Good morning. Welcome to Tremont Mortgage Trust First Quarter 2021 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note that 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 first quarter of 2021, as well as details about our proposed merger with RMR Mortgage Trust. We will then open the call up to a question-and-answer session with sell side analysts.

As many of you know, Tremont Mortgage Trust and RMR Mortgage Trust issued a joint press release on Monday, April 26 announcing we have entered into a definitive agreement to merge with RMRM.

We have also provided an investor presentation that can be accessed on our website www.trmtreit.com which presentation has also been filed with the Securities and Exchange Commission or SEC. We request you to access the presentation as our management team will be referencing it in their prepared remarks.

I would like to note that the recording and retransmission of today's conference call is strictly prohibited without TRMT’s prior written consent. 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 TRMT’s beliefs and expectations as of today, Wednesday, April 28, 2021, and actual results may differ materially from those that we project. TRMT undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call.

A number of risks and uncertainties exist that could cause TRMT’s actual results to differ materially from those expressed or implied. Additional information concerning factors that could cause those differences is contained in our filings with the SEC, which can be accessed from the SEC’s website.

Investors are cautioned not to place undue reliance upon any forward-looking statements. In addition, our discussion regarding the proposed merger of TRMT and RMRM does not constitute an offer to sell, or the solicitation of an offer to buy any securities, or the solicitation of any vote or approval.

RMRM expects to file with the SEC a registration statement on Form S-4 containing the joint proxy statement/prospectus and other documents with respect to the merger and other transactions with respect to both RMRM and TRMT.

Investors are urged to read the joint proxy statement/prospectus including all the amendments and supplements if and when they become available in any of the documents we file with the SEC in connection with the merger, or incorporated by reference in the joint proxy statement/prospectus, because they don’t contain important information about the merger.

Finally, 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 website. I will now turn the call over to Tom..

Thank you, Kevin. Good morning, everyone, and thank you for joining us. On Monday, April 26th, TRMT issued a press release announcing that we have entered into a definitive agreement to merge with RMR Mortgage Trust and yesterday, TRMT issued a press release reporting its results for the first quarter of 2021.

I’ll begin today’s call with some commentary about the proposed merger and then provide a brief update on TRMT’s first quarter performance. Doug will then run through the details of our recent investment activity and financial results and then we will open up the call for Q&A.

On Monday, we posted a presentation to our website which is also filed with the SEC. Certain pages of which I will refer to during my remarks today. Before we get started, I encourage you to look over the warning regarding forward-looking statements, other disclaimers that can be found on Slides 2 and 3 of the presentation.

Let’s start with the transaction summary on Slide 4. With the unanimous approval of our Special Committee and our Board and entire board of trustees, we are thrilled to be bringing together two highly complementary businesses in Tremont Mortgage Trust and RMR Mortgage Trust.

The transaction will be at stock for stock exchange whereby TRMT shareholders will receive 0.52 shares of RMRM for each common share of TRMT.

Based on Friday’s closing price for RMRM, the implied offer price per share of approximately $6.55 represents a 6.3% premium to the closing price of TRMT’s common stock on April 23rd, and a 9% premium to the volume weighted average price for the 30 trading days ended April 23rd.

RMRM and TRMT shareholder will own approximately 70% and 30% of the combined companies respectively. In terms of the financial impact, the transaction is expected to be accretive to distributable earnings in 2022 as we eliminate certain duplicative public company costs.

We expect little to no integration risk as both companies are under the common management of Tremont Realty Advisors and our existing senior management team will continue to lead its company. We intend to close the transaction as soon as possible and expect that to be sometime during the third quarter.

Turning to Slide 5, I would like to highlight the merits of this transaction. First, we believe the combination of TRMT and RMRM represent a unique opportunity to quickly achieve scale and create a larger, more diversified commercial mortgage REIT.

By coming together the transaction is expected to immediately position the company to approach $1 billion in assets when fully invested. Second, we expect this accretive transaction will help us increase our collective financial strength and create enhanced returns for our shareholders over time.

We will generate savings by eliminating redundant public company costs with the potential to drive further operating efficiencies as we scale the business. To this end, we expect to realize annual cost savings of $1.4 million to $1.6 million or $0.10 to $0.11 on a per share basis with the rightsizing of public company overhead costs.

Third, following the close of the transaction, we believe shareholders will benefit from an increase in trading liquidity and investor base diversity with an expanded public common share float.

We also expect our expanded capital base to improve our ability to access the capital markets with more efficient sources of financing to fund our growth as we leverage the combined company’s liquidity and debt capacity.

TRMT currently has limited investment capacity and due to size, lacks the ability to access potentially attractive sources of capital such as the CLO market on more competitive REPO terms, which are necessary to support future earnings growth.

