NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(dollars in thousands, except per share data)
Note 1. Organization
RMR Mortgage Trust, or we, us, our, or the Trust,
is a Maryland statutory trust. We were previously registered under the Investment Company Act of 1940, as amended, or the 1940 Act, as
a closed-end management investment company. Our investment objective while we operated as a registered investment company was investing
in equity securities of real estate companies.
On January 5, 2021, the Securities and Exchange
Commission, or the SEC, issued an order granting our request to deregister as an investment company under the 1940 Act, or the Deregistration.
As a result, the Trust changed its SEC registration to a reporting company under the Securities Exchange Act of 1934, as amended, or the
Exchange Act. The issuance of the deregistration order enabled us to proceed with full implementation of our new business mandate to operate
as a real estate investment trust, or REIT, that focuses primarily on originating and investing in first mortgage whole loans secured
by middle market and transitional commercial real estate, or CRE, or the Business Change.
On April 26, 2021, we and Tremont Mortgage
Trust, or TRMT, entered into an Agreement and Plan of Merger, or the Merger Agreement, pursuant to which, on the terms and subject to
the satisfaction or waiver of the conditions thereof, TRMT has agreed to merge with and into us, with us continuing as the surviving entity
in the merger, or the Merger. Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the effective
time of the Merger, or the Effective Time, each common share of beneficial interest, $0.01 par value per share, of TRMT, or TRMT Common
Shares, issued and outstanding immediately prior to the Effective Time will be converted into the right to receive 0.52, or the Exchange
Ratio, of one newly issued common share of beneficial interest, $0.001 par value per share, of our common shares, or the RMRM Common Shares,
subject to adjustment as described in the Merger Agreement, with cash paid in lieu of fractional shares. Under the Merger Agreement, the
Exchange Ratio is fixed and will not be adjusted to reflect changes in the market price of the RMRM Common Shares or the TRMT Common Shares
prior to the Effective Time. Pursuant to the Merger Agreement, at the Effective Time, any unvested TRMT Common Share awards outstanding
under TRMT's equity compensation plan generally will be converted into an unvested RMRM Common Share award under our equity compensation
plan, subject to substantially similar vesting requirements and other terms and conditions, determined by multiplying the number of unvested
TRMT Common Shares subject to such award by the Exchange Ratio (rounded down to the nearest whole number). The Merger and the other transactions
contemplated by the Merger Agreement are collectively referred to herein as the other Transactions. We have incurred $2,183 of transaction
costs related to the Merger that are included in prepaid expenses and other assets in the condensed consolidated balance sheet.
Following the consummation of the Merger, the combined
company will continue to be managed by our and TRMT’s current manager, Tremont Realty Advisors LLC, or TRA or our Manager, pursuant
to the terms of our existing management agreement with TRA. Contemporaneously with the execution of the Merger Agreement, we, TRMT and
TRA entered into a letter agreement, or the TRA Letter Agreement, pursuant to which, on the terms and subject to conditions contained
therein, we, TRMT and TRA have acknowledged and agreed that, effective upon consummation of the Merger, TRMT shall have terminated its
management agreement with TRA, and TRA shall have waived its right to receive payment of the termination fee pursuant to such agreement.
In consideration of this waiver, we have agreed that, effective upon consummation of the Merger and the termination of TRMT's management
agreement with TRA, certain of the expenses TRA had paid pursuant to such management agreement will be included in the “Termination
Fee” under and as defined in our existing management agreement with TRA. The TRA Letter Agreement further provides that such termination
by TRMT and waiver by TRA shall apply only in respect of the Merger and will not apply in respect of any competing proposal or superior
proposal (as those terms are defined in the Merger Agreement) or to any other transaction or arrangement.
Contemporaneously with the execution of the Merger
Agreement, we entered into a voting agreement with TRA, or the Voting Agreement, pursuant to which TRA has agreed to vote all of the TRMT
Common Shares which it is entitled to vote in favor of approval of the Merger and the other Transactions to which TRMT is a party at the
special meeting of TRMT's shareholders scheduled to be held on September 17, 2021 for that purpose and against any competing acquisition
proposal.
Also contemporaneously with the execution of the
Merger Agreement, TRMT entered into a voting agreement with Diane Portnoy, pursuant to which Ms. Portnoy has agreed to vote all of
our common shares which she is entitled to vote in favor of approval of the issuance of the RMRM Common Shares in the Merger, or the Merger
Share Issuance, at the special meeting of our shareholders held for that purpose and against any competing acquisition proposal.
