Good morning and welcome to Tremont Mortgage Trust’s Third Quarter 2020 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be opportunity to ask questions. Please note that the event is being recorded. I like to turn the conference over to Mr.

Kevin Barry; Manager, Investor Relations. Please go ahead..

Thank you and good morning everyone. Thanks for joining us today. With me on the call are President and Chief Executive Officer, David Blackman; Chief Financial Officer and Treasurer, Doug Lanois and Managing Director of Capital Markets; Tom Lorenzini.

In just a moment, they will provide details about our business and our performance for the third 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 securities laws.

These forward-looking statements are based on Tremont’s beliefs and expectations as of today, Tuesday, November 3, 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 revision 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’s 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 the GAAP to core earnings, please see this morning’s quarterly earnings release, which is available on our website. I will now turn the call over to David.

David?.

Thank you, Kevin and good morning. Welcome to the third quarter earnings call for Tremont Mortgage Trust. During the quarter, our attention focused on asset managing our loan portfolio and actively engaging with our own sponsors.

While many borrowers are under pressure in this economic environment, I'm pleased to report that all of our loans are currently on debt service. As we’ve discussed on prior earnings calls, Tremont’s capital remains fully committed, which eliminated our ability to originate new loans during the quarter.

Our portfolio consists of 14 whole loans with approximately $294 million in aggregate loan commitments with a weighted average maturity of 2.9 years when including extension options. As of September 30, the portfolio had a weighted average coupon of 5.7% and an all-in yield of 6.4%.

Since the end of the quarter, the sponsor of our financing secured by our retail center in Paradise Valley, Arizona exercises extension right and has met all the conditions for a one year loan extension to be effective later this month. Our financing secured by our multifamily community in Houston also matures in November.

We are negotiating definitive documentation with a sponsor for a one year extension that includes an increase in the loans interest reserve.

At the current cash flow run rate the interest reserve should be more than adequate to help maintain debt service current for the next 12 months while the sponsor stabilizes on occupancy and market the property for sale. We expect documentation to be finalized and the extension become effective later this month.

As I mentioned earlier, some of our borrowers are experienced in various levels of distress from tenants that are not able to operate and require rent relief. For the trailing three months ended September 30.

We had five loans where the pandemic negatively impacted the cash flow from our collateral properties such that the income generated from the tenants was not sufficient to fully pay debt service. None of these loans are required forbearance and all remain current on debt service.

As a reminder, all of our loans are structured with risk mitigation mechanisms such as cash flow sweeps or interest reserves to help protect us against investment losses. The relationship with our repurchase facility lender remains strong and we are maintaining consistent dialogue regarding our liquidity and the status of our loans.

During the quarter Citi advanced money in normal course to fund our loan commitments to borrowers. In October, we extended this facility by one year until November 2022. We believe this reflects confidence in both the health and quality of our loan portfolio, as well as our ability to originate high quality loans into effectively asset management.

In October, we declared a $0.01 per share distribution. This is consistent with the distribution declared during the previous two quarters and reflects the decision announced earlier this year to reduce the dividend in light of the economic uncertainty and disruption to the U.S. capital markets broadened up by the COVID-19 health crisis.

Our business has continued to perform well, and the proactive measures we have taken to preserve capital have led to improved liquidity. As we look towards year end, we need to declare a one-time distribution to shareholders in December in order to pay out at least 90% of trademarks 2020 taxable income to maintain our REIT status.

We expect to pay this distribution in cash and our Board will determine the amount based upon three months full year financial performance after considering our tax loss carry forward and distributions paid during the year.

As a reminder, our manager has extended his management fee waiver through the end of 2020, which we believe highlights our manager’s ability, manager’s alignment with shareholders during this challenging time. And finally a few weeks ago, we announced upcoming management changes at Tremont.

I will be retiring in June 2021 and will be resigning from my executive position with Tremont at the end of 2020. It's my pleasure to introduce Tom Lorenzini who has been appointed President of Tremont effective January 1, 2021. Tom is currently our Managing Director of Capital Markets for our Manager.

He is a family member of Tremont predecessor business and has more than 25 years of experience in the commercial real estate finance industry. We are thrilled to have an executive with such a strong background to lead the team forward and navigate our high performing loan portfolio and achieve greater scale in the future.

I'll now turn the call over to Tom for an update on market dynamics in the current environment.

Tom?.

Thank you, David and good morning everyone. Before I get started on behalf of all of us at Tremont, I would like to take this opportunity to thank you, David for your leadership and dedication. It has been your steady hand that has helped to lay the foundation for Tremont and our bright future.

We have a great opportunity in front of us to build upon the strength of our loan portfolio. And I look forward to leading the team and helping to guide our horse. I would like to take a minute to update you on our view of the commercial real estate debt markets as they continue to evolve amid the ongoing pandemic.