This merger represents a compelling opportunity to address this challenge and potentially lower our cost of capital to further enhance our return on equity. The combined company will not only have greater scale, but broader investment diversity among loans across geographies and asset classes.

The investments of the company will be more evenly balanced across commercial real estate nationwide and secured by property types that continue to demonstrate solid fundamentals with the highest mix in industrial, multi-family and office properties.

And finally, we believe this proposed merger will provide greater market visibility and increased deal flow as we become a more significant player in the commercial mortgage market.

We expect there is a strong demand for bridge loans over the next several years as the pandemic has increased the number of uncapitalized properties in need of financing and we believe now is the right time to execute on this opportunity to strengthen our position and capture a greater percentage of the maturing loan volume that’s not being refinanced by traditional lending sources.

To further highlight the benefits of the merger, let’s review the portfolio of the combined company on Page 8 of the presentation.

The combined company has much greater scale of 22 first mortgage home loans with approximately $519 million in aggregate loan commitments and a principal balance of $471 million with the weighted average loan to value of 66% and weighted average maximum maturity of 3.2 years.

The pro forma portfolio has a weighted average coupon of 5.4% and an all in yield of 6%. We have achieved our fully invested target of approximately $1 billion in total loan commitments we plan to originate approximately 20 additional loans assuming a similar average commitment loan size as the existing portfolios.

In summary, we believe the merger of TRMT and RMRM provides a tremendous opportunity to build strong growth momentum and provide compelling benefits to the shareholders of both companies. It creates a larger, more diversified business with increased financial strength and attractive portfolio metrics.

We believe the combined company will be better positioned to pursue its focus on commercial mortgage lending, drive earnings growth and deliver attractive risk-adjusted returns over the long-term. Now, let me update on Tremont Mortgage Trust results and investment activities during the first quarter.

Our business continued to perform well with all of our loans remaining current and debt service. Further improvements in our portfolio is risk free and strong growth in distributable earnings compared to a year ago.

Based on the healthy performance of our portfolio, we are pleased to have reached stated quarterly distribution to our shareholders of $0.10 per share. During the quarter, our attention remains focused on managing our portfolio and actively communicating with our borrowers as they continued to execute the business plans.

Our portfolio of first mortgage home loans is healthy and well supported by quality sponsors and business plans generally remain on track. The weighted average risk rating of our portfolio improved from 3.2 last quarter to 2.9 during the quarter.

We upgraded the ratings on five loans as that have demonstrated better performance and experienced less disruption from the pandemic than initially anticipated.

Conversely, we downgraded one loan related to an office property in Yardley, Pennsylvania as a result of the borrower’s business plan taking longer to execute than expected due to the challenges in the leasing market during COVID. None of our loans are rated at five.

Turning to our loan portfolio at quarter end, we had approximately $268 million in aggregate loan commitments consisting of the diverse portfolio of 13 first mortgage home loans with a weighted average loan to value of 67% and a weighted average maximum maturity of 2.4 years when including extension options.

Our portfolio was 100% floating rate and all of our loans have active LIBOR floors. The portfolio had a weighted average coupon of 5.7% and an all in yield of 6.4%. The relationship with our master repurchase facility lender remains strong and Citi continues to advance money in normal course to fund our loan commitments to our borrowers.

Based on our liquidity and the status of our loans, we are well positioned to finance new investments as loans repay. As such, we intend to keep our finite – fully invested.

Our manager, Tremont Realty Advisors under their trade name Tremont Realty Capital remains active in the market with a robust pipeline of potential opportunities to reinvest available capital according to our loan allocation policy.

The current pipeline is strong with more than $600 million in transactions in various stages of review underwriting and diligence. One opportunity currently in diligence go back to TRMT’s recent loan repayment is a $15.3 million bridge loan to refinance a 125,000 square foot office building outside of Denver.

The loan has not yet closed and remains subject to file a diligence. Tremont Realty Capital also has five term sheets outstanding with respect to the financing opportunities with an aggregate loan amount of approximately $135 million.

These opportunities have quoted financing terms with an effort to win the business and convert them to loan applications. In addition to the outstanding term sheets, Tremont Realty Capital has more than 20% of transactions totaling over $450 million in various stages of review for possible investment.

The next step for these transactions would be to issue term sheets that we believe that the credit risk and the risk-adjusted return on capital is acceptable. And with that, I will turn it over to Doug to review our financial results.

Doug?.

Thank you, Tom, and good morning, everyone. I’ll begin with a brief update on our recent loan activity and then run through our first quarter financial results. In February, we amended our loan related to a retail property in Coppell, Texas extend the maturity date by six months to August of 2021.