RMR MORTGAGE TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(dollars in thousands, except per share data)
The record date for determining the shareholders
entitled to receive notice of, and to vote at, our and TRMT's special meetings is July 14, 2021. Pending requisite approval by us
and TRMT shareholders, the Merger is expected to close during the third quarter of 2021.
Note
2. Basis of Presentation.
Prior to the Business Change, the Trust was accounted
for as an investment company in accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification,
or ASC, Topic 946, Financial Services - Investment Companies, or the Predecessor Basis. Upon the Business Change, we discontinued
the application of guidance in ASC Topic 946 and prospectively applied the guidance required under GAAP, applicable to companies that
are not investment companies, or the Successor Basis. As a result of these changes, our condensed consolidated financial statements as
of and for the three and six months ended June 30, 2021 are presented separately from our financial statements on the Predecessor
Basis, as of and for the periods prior to December 31, 2020. The results of operations from January 1, 2021 through January 4,
2021 were not material to the Trust's condensed consolidated financial statements and have not been presented separately, but they are
included in our condensed consolidated statement of operations for the six months ended June 30, 2021.
In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair statement of results for the interim periods have been included. All intercompany
transactions and balances with or among our consolidated subsidiaries have been eliminated. Operating results for interim periods are
not necessarily indicative of the results that may be expected for the full year.
The preparation of financial statements in conformity
with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates.
Significant estimates in the accompanying condensed consolidated financial statements include the fair value of financial instruments.
Note 3. Summary of Significant Accounting Policies
Consolidation.
These consolidated financial statements include the accounts of us and our subsidiaries, all of which are 100% owned directly
by us. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated.
For each investment we make, we evaluate whether
consolidation of the borrower's financial statements is required under GAAP. GAAP addresses the application of consolidation principles
to an investor with a controlling financial interest.
Cash,
Cash Equivalents and Restricted Cash. We consider highly liquid investments with original maturities of three months or
less at the date of purchase to be cash equivalents.
Restricted cash primarily consists of deposit proceeds
from potential borrowers when originating loans, which may be returned to the applicable borrower upon the closing of the loan, after
deducting any transaction costs paid by us for the benefit of such borrower.
Loans
Held for Investment. Generally, our loans are classified as held for investment based upon our intent and ability to hold them
until maturity, or if earlier, repayment. Loans that are held for investment are carried at cost, net of unamortized loan origination
and accreted exit fees that are required to be recognized in the carrying value of the loans in accordance with GAAP, unless the loans
are deemed to be impaired. Loans that we have a plan to sell or liquidate are held at the lower of cost or fair value less cost to sell.
We evaluate each of our loans for impairment at
least quarterly by assessing a variety of risk factors in relation to each loan and assigning a risk rating to each loan based on those
factors. Factors considered in these evaluations include, but are not limited to, property type, geographic and local market dynamics,
physical condition, leasing and tenant profile, projected cash flow, risk of loss, current loan to value ratio, or LTV, debt yield, collateral
performance, structure, exit plan and sponsorship. Loans are rated “1” (lower risk) through “5” (impaired/loss
likely) as defined below:
"1" lower risk—Criteria reflects
a sponsor having a strong financial condition and low credit risk and our evaluation of management's experience; collateral performance
exceeding performance metrics included in the business plan or credit underwriting; and the property demonstrating stabilized occupancy
and/or market rates, resulting in strong current cash flow and net operating income and/or having a very low LTV.
RMR MORTGAGE TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(dollars in thousands, except per share data)
"2" average risk—Criteria reflects
a sponsor having a stable financial condition and our evaluation of management's experience; collateral performance meeting or exceeding
substantially all performance metrics included in the business plan or credit underwriting; and the property demonstrating improved occupancy
at market rents, resulting in sufficient current cash flow and/or having a low LTV.
"3" acceptable risk—Criteria reflects
a sponsor having a history of repaying loans at maturity and meeting its credit obligations and our evaluation of management's experience;
collateral performance expected to meet performance metrics included in the business plan or credit underwriting; and the property having
a moderate LTV. New loans and loans with a limited history will typically be assigned this rating and will be adjusted to other levels
from time to time as appropriate.
"4" higher risk—Criteria reflects
a sponsor having a history of unresolved missed or late payments, maturity extensions and difficulty timely fulfilling its credit obligations
and our evaluation of management's experience; collateral performance failing to meet the business plan or credit underwriting; the existence
of a risk of default possibly leading to a loss and/or potential weaknesses that deserve management’s attention; and/or the property
having a high LTV.