Prior to COVID-19 commercial real estate transaction volumes were increasing driving demand for CRE loans. Alternative lenders like Tremont had gained market share and loan prices had begun to stabilize. The outbreak of the pandemic in the first quarter of 2020 led to an unprecedented decline in economic activity over the first half of the year.

Uncertainty surrounding the depth and duration of the economic downturn resulted in a severe decline in overall CRE transaction volume during that period. In our view, the CRE debt markets began to rebound in the latter half of the third quarter.

In June 2020, the CMBS loan delinquency rate was near the highs experienced in 2010, but has since steadily declined as the default have been cured, either by borrowers investing additional capital to support their loans or in the form of a loan forbearance.

With interest rates hovering around zero percent across the globe, investor’s appetite for higher returns has resulted in a rebound for the CMBS market.

Although credit spreads offer to borrowers by alternative lenders have increased from those offered prior to the pandemic, the lack of property sale transaction activity has resulted in fewer transactions to be financed and greater competition amongst lenders seeking to fund new loans.

We believe that this increased competition amongst lenders, along with significant declines in LIBOR and the US Treasury index rates has benefited borrowers seeking to refinance high quality properties, particularly multifamily, industrial, life science, R&D lab properties that are either stabilized or near stabilization.

Although longer term impact of COVID-19 pandemic is still uncertain. We feel there will be modest increase in CRE sales transaction volume in the fourth quarter as institutions and investors seek to invest dry powder into opportunistic situations. Furthermore, we believe that as the U.S.

economy improves and returns to a more stable state, there will be significant opportunities for Tremont to provide creative flexible debt capital for low capitalized sponsors.

In the meantime, despite not having available capacity to originate new loans in the near term, we remain active in the market and focused on building awareness of Tremont’s platform across the CRE industry. And with that, I'll turn it over to Doug to review our financial results.

Doug?.

Thank you Tom and good morning everyone. I'll begin with review of the statement of operations. Our third quarter core earnings was $2.7 million or $0.33 per weighted average diluted share, compared with $0.30 per share last quarter.

This increase was primarily driven by our income from investments net, which benefited from the continued reduction of LIBOR. Interest income from investments for the quarter was $4.6 million, compared to $4.5 million in the prior quarter.

Interest and related expenses incurred from borrowings on our master repurchase facility was approximately $1.2 million, compared to $1.4 million in the second quarter of 2020. Income from investments net increased to $3.4 million for the quarter from $3.1 million in the prior quarter.

As presented in our supplemental financial package, our weighted average all-in yield on our investments as of September 30, was LIBOR plus 428 basis points, and our weighted average LIBOR floor was 210 basis points. Let me give you a bit more color on our exposure to interest rate fluctuations.

The interest income on our loans held for investment and the interest expense on our borrowings float with LIBOR. As LIBOR has decreased over the past three quarters, our income from investments net of interest expense has increased.

We have interest rates for provisions in our loan agreements with borrowers that establish a minimum LIBOR rate for each loan currently ranging between 150 to 250 basis points. However, borrowings for our master repurchase agreements do not have a minimum LIBOR floor provision.

As a result as LIBOR decreased below the floor established for investments our income from investments remained constant while our borrowing costs decreased.

If LIBOR increases in the future, but remains below our floors, our interest income will remain stable, and interest expense on our repurchase facility will rise, resulting in decreased income from investments net, back to our review of the statement of operations.

Our expenses in the third quarter totaled approximately $765,000 and include G&A expenses of $576,000 of which $76,000 was non-cash stock compensation expense. Reimbursed shared services expenses amounted to $189,000 in the third quarter. Now turning to our balance sheet, at the end of the third quarter, we had $11 million in cash.

Our loans held for investment net at quarter end was $280.2 million, an increase of $2 million from last quarter. At quarter end, we had total loan commitments of $294 million of which $14 million was unfunded. During the quarter we borrowed $1.3 million on our master repurchase facility to fund advances made to borrowers.

As we discussed on our call last quarter in July, we repaid our facility $1.4 million using proceeds from the partial repayment we received from the borrower under our loan related to a retail property in Coppell, Texas.

As a result, the outstanding principal balance of our facility was $201.1 million at the end of the quarter, unchanged from the prior floors.

As of September 30, we had $213.5 million of total capacity on our master repurchase facility of which $12.4 million is undrawn, including $8.3 million that is below the maximum leverage from our existing pledge loans. Operator, this concludes our prepared remarks. We will now take questions from sell-side research analysts..

[Operator Instructions] First question comes from Steve Delaney of JMP Securities. Please go ahead..

I'm just curious if you anticipate any near term - loan repayments over the next one to two quarters?.

That's a good question, Steve. We have six loans that have final maturity dates in 2021. And so we're likely probably beginning in 2021 going to have some loans repay. But I don't anticipate that we have anything that's going to repay during the fourth quarter..

Okay.