As part of the amendment, TRMT collected an extension fee and its sponsor funded an interest reserve of $500,000 and repaid $250,000 of the outstanding principal balance. The total loan commitment decreased to $19.9 million. We also received the early repayment of our multi-family loan in Rochester, New York with proceeds totaling $24.8 million.

We use these proceeds to pay down our Citi repurchase facility by $22.4 million and retained approximately $2.4 million for liquidity purposes.

Additionally, a borrower under our Barrington, New Jersey loan has entered into an agreement to sell the underlying industrial property and accordingly that loan of $36.2 million may prepay during the second quarter. Following the end of the quarter, we amended our loan secured by an office building in Metairie, Louisiana.

The sponsor paid TRMT extension fee and the loan was extended six months until October of 2021 while they refinance our position. Turning to our first quarter financial results distributable earnings came in at $2.2 million or $0.27 per weighted average diluted share compared to $0.21 in the prior year period and $0.28 in the prior quarter.

Our loans continue to benefit from our LIBOR floors as interest rates remain at historic lows. Interest income from investments for the quarter was $4.5 million compared to $4.6 million in the prior quarter.

Interest and related expenses incurred from borrowings on our master repurchase facility was approximately $1.1 million, compared to $1.2 million last quarter. Income from investments net was stable at $3.4 million. As presented in our supplemental financial package, our weighted average all in yield on our investments as of March 31st was 6.4%.

This includes our weighted average LIBOR floor of 210 basis points, a weighted average spread of 364 basis points and the amortization of our loan fees. All of our investments remain current on debt service and we had no loan losses during the quarter.

Total expenses were $1.8 million in the first quarter, compared to $1.1 million in the prior quarter. The sequential increase was primarily driven by the reinstatement of management and incentive fees totaling $962,000 partially offset by a decline in shared services expenses and general administrative costs.

As Tom mentioned, we recently declared quarterly distribution of $0.10 per common share or approximately $831,000. Turning to our balance sheet. At the end of the first quarter, we had $10.9 million in cash.

Our loans held for investment net totaled $260.2 million, a decrease of $22.1 million from last quarter reflecting the early repayment of a New York loan in February. We had total loan commitments of $268.4 million, of which $9 million was unfunded.

As of March 31st, we had an outstanding principal balance on our master repurchase facility of $180.8 million. We ended the quarter with approximately $241 million of capital available to reinvest. Operator, this concludes our prepared remarks. We will now take questions from sell side analysts..

[Operator Instructions] Our first question is from Jason Stewart from Jones Trading. Go ahead. .

Hi, good morning. Thanks for taking the question. And thanks for the update on the pipeline. I was hoping you could give us a little bit more information in terms of structure of those loans that are in term sheets spreads, do you expect it to be accretive to the spread in your LIBOR floors where those big.

Any kind of information on that would be helpful. Thanks..

Sure, Jason. This is Tom. Regarding LIBOR floors, and for our pipeline now for transactions that we either have quoted our term sheets outstanding and even applications for that matter. Spreads – floors range anywhere from 25 basis points to 50 basis points across those transactions. Spreads are generally in the 385 to 400 range.

We do have one transaction, a little bit higher than average which is another transaction that we are looking at right now. But as a general rule, we are – we are kind of in the 4 to 4.25 range on housing transactions. .

Okay. Great. Thanks. And then, the Louisiana office, assuming you reunderwrote that. There was different criteria in moving that risk rating. You told okay, making the extension, any color you could give us in terms of additional color on that loan would be – would also be helpful. .

Sure, Jason. This is Doug Lanois. That’s actually one of the loans that we upgraded in our loan ratings. So we felt very confident about that. They are looking to lower their cost of capital and are interested in refying to another lender. So, that’s how that’s working out.

They’ll – they’ve got several term sheets that are working towards a refi and that’s a pretty good collateral for this. .

Got it. Okay. That’s super helpful. And then one question on the merger, thank you for all the strategic rationale for it.

How did book value for TRMT play into your thoughts in this transaction in terms of priced to multiple to book? And maybe if you could weigh that against your thoughts in terms of doing just the capital – equity capital raise at TRMT that perhaps would have been dilutive or comparably dilutive to book value.

Just if you could give us some thoughts on those two, that would be helpful. Thanks. .

Yes, Jason, the equity markets where TRMT that haven’t really not – not an option for us given where we are trading relative to book value. In regards to the merger both entities are trading at quite a – fairly substantial discount to book value.

And that’s really one of the primary benefits we believe is that by putting these together, we should be able to narrow that gap over time to reward the shareholders. .

Great. Okay. Thanks for taking the questions. .

Our next question is from Chris Muller from JMP Securities. Go ahead. .