"5" impaired/loss likely—Criteria
reflects a very high risk of realizing a principal loss or having incurred a principal loss; a sponsor having a history of default payments,
trouble fulfilling its credit obligations, deeds in lieu of foreclosures, and/or bankruptcies; collateral performance is significantly
worse than performance metrics included in the business plan; loan covenants or performance milestones having been breached or not attained;
timely exit via sale or refinancing being uncertain; and/or the property having a very high LTV.
See Note 5 for further information regarding our
current loan portfolio’s assessment under our internal risk rating policy.
Impairment occurs when it is deemed probable that
we will not be able to collect all amounts due under a loan according to its contractual terms. Impairment will then be measured based
on the present value of the expected future cash flows discounted at the loan's contractual effective rate and the fair value of any available
collateral, net of any costs we expect to incur to realize that value. The determination of this estimated fair value involves judgments
and assumptions based on objective and subjective factors. Consideration will be given to various factors, such as business plans, property
occupancies, tenant profiles, rental rates, operating expenses and borrowers’ repayment plans, among others, and will require significant
judgments regarding certain circumstances, such as guarantees, if any. Upon measurement of an impairment, we will record an allowance
to reduce the carrying value of the loan accordingly, and record a corresponding charge to net income in our condensed consolidated statements
of operations.
As of June 30, 2021, we have not recorded
any allowances for losses as we believe it is probable that we will collect all amounts due pursuant to the contractual terms of our loan
agreements with borrowers.
Fair
Value of Financial Instruments. FASB ASC Topic 820-10, Fair Value Measurements and Disclosures, defines fair value,
establishes a framework for measuring fair value in accordance with GAAP and expands the required disclosure regarding fair value measurements.
ASC Topic 820-10 defines fair value as the price that would be received for a financial instrument in a current sale, which assumes an
orderly transaction between market participants on the measurement date. We determine the estimated fair value of financial assets and
liabilities using the three-tier fair value hierarchy established by GAAP, which prioritizes the inputs used in measuring fair value.
GAAP establishes market based or observable inputs as the preferred source of values followed by valuation models using management assumptions
in the absence of market inputs. The three levels of inputs that may be used to measure fair value are as follows:
Level I—Inputs include quoted prices in active
markets for identical assets or liabilities that we have the ability to access.
Level II—Inputs include quoted prices in
markets that are less active or inactive or for which all significant inputs are observable, either directly or indirectly.
Level III—Inputs include unobservable prices
and are supported by little or no market activity and are significant to the overall fair value measurement.
RMR MORTGAGE TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(dollars in thousands, except per share data)
Loan
Deferred Fees. Loan origination and exit fees are reflected in loans held for investment, net, in our condensed consolidated
balance sheet and include fees charged to borrowers. These fees are amortized and accreted, respectively, into interest income over the
life of the related loans held for investment.
Deferred
Financing Costs. Costs incurred in connection with financings are capitalized and recorded as an offset to the related liability
and amortized over the respective financing terms and are recorded in our condensed consolidated statements of operations as a component
of interest and related expenses. At June 30, 2021, we had approximately $397 of capitalized financing costs, net of amortization.
Net
Income Per Common Share. We calculate net income per common share, or EPS, by dividing net income by the weighted average number
of common shares outstanding during the period. At June 30, 2021 and December 31, 2020, no warrants, options or other types
or classes of securities existed that could be potentially dilutive to our common shares outstanding.
Revenue
Recognition. Interest income related to our first mortgage whole loans secured by CRE will generally be accrued based on the
coupon rates applied to the outstanding principal balance of such loans. Fees, premiums and discounts, if any, will be amortized or accreted
into interest income over the remaining lives of the loans using the effective interest method, as adjusted for any prepayments.
If a loan's interest or principal payments are
not paid when due and there is uncertainty that such payments will be collected, the loan may be categorized as non-accrual and no interest
will be recorded unless it is collected. When all overdue payments are collected and, in our judgment, a loan is likely to remain current,
it may be re-categorized as accrual.
For loans purchased at a discount, GAAP limits
the yield that may be accreted (accretable yield) to the excess of the investor’s estimate of undiscounted expected principal, interest
and other cash flows (cash flows expected at acquisition to be collected) over the investor’s initial investment in the loan. GAAP
also requires that the excess of contractual cash flows over cash flows expected to be collected (non-accretable difference) not be recognized
as an adjustment of yield, loss accrual or valuation allowance. Subsequent increases in cash flows expected to be collected from such
loans generally will be recognized prospectively through adjustment of the loan’s yield over its remaining life. Decreases in cash
flows expected to be collected will be recorded as an impairment.
