that be necessary to have, do you feel like that support is sufficient if you do need to work out some of these loans and perhaps sell them?.

Yes. Certainly Jason, one of the strengths of our platform has always been the fact that we have a number of companies that we operate that own real estate. We have our own property management group. We have several operating companies that operate senior living as well as hotels.

So we have a lot of hands-on experience in executing business plans and operating properties. So we also have very deep asset management teams for office, industrial, retail, hotels and senior living.

So there's a tremendous amount of expertise at RMR to take over and manage a property should one of our borrowers default and we have to take over operation of the asset. Obviously we hope it doesn't come to that but certainly we have the expertise to work through an adverse situation..

Got it. I appreciate the time for the questions and stay safe..

Thank you. You too..

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to David Blackman for any closing remarks. Please go ahead sir..

Thank you operator and thank you all for joining us on the call today. That concludes our call..

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