Hey guys. Thanks for taking the questions. I am on for Steve today. So, it looks like roughly half the loans are set mature in the – mostly the back half of those 2021.

I was wondering if you guys could talk about why if they have to schedule what the impacts would be as those LIBOR floors roll off with you guys being at 2.1% that’s I think probably one of the highest in the group.

And then a follow-up on that, I see the several notes on loan modifications and extensions, are there other conversations ongoing with borrowers on any further extensions, what could offset them is my first question? Thanks. .

Chris, this is Doug Lanois. You are focusing on the floors that quite strong floors that TRMT has the 210 basis points. Our expectation is as those loans roll and don’t renew, they will – that floor will gravitate then towards current market which is in the 25 to 50 basis points.

That will impact the earnings and as long as we stay at this low interest LIBOR level.

And regarding extensions, all of our loans current, well, most of our loans currently have extension options and depending on whether the borrower qualifies for the conditions of those extensions, they’ll either extend or we may enter into discussions to extend them and amend the loan agreement to accommodate that.

The Houston office building, we’ve had a discussion with them. They are looking at refinancing options, as well as possibly extending. But it’s just kind of preliminary discussions at this point. .

Thank you. It’s very helpful.

And then, just on the flip side of that, what kind of loan do you guys seeing in the pipeline? Is there – are you guys focused on multi-family, office, I guess, what do you like out there right now?.

Yes, multi-family certainly, industrial, office, those are really kind of the three top product types worth at the moment, certainly life science, as well. We don’t want to diswave anybody from us from looking at other retail or hospitality but those opportunities are – would be much more unique for us right now.

We think that as a general rule, we’d rather be backing sponsors with some more traditional office, industrial, and multi-family at this stage and that’s where we are seeing most of our deal flow and that’s where we are having most of our execution, as well. .

Thank you very much. Very helpful and congrats on the great next year. .

Thank you. .

[Operator Instructions] Our next question is from Brock Vandervliet from UBS. Go ahead. .

Thanks for taking the question.

You could have just noted the conservative setting of the Tremont dividend going forward in the new template, the new structure, do you anticipate also having a dividend that’s well below the distributable income as you’ve done here or is it – do you think you can run it much closer to the distributable level?.

Hey Brock, this is Doug Lanois. RMRM has declared $0.15 distribution. We expect annual savings from public company costs in the new combined entity of $0.10 to $0.11 per share. So, we expect that to impact distributable earnings and – as well as – as RMRM completes the investment of its capital, its Board will certainly review the distribution level.

And the other thing obviously to – we have to comply with is that we need to distribute all of our – or at least 90% of our taxable income as we did in TRMT in January and we did the catch-up distribution.

So, all of those playing into this and our expectation is, we have not only the – what we expect the savings to impact distributable earnings and potential new distributions, we expect other synergies to come to play where we connect this capital in the new combined entity and drive earnings. .

Got it.

And just stepping back a little bit, you talked about some of the spreads available now, and can you back up and just now versus a year ago, say, on new opportunities, what’s the spread profile better, worst, same? And number two, in the wake of COVID, has that created new discussions that you are observing in the marketplace as owners look to reposition buildings or really not so much, what’s then the COVID going to impact? Thanks.

.

Brock it’s Tom. From a year ago, or let’s even say, nine months ago, really a year ago, everybody was pretty much positive in the industry, but the COVID premium, what I’ll call it was kind of a short lived window, really probably for about six months.

So the spreads that we are seeing today are lower than transactions that we were able to run against up to RMRM during, call it, last summer through the end of the year. Those spreads have probably gone 50 to 75 basis points from that point in time.

And as far as the real estate as it relates to COVID, we are seeing borrowers now asking for more flexible capital rather than where potentially they could qualify for permanent capital, because they are having gone through maybe some difficulties during COVID with servicers and what have you that they are looking to a balance sheet execution which I think puts is in a good place.

We are also hearing and seeing really more suburban type office than we are CBD office, people at the major cities they would not come back fully – they are talking about along greater capacity. So things have changed a little bit from that perspective. Multi-family was the surprising winner throughout the pandemic.

I think people expected that whole off, but they really didn’t see that. In fact, we saw it become more competitive. So, the industrial as well as and there is really just proven the beauty of the shining star throughout the entire COVID pandemic. .

And Brock, missing the last deals as well, and closed a few that are attractive to us. .

Yes. Like [Indiscernible].

Thanks for the color. .

Thank you. .

[Operator Instructions] At this time, we have no more questions. So this concludes the Question-And-Answer Session. I would like to turn the conference back over to Thomas Lorenzini, President of Tremont Mortgage Trust for closing remarks. .

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

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