Securities
Transactions and Investment Income. Under the Predecessor Basis, we recorded securities transactions on a trade date basis,
dividend income on the ex-dividend date and any non-cash dividends at the fair market value of the securities received. We use the accrual
method for recording interest income, including accretion of original issue discount, where applicable, and accretion of discount on short
term investments and identified cost basis for realized gains and losses from securities transactions. The difference between cost and
fair value for investments we continue to hold is reflected as unrealized gain (loss), and any change in that amount from a prior period
is reflected in the accompanying consolidated statement of operations.
Note 4. Recent Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update, or ASU, No. 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires
that entities use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance
for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and
supportable forecasts that affect the collectability of the reported amount. As a smaller reporting company, we expect to adopt ASU No. 2016-13
on January 1, 2023. We are currently assessing the potential impact the adoption of ASU No. 2016-13 will have on our condensed
consolidated financial statements.
Note 5. Loans Held for Investment
We originate first mortgage loans secured by middle
market and transitional CRE, which are generally to be held as long term investments. We funded our existing loan portfolio using cash
on hand and advancements under our master repurchase facility with UBS AG, or UBS, or our Master Repurchase Facility. See Note 6 for further
information regarding our Master Repurchase Facility.
RMR MORTGAGE TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(dollars in thousands, except per share data)
The table below provides overall statistics for
our loan portfolio as of June 30, 2021 and December 31, 2020:
|
|
As of
June 30, 2021
(Successor Basis)
|
|
|
As
of December 31, 2020
(Predecessor Basis)
|
|
Number of loans
|
|
|
9
|
|
|
|
5
|
|
Total loan commitments
|
|
$
|
250,710
|
|
|
$
|
111,720
|
|
Unfunded loan commitments (1)(2)
|
|
$
|
38,291
|
|
|
$
|
18,857
|
|
Principal balance (2)
|
|
$
|
212,515
|
|
|
$
|
92,863
|
|
Unamortized net deferred origination and exit fees
|
|
$
|
(1,773
|
)
|
|
$
|
(984
|
)
|
Carrying value
|
|
$
|
210,742
|
|
|
$
|
91,879
|
|
Weighted average coupon rate
|
|
|
4.98
|
%
|
|
|
5.08
|
%
|
Weighted average all in yield (3)
|
|
|
5.62
|
%
|
|
|
5.71
|
%
|
Weighted average LIBOR floor
|
|
|
0.76
|
%
|
|
|
0.78
|
%
|
Weighted average maximum maturity (years) (4)
|
|
|
4.2
|
|
|
|
4.2
|
|
Weighted average risk rating
|
|
|
2.9
|
|
|
|
3.0
|
|
Weighted average LTV (5)
|
|
|
68
|
%
|
|
|
68
|
%
|
|
(1)
|
Unfunded loan commitments are primarily used to finance property and building improvements and leasing capital and are generally funded
over the term of the loan.
|
|
(2)
|
The principal balance at June 30, 2021 includes $96 of capitalized interest that does not reduce the amount of unfunded loan
commitments.
|
|
(3)
|
All in yield represents the yield on a loan, excluding any repurchase debt funding applicable to the loan and including amortization
of deferred fees over the initial term of the loan.
|
|
(4)
|
Maximum maturity assumes all borrower loan extension options have been exercised, which options are subject to the borrower meeting
certain conditions.
|
|
(5)
|
LTV represents the initial loan amount divided by the underwritten in-place value of the underlying collateral at closing.