And we assume the plan is going to be that your situation with Citi is that it will be your desire to reinvest those funds and new loans, or would you I guess short-term you'd pay Citi down but would you intend to stay fully invested is what I'm saying rather than just paydown Citi?.

Yes, Steve I think our desire would be to stay fully invested, maybe around margin, we might choose not to level our loans quite as highly. But I think staying invested would be good for our shareholders as it relates to our ability to pay dividends..

Now, you mentioned all your loans are current, I'm just curious of the 14 loans, have any been modified and has any interest actually been deferred? So in other words you could be current but you may have chosen to work with the borrower and defer some part of their interest payments?.

Yes see, if we have not deferred interest payments with any of our borrowers. The only one loan I think we modified was to simply move some money that we had swept from cash that we have swept to an interest reserve. So that we could use it to help keep debt service current, but no, we have not had to defer any interest payments on our loans..

Right well thank you for the comments. And David, we wish you a very happy retirement..

Thank you, Steve..

[Operator Instructions] Next question comes from Brock Vandervliet with UBS. Please go ahead..

You mentioned the five loans that didn't have enough to fully pay debt service. So that's, I guess you're utilizing either cash flow sweep or interest reserves to do that.

Can you talk about those loans and how, basically how tenuous that situation is your confidence with the cash flow sweeps and an interest reserves just trying to appear into the future a little bit on credit quality here?.

Sure, good question Brock. For those five loans, have interest reserves. And the reserves, we believe are adequate to continue to support the loans as they continue to recover. One of the loans actual our hotel loan in Atlanta does not have an interest reserve.

But we have a sponsor with incredibly high character who has made additional equity investments into the properties to keep that service current. So we're very pleased for them to continue to do that.

One of the five loves has a early 2021 final maturity date and we expect that if we do extend the maturity of that loan, it would likely be subject to refreshing the interest reserve..

And it is more of a bigger picture strategic question so far, you seem to be navigating this pretty incredible dislocation very well.

What's the longer term plan on closing the book value discount here And would the company be amenable to other sources of capital and is it exploring any new avenues of funding or capital?.

Brock that’s a good excellent question, I would say first and foremost. We need to, reinstate to a more normalized distribution. And because most of the companies in this sector tend to trade based upon a dividend yield, and the fact that we're only paying a penny a quarter or $0.04 a year, really isn't adequate to help close that gap.

But, we think we're starting to turn the corner with a risk in our portfolio, and hope to go to a more normalized distribution sometime in 2021, which we think will go a long way to help closing that gap. I think the other question that you asked was whether we would be open to exploring additional capital? And I think the answer is yes.

Obviously, it's got to make sense for shareholders we've got to be creative. And it can't be capital that necessarily, put the gun to our head or anything like that. But yes, we would probably be open minded considering something like that..

Next question comes from Jason Stewart of Jones Trading. Please go ahead..

I’ll follow-up on Jim's question about use of proceeds in the event you do get an uptick in investment sale activity or repayments.

Would you consider as you pay down Citi also repurchasing stock?.

Yes, Jason it’s a good question. We always have to consider whether that's a good use of our capital. But we're reasonably this business uses a fair amount leverage. And we have a relatively small equity base.

And so, I think it would be challenging for us to seriously consider repurchasing shares versus trying to make investments to stay fully invested..

Understood, yes currently it's a balancing act it sure trying to maintain and when you think about that and you go back to sounds like a 2021, normalized dividend distribution.

What is keeping you from embracing it right now? Is it the repayment activity that's expected in 2021?.

Well as I said in my prepared remarks we are making a one-time distribution or we are going to declare a one-time distribution in December, with the expectation that pays in January. And I think that will be meaningful. And then I think, depending upon how our loans continue to perform, and our view on our ability to reinvest.

I would expect that, we will return to a more normalized distribution in 2021..

We have a follow-up question from Brock Vandervliet of UBS. Please go ahead..

I was - you may have mentioned this, but as part of the extension of that Citi funding line, were there - are there any covenant mods in there or is it just a straight extension?.

Brock it’s Doug Lanois, thanks no, covenant mods at all in that extension, just a straight extension of the term..

Okay.

And lastly, that Slide 11, where you show the original maturity and the revised maturity dates is the step out among a number of loans there simply a nature of these loans are, structurally for repositioning a property and that's taken, more extended period of time amid COVID or is there - is that a sign of, greater stress that we should be aware of?.

Yes Brock, I don't consider a greater stress, we make loans based upon our business plan to reposition an asset and ultimately we expect to be repaid either through an asset sale or refinance.

We generally will have at least one extension options built into our structures for the scenario where it may take a business plan a little bit longer to execute. And I think as a result of COVID, and the property market substantially shutting down for a portion of the year, business plans are expected to take a little bit longer to execute.

I don't view that as distressed. I view it more as just simple timing..

This concludes our question-and-answer session. Now I’d like to turn the conference back over to Mr. David Blackman, President and CEO for closing remarks. Please go ahead..

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

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