Good morning, and welcome to the Tremont Mortgage Trust Fourth Quarter 2020 Financial Results Conference Call [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Kevin Barry, Manager of Investor Relations. Please go ahead..

Thank you, and good morning, everyone. Thanks for joining us today. With me on the call are President, Tom Lorenzini; and 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 2020.

We will then open the call to a question-and-answer session with sell side analysts. First, I'd 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, Monday, February 22, 2021, 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 Web site. 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 distributable earnings. For a reconciliation of net income determined in accordance with GAAP to distributable earnings, please see our quarterly earnings release, which is available on our Web site. I will now turn the call over to Tom..

Thank you, Kevin. Good morning, everyone, and thank you for joining us. On Friday, we reported solid results for the fourth quarter that reflect our proactive measures over the past year to actively manage our loans, preserve liquidity and enhance the stability of our balance sheet.

Tremont's portfolio delivered stable investment performance with 100% of our loans remaining current on debt service. The strength and resiliency of our portfolio during this period of unprecedented economic uncertainty underscores the expertise and experience of our team and the value of our relationship with the RMR Group.

Our collective knowledge and resources across Tremont Realty Capital and the depth of RMR's national CRE platform provides our investment program with an enhanced ability to understand market conditions, evaluate our borrowers' business plans and monitor the ongoing repositioning activities of our loan collateral.

During the fourth quarter, Tremont's capital remained fully committed, which eliminated our ability to originate new loans. We are focused on managing our portfolio and actively communicating with our borrowers as they continue to execute their business plans.

While the ongoing pandemic continues to weigh on some of our borrowers' tenants, our loans continue to perform well with strong support from their sponsors. The weighted average risk rating of our portfolio improved during the fourth quarter.

We upgraded the ratings on two loans as a result of better performance of the underlying loan collateral and our borrowers' progress implementing their business plans. We did not have any downgrades during the quarter.

On a five point scale, with one representing lowest risk and five representing highest risk, the weighted average risk rating improved from 3.4 in Q3 to 3.2 at year end. None of our loans are rated at five.

As we have discussed on prior calls, in early 2020, we reduced Tremont's quarterly dividend to protect our balance sheet amid the economic uncertainty and disruption brought on by the health crisis. During this disruption, our business has remained stable.

As a result, I am pleased to announce that our Board intends to reinstate a quarterly dividend, the amount of which will be declared in April. While we expect the dividend to increase compared to last year's regularly scheduled dividend, it remains subject to further Board discussion, and we are not providing further guidance at this time.

Turning to our loan portfolio at year end. Our assets consisted of 14 first mortgage whole loans with approximately $294 million aggregate loan commitments with a weighted average loan to value of 67% and a weighted average maximum maturity of 2.6 years when including extension options.

The portfolio had a weighted average coupon of 5.7% and an all in yield of 6.4%. Our investments are geographically diverse with exposure to commercial real estate nationwide. Approximately 75% of our loans are secured by industrial, multifamily and office properties, which continue to demonstrate solid fundamentals.

Our remaining loans are secured by retail assets that are either grocery or drugstore anchored as well as one hotel. In terms of recent loan activity, two loans scheduled to mature in November of 2020 and were extended during the fourth quarter.

The borrower for our financing secured by a retail center in Paradise Valley, Arizona, exercised its right and met all the conditions for a one year loan extension until November of 2021. We also amended our financing secured by a multifamily property in Houston.

As part of the amendment, the borrower funded an interest reserve of $500,000 and the loan maturity date was also extended by one year until November of 2021. At the current cash flow run rate, the interest reserve should be more than adequate to maintain debt service for the remaining loan term.

Subsequent to quarter end, we amended our loan related to a retail property in Coppell, Texas and extended the maturity by six months until August of 2021. As part of the amendment, the sponsor funded an interest reserve of $500,000 and repaid $250,000 of the outstanding principal balance, which reduced the total loan commitment to $19.9 million.

As a reminder, all of our loans are structured with risk mitigation mechanisms, such as cash flow sweeps and interest reserves to help protect us against investment losses.