|
The table below represents our loan activities
during the three months ended June 30, 2021:
|
|
Principal Balance
|
|
|
Deferred Fees
|
|
|
Carrying Value
|
|
Balance at March 31, 2021 (Successor Basis)
|
|
$
|
148,652
|
|
|
$
|
(1,405
|
)
|
|
$
|
147,247
|
|
Additional funding
|
|
|
693
|
|
|
|
—
|
|
|
|
693
|
|
Originations
|
|
|
63,170
|
|
|
|
(755
|
)
|
|
|
62,415
|
|
Net amortization of deferred fees
|
|
|
—
|
|
|
|
387
|
|
|
|
387
|
|
Balance at June 30, 2021 (Successor Basis)
|
|
$
|
212,515
|
|
|
$
|
(1,773
|
)
|
|
$
|
210,742
|
|
The table below represents our loan activities
during the six months ended June 30, 2021:
|
|
Principal Balance
|
|
|
Deferred Fees
|
|
|
Carrying Value
|
|
Balance at December 31, 2020 (Predecessor Basis)
|
|
$
|
92,863
|
|
|
$
|
(984
|
)
|
|
$
|
91,879
|
|
Additional funding
|
|
|
967
|
|
|
|
—
|
|
|
|
967
|
|
Originations
|
|
|
118,685
|
|
|
|
(1,430
|
)
|
|
|
117,255
|
|
Net amortization of deferred fees
|
|
|
—
|
|
|
|
641
|
|
|
|
641
|
|
Balance at June 30, 2021 (Successor Basis)
|
|
$
|
212,515
|
|
|
$
|
(1,773
|
)
|
|
$
|
210,742
|
|
In July 2021, we originated a first mortgage
loan of $27,385 to refinance a multi-tenant office building located in Plano, TX. This loan requires the borrower to pay interest at the
floating rate of LIBOR plus a premium of 475 basis points per annum. This floating rate loan includes an initial funding of $24,635 and
a future funding allowance of $2,750 for tenant improvements, leasing commissions and capital expenditures and has a three-year initial
term with two, one-year extension options, subject to the borrower meeting certain conditions.
Also in July 2021, we originated a first
mortgage loan of $19,688 to finance the acquisition of a 100-unit apartment building located in Portland, OR. This loan requires the
borrower to pay interest at the floating rate of LIBOR plus a premium of 357 basis points per annum. This floating rate loan was
fully funded at closing and has a three-year initial term with two, one-year extension options, subject to the borrower meeting
certain conditions.
RMR MORTGAGE TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(dollars
in thousands, except per share data)
The tables below detail the property type and geographic
location of the properties securing the loans in our portfolio as of June 30, 2021 and December 31, 2020:
|
|
June 30, 2021
(Successor Basis)
|
|
|
December 31, 2020
(Predecessor Basis)
|
|
Property Type
|
|
Number of Loans
|
|
|
Carrying Value
|
|
|
Percentage of Value
|
|
|
Number of Loans
|
|
|
Carrying Value
|
|
|
Percentage
of Value
|
|
Office (1)
|
|
|
4
|
|
|
$
|
68,395
|
|
|
|
33
|
%
|
|
|
2
|
|
|
$
|
38,106
|
|
|
|
41
|
%
|
Multifamily
|
|
|
1
|
|
|
|
44,205
|
|
|
|
21
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
%
|
Lab
|
|
|
2
|
|
|
|
31,199
|
|
|
|
15
|
%
|
|
|
2
|
|
|
|
31,078
|
|
|
|
34
|
%
|
Retail
|
|
|
1
|
|
|
|
17,780
|
|
|
|
8
|
%
|
|
|
1
|
|
|
|
17,029
|
|
|
|
19
|
%
|
Industrial (1)
|
|
|
1
|
|
|
|
49,163
|
|
|
|
23
|
%
|
|
|
—
|
|
|
|
5,666
|
|
|
|
6
|
%
|
|
|
|
9
|
|
|
$
|
210,742
|
|
|
|
100
|
%
|
|
|
5
|
|
|
$
|
91,879
|
|
|
|
100
|
%
|
|
(1)
|
Two loan investments secured by mixed use properties consisting of office space and an industrial warehouse in Aurora, IL and
Colorado Springs, CO are classified as office for the purpose of counting the number of loans in our portfolio because the majority of
the square footage of the properties consists of office space. The carrying value of these loan investments are reflected in office and
industrial based on the fair value of the buildings at the time of origination relative to the total fair value of the properties.
|
|
|
June 30, 2021
(Successor Basis)
|
|
|
December 31, 2020
(Predecessor Basis)
|
|
Geographic Location
|
|
Number of Loans
|
|
|
Carrying Value
|
|
|
Percentage of Value
|
|
|
Number of Loans
|
|
|
Carrying Value
|
|
|
Percentage
of Value
|
|
East
|
|
|
1
|
|
|
$
|
33,908
|
|
|
|
16
|
%
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
%
|
South
|
|
|
2
|
|
|
|
24,184
|
|
|
|
11
|
%
|
|
|
1
|
|
|
|
13,281
|
|
|
|
14
|
%
|
West
|
|
|
3
|
|
|
|
64,537
|
|
|
|
31
|
%
|
|
|
2
|
|
|
|
34,826
|
|
|
|
38
|
%
|
Midwest
|
|
|
3
|
|
|
|
88,113
|
|
|
|
42
|
%
|
|
|
2
|
|
|
|
43,772
|
|
|
|
48
|
%
|
|
|
|
9
|
|
|
$
|
210,742
|
|
|
|
100
|
%
|
|
|
5
|
|
|
$
|
91,879
|
|
|
|
100
|
%
|
Loan Risk Ratings
We evaluate each of our loans for impairment at
least quarterly by assessing a variety of risk factors in relation to each loan and assigning a risk rating to each loan based on those
factors. The higher the number, the greater the risk level. The following table allocates the carrying value of our loan portfolio at
June 30, 2021 and December 31, 2020 based on our internal risk rating policy:
|
|
June 30, 2021
(Successor Basis)
|
|
|
December 31,2020
(Predecessor Basis)
|
|
Risk Rating
|
|
Number of Loans
|
|
|
Carrying Value
|
|
|
Number of Loans
|
|
|
Carrying Value
|
|
1
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
2
|
|
|
1
|
|
|
|
17,850
|
|
|
|
—
|
|
|
|
—
|
|
3
|
|
|
8
|
|
|
|
192,892
|
|
|
|
5
|
|
|
|
91,879
|
|
4
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
5
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
9
|
|
|
$
|
210,742
|
|
|
|
5
|
|
|
$
|
91,879
|
|
The
weighted average risk rating of our loans by carrying value was 2.9 and 3.0 as of June 30, 2021 and December 31, 2020, respectively.
We did not have any impaired loans or nonaccrual loans as of June 30, 2021 or December 31, 2020. See Note 3 for further information
regarding our loan risk ratings.
As of July 30, 2021, all of our borrowers
had paid all of their debt service obligations owed and due to us and none of the loans included in our investment portfolio were in default.
RMR MORTGAGE TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(dollars
in thousands, except per share data)
Note 6. Debt Agreements
The table below summarizes our debt agreements
as of June 30, 2021:
|
|
Debt
Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
Collateral
|
|
|
|
Maximum
Facility
Size
|
|
|
Principal
Balance
|
|
|
Carrying
Value
|
|
|
Coupon
Rate
|
|
|
Remaining
Maturity
(1)
(years)
|
|
|
Principal
Balance
|
|
|
Fair
Value
(2)
|
|
June 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master
Repurchase Facility
|
|
$
|
193,055
|
|
|
$
|
49,172
|
|
|
$
|
48,775
|
|
|
|
L
+ 2.05
|
%
|
|
|
2.5
|
|
|
$
|
212,515
|
|
|
$
|
208,678
|
|
|
(1)
|
The
weighted average remaining maturity is determined using the current maturity date of the
corresponding loans, assuming no borrower loan extension options have been exercised. Our
Master Repurchase Facility matures on February 18, 2024.
|
|
(2)
|
See
Note 7 for further discussion of our financial assets and liabilities not carried at fair
value.
|
On February 18, 2021, one of our wholly owned
subsidiaries entered into a master repurchase agreement, or the Master Repurchase Agreement, with UBS for our Master Repurchase Facility,
pursuant to which we may sell to UBS, and later repurchase, commercial mortgage loans, or the Purchased Assets. The expiration date of
the Master Repurchase Agreement is February 18, 2024, unless extended or earlier terminated in accordance with the terms of the Master
Repurchase Agreement. Pursuant to the Master Repurchase Agreement, we will pay UBS a non-refundable upfront fee that is equal to 0.50%
of the applicable tranche amount on each Purchase Date (as each term is defined in the Master Repurchase Agreement). While the Master
Repurchase Facility has no maximum facility amount, we expect the advancements under the Master Repurchase Facility to not exceed our
equity, which, as of June 30, 2021, is $193,055. Our equity will change from time-to-time and may increase or decrease. We expect
that the size of our Master Repurchase Facility may similarly change as our equity changes.
Under our Master Repurchase Facility, the initial
purchase price paid by UBS for each Purchased Asset is up to 75% of the lesser of the market value of the Purchased Asset and the unpaid
principal balance of such Purchased Asset, subject to UBS’s approval. Upon the repurchase of a Purchased Asset, we are required
to pay UBS the outstanding purchase price of the Purchased Asset, accrued interest and all accrued and unpaid expenses of UBS relating
to such Purchased Assets. The pricing rate (or interest rate) relating to a Purchased Asset is equal to one month LIBOR plus a customary
premium within a fixed range, determined by the debt yield and property type of the Purchased Asset’s real estate collateral. UBS
has the discretion under our Master Repurchase Agreement to make advancements at margins higher than 75%. The weighted average interest
rate for advancements under our Master Repurchase Facility was 2.39% for both the three and six months ended June 30, 2021, respectively.