The current individual cash flows and structured interest reserves should be more than sufficient to maintain debt service for the next 12 months on each of our loans with the exception of our hospitality loan in Atlanta, Georgia.

However, sponsor for this hotel loan has continued to support the asset with additional equity investments to maintain debt service and operations.

While we did not have any loan repayments during the fourth quarter, last week, we received the early repayment of our multifamily housing loan in Rochester, New York, with proceeds totaling $24.8 million.

In the short term from these proceeds we retained approximately $2.4 million for liquidity purposes and paid down our Citi repurchase facility by $22.4 million.

In addition, we are aware that our borrower under our Barrington, New Jersey loan, has entered into an agreement to sell the underlying industrial property and accordingly that loan of $35.2 million may prepay in April. Going forward, we plan to keep our portfolio fully committed.

We remain active with a robust pipeline of potential opportunities to reinvest this capital as loans are repaid. The relationship with our master repurchase facility lender remains strong.

We have maintained consistent dialog regarding our liquidity and the status of our loans, and Citi has advanced money in normal course to fund our loan commitments to borrowers during the fourth quarter.

We extended this facility by one year until November of 2022, which reflects our mutual confidence in Tremont's loan portfolio and positions us to reinvest the proceeds we receive from repayments. Looking ahead, we are excited about the future and the strength of our CRE lending platform.

As the economy improves and returns to a more normal state, there will be significant opportunities for alternative lenders like us to provide creative flexible debt capital for a wide array of circumstances and business plans.

We are well positioned to continue to navigate the current economic climate, preserve invested capital and generate attractive risk adjusted returns for our shareholders. And with that, I'll turn it over to Doug to review our financial results.

Doug?.

Thank you, Tom, and good morning, everyone. First, I would like to note that beginning this quarter, we have changed our terminology on non-GAAP earnings from core earnings to distributable earnings.

This reflects a recent transition across the mortgage REIT industry to adopt terminology that better describes what this metric represents, which is a measure of our results that start with GAAP net income and is adjusted for certain noncash items to be more indicative of our performance in the context of a potential distribution.

This is only a change in terminology and does not alter our calculation of this non-GAAP metric. Turning now to our financial results for the fourth quarter. Distributable earnings came in at $2.3 million or $0.28 per weighted average diluted share compared to $0.17 in the prior year period and $0.33 per share last quarter.

Our loans continue to benefit from our LIBOR floors in this historically low rate environment. Income from investments net was stable quarter over quarter at $3.4 million during the fourth quarter.

This reflects interest income from investments of $4.6 million and interest from related interest and related expenses from borrowings on our master repurchase facility of $1.2 million. As presented in our supplemental financial package, our weighted average all in yield on our investments as of December 31st, was 6.4%.

This includes our weighted average LIBOR floor of 210 basis points, a weighted average spread of 360 basis points and amortization of loan fees. All of our investments remain current on debt service and we have had no loan losses at year end. Total expenses were $1.2 million in the fourth quarter compared to $765,000 in the prior quarter.

This sequential increase was primarily driven by shared services and state taxes as well as other public company costs. While shared services expense came in above our run rate for the fourth quarter, for the full year, it declined approximately 20% year-over-year. Turning to our balance sheet.

At the end of the fourth quarter, we had $10.5 million in cash. Our loans held for investment net totaled $282 million, an increase of $2 million from last quarter and we had total loan commitments of $294 million, of which $12.3 million was unfunded. Our GAAP book value as of December 31st was $10.71 per share.

As of December 31st, we had $213.5 million of total capacity on our master repurchase facility, of which $12.4 million was undrawn. We are slightly under levered on our portfolio with approximately $9.6 million currently available. We ended the quarter with an outstanding principal balance of $201.1 million unchanged from the prior quarter.

After paying down our facility with the proceeds we received from the early repayment of our Rochester, New York loan last week, we have approximately $24 million of capital to reinvest.

In December, our Board declared and in January, we paid a onetime cash distribution of $0.53 per common share to ensure we satisfied minimum distribution requirements to maintain our REIT tax status. For the full year, we paid or declared $0.78 per common share. Looking ahead, we expect our cash flows and liquidity to remain healthy.

As Tom discussed, our Board plans to reinstate our regular quarterly dividend in 2021. As a reminder for modeling purposes, Tremont's management fee waiver expired at the end of 2020. Beginning in the first quarter of 2021, we are required to pay or manage on an annual base fee of 1.5% of our equity, payable on a quarterly basis.

We also expect to recognize an incentive fee based on our level of profitability over the trailing 12 months. For context, had our manager not waived these fees, we would have recognized $1.3 million of base management fee and $467,000 of incentive fee for the year ended December 31, 2020.

The calculation of incentive fees is not recognized ratably through the year and is reduced by incentive fee payments over the trailing 12 months. Finally, keep in mind that net interest margin has benefited substantially from our LIBOR floors.

Going forward, we expect our net interest spreads to narrow as loans prepay or pay off at maturity and new loans come on at prevailing market LIBOR floors. Operator, this concludes our prepared remarks. We will now take questions from sell side analysts..

[Operator Instructions] The first question is from Steve Delaney from JMP Securities..

Tom, you mentioned an active pipeline. Could you comment on the pipeline that you're seeing relative to Tremont? And also, I think this is just obviously coincidence. You had a pay off in February and I believe that RMR mortgage had made a fairly large loan in January and another.

And I'm curious, as part of your pipeline, is it possible under the structure of the two companies where Tremont could actually take a participation in a loan that was primarily targeted for RMR? Thank you..

Regarding pipeline, you're correct in that with RMR, we do have an active pipeline and have been closing transactions inside of that vehicle. I would tell you right now that we have -- our current pipeline is roughly $600 million in transactions that are in various stages from initial diligence through the closing process.

10 of those transactions are in the quoted stage through the application stage or diligence, narrowing that down to a couple of hundred million dollars. So we would have the ability as capital is repaid into TRMT to replace the loans, such as the Rochester, New York loan.

Regarding your question about the sharing of loans or a participation of loans, that certainly is something that we could entertain. I'm not sure that we are necessarily going that route, there's some additional documentation that would be required to do that between the two entities.

And most likely would prefer to keep the investments whole inside of each of the REITS, but it is certainly something that we could do if we decided to go that route..

Well, I think I'm hearing you say that the pipeline targeted for Tremont, TRMT, is sizable enough that it doesn't sound like you have too much concern about redeploying that $24 million in the matter of a couple of months.

Am I hearing you correctly there?.

I think that's a fair statement. We certainly have to look to make sure that we have the rightsized loan to go into TRMT. We don't want to do too small of a transaction and be left with some capital that's uninvested or uncommitted. But as additional payoffs come in, that becomes less of an issue for us because we'll have additional capacity.

And with Tremont Realty Advisors originating for both entities we should be able to transition pretty smoothly into putting that capital back to work inside of TRMT..

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

Just wondering if you could talk about the expense dynamic in the fourth quarter. I understand the incentive fees has been well telegraphed that starts here in Q1.

But in terms of G&A or total expense base, what should we be expecting going forward in those respects? Was there anything one-time related in Q4?.

Our expenses in Q4 did run a little bit higher than the full year. So the way I view it, the full year is a good indicator in terms of going forward in terms of G&A, there were some onetime items. And so I think the full year is a best indicator.

With regard to shared service expense, our expectation is that we'll continue to reduce at a similar pace as it did from 2019 to 2020..

And at what level do you think you can hold, I guess, total expenses ex any incentive payments at? Should those be relatively flat or could they even be negative on a full year basis?.

In terms of G&A, again, I would think that it's a typical year-over-year increase inflation oriented. And again with shared services, our expectation is that they'll decrease. And again, at a similar rate..

And separately, if I can. You mentioned loan yields may be under pressure with these new LIBOR floors.

Can you dimension that more for us?.

Yes, I think that if you look at our portfolio currently, with weighted average of 5.7% and 2.1% of that is based on the LIBOR floors going forward. Spreads shouldn't dramatically be different. However, the reset of the floors to 50 basis points or less will certainly impact the overall yield on those loans, on new loans..

There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Tom Lorenzini for any closing remarks..

Thank you, Jason, and thanks, everyone, for joining us today. This concludes our call..

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