In connection with our Master Repurchase Agreement,
we entered into a guaranty, or the Guaranty, which requires us to guarantee 25% of the aggregate repurchase price, and 100% of losses
in the event of certain bad acts as well any costs and expenses of UBS related to our Master Repurchase Agreement. The Guaranty also requires
us to comply with customary financial covenants, which include the maintenance of a minimum tangible net worth, minimum cash liquidity
and a total indebtedness to stockholders' equity ratio.
Our Master Repurchase Facility also contains margin
maintenance provisions that provide UBS with the right, in certain circumstances related to a Credit Event (as defined in the Master Repurchase
Agreement) to redetermine the value of Purchased Assets. Where a decline in the value of such Purchased Assets has resulted in a margin
deficit, UBS may require us to eliminate any margin deficit through a combination of Purchased Asset repurchases and cash transfers to
UBS subject to UBS’s approval. As of June 30, 2021, we were in compliance with all covenants and other terms under our Master
Repurchase Agreement and the Guaranty.
As of June 30, 2021 and July 30, 2021,
we had a $49,172 and a $69,172, respectively, aggregate outstanding principal balance under our Master Repurchase Facility.
For the three and six months ended June 30,
2020, we recorded interest expense of $297 and $851, respectively, related to our former revolving credit facility with BNP Paribas Prime
Brokerage International Ltd. In November 2020, we repaid all outstanding amounts and terminated that facility.
RMR
MORTGAGE TRUST
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars
in thousands, except per share data)
Note 7. Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurements,
establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives
the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level I) and the lowest priority
to unobservable inputs (Level III). A financial asset’s or financial liability’s fair value measurement level within the fair
value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used
need to maximize the use of observable inputs and minimize the use of unobservable inputs.
As of June 30, 2021 and December 31,
2020, the carrying values of cash and cash equivalents, restricted cash and accounts payable approximate their fair values due to the
short term nature of these financial instruments. At June 30, 2021, the outstanding principal balance under our Master Repurchase
Facility approximated the fair value, as interest was based on floating rates based on LIBOR plus a spread, and the spread was consistent
with those demanded by the market.
We estimate the fair values of our loans held for
investment and outstanding principal balances under our Master Repurchase Facility by using Level III inputs, including discounted cash
flow analyses and currently prevailing market terms as of the measurement date, determined by significant unobservable market inputs,
which include holding periods, discount rates based on LTV, property types and loan pricing expectations which are corroborated by a comparison
with other market participants to determine the appropriate market spread to add to the one month LIBOR (Level III inputs as defined
in the fair value hierarchy under GAAP).
The table below provides information regarding
financial assets and liabilities not carried at fair value on a recurring basis in our condensed consolidated balance sheets:
|
|
June 30, 2021 (Successor Basis)
|
|
|
December 31, 2020 (Predecessor Basis)
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for investment
|
|
$
|
210,742
|
|
|
$
|
209,034
|
|
|
$
|
91,879
|
|
|
$
|
91,879
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master Repurchase Facility
|
|
$
|
48,775
|
|
|
$
|
48,238
|
|
|
|
—
|
|
|
|
—
|
|
There were no transfers of financial assets or
liabilities within the fair value hierarchy during the three or six months ended June 30, 2021.
Note 8. Shareholders' Equity
Common Share Awards
We have common shares available for issuance under
the terms of our 2021 Equity Compensation Plan, or the 2021 Plan. The values of the share awards are based upon the closing price of our
common shares on The Nasdaq Stock Market LLC, or Nasdaq, on the date of award. The common shares that we have awarded to our Trustees
vested immediately. We have not made any awards of common shares to date under the 2021 Plan to our officers and other employees of our
Manager and of RMR LLC. We expect that the awards of common shares that we award to these persons will vest in five equal annual installments
beginning on the date of award. We will recognize the value of awarded shares in general and administrative expenses ratably over the
vesting period. We will recognize any share forfeitures as they occur.
On May 27, 2021, in accordance with our Trustee
compensation arrangements, we awarded to each of our five Trustees 3,000 of our common shares, valued at $12.10 per common share, the
closing price of our common shares on the Nasdaq that day.
Distributions
For the six months ended June 30, 2021, we
declared and paid a distribution to common shareholders as follows:
Record Date
|
|
Payment Date
|
|
Distribution per Share
|
|
|
Total Distribution
|
|
April 26, 2021
|
|
May 20, 2021
|
|
$
|
0.15
|
|
|
$
|
1,530
|
|
RMR MORTGAGE TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(dollars
in thousands, except per share data)
On July 15, 2021, we declared a quarterly
distribution of $0.15 per common share, or approximately $1,533 in aggregate, to shareholders of record as of July 26, 2021. We expect
to pay this distribution on or about August 19, 2021.
Note 9. Management Agreement with our Manager
We have no employees. The personnel and various
services we require to operate our business are provided to us by our Manager, pursuant to a management agreement, which provides for
the day to day management of our operations by our Manager, subject to the oversight and direction of our Board of Trustees.
Prior Agreements with RMR Advisors
Administration
Agreement. Prior to its merger with our Manager on January 6, 2021, RMR Advisors LLC, or RMR Advisors, performed administrative
functions for us pursuant to an administration agreement with us. RMR Advisors was also a party to a subadministration agreement with
State Street Bank and Trust Company, or State Street, to perform substantially all fund accounting and other administrative services for
us. Under the administration agreement, RMR Advisors was entitled to reimbursement of the cost of providing administrative services. On
January 6, 2021, RMR Advisors merged with and into our Manager, with our Manager being the surviving entity, and our Manager assumed
the administration agreement with us and the subadministration agreement with State Street. Each of those agreements was terminated, effective
March 16, 2021. We incurred administration service fees of $24 and $48 for the three and six months ended June 30, 2020, respectively,
and $15 for the period from January 1, 2021 to March 16, 2021, all of which related to the subadministration service fees payable
by RMR Advisors to State Street and reimbursable by us; we did not incur any additional administration service fees beyond those reimbursable
amounts for those periods.
Investment
Advisory Agreement. Prior to January 5, 2021, RMR Advisors provided us with a continuous investment program, made day
to day investment decisions and generally managed our business affairs in accordance with our investment objectives and policies as a
registered investment company pursuant to an investment advisory agreement. The investment advisory agreement was terminated on January 5,
2021 with our deregistration as an investment company. Pursuant to the investment advisory agreement, RMR Advisors was compensated at
an annual rate of 0.85% of our average daily managed assets. We incurred advisory fees of $547 and $1,252 for the three and six months
ended June 30, 2020, respectively, and for the period from January 1, 2021 to January 5, 2021, we incurred advisory fees
of $22 which is included in base management fees in our condensed consolidated statements of operations. We incurred internal audit and
compliance costs reimbursable to RMR Advisors of $34 and $68 for the three and six months ended June 30, 2020, respectively.
Current Management Agreement with our Manager
Effective January 5, 2021, our Manager provides
services to us pursuant to a new management agreement. We recognized base management fees of $721 and $1,414 for the three and six months
ended June 30, 2021, respectively. Pursuant to the terms of our management agreement, no management incentive fees are payable until
the first full quarter following the effective date of the management agreement and, thereafter, any management incentive fees would be
subject to our Manager earning those fees in accordance with the management agreement adopted by us. We did not incur any management incentive
fees for the three and six months ended June 30, 2021.
We are required to pay or to reimburse our Manager
and its affiliates for all other costs and expenses of our operations. Some of these overhead, professional and other services are provided
by The RMR LLC Group, or RMR LLC, pursuant to a shared services agreement between our Manager and RMR LLC. We reimburse our Manager for
shared services costs our Manager pays to RMR LLC. These reimbursements include an allocation of the cost of personnel employed by RMR
LLC and our share of RMR LLC’s costs for providing our internal audit function. These shared services costs are subject to approval
by a majority of our Independent Trustees at least annually. We incurred shared services costs of $312 and $664 and payable to our Manager
for the three and six months ended June 30, 2021, respectively. We include these amounts in reimbursement of shared services expenses
or general and administrative expenses, as applicable, in our condensed consolidated statements of operations.
RMR MORTGAGE TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(dollars
in thousands, except per share data)
Contemporaneously with the execution of the Merger
Agreement, we, TRMT and TRA entered into the TRA Letter Agreement, pursuant to which, on the terms and subject to conditions contained
therein, we, TRMT and TRA have acknowledged and agreed that, effective upon consummation of the Merger, TRMT shall have terminated its
management agreement with TRA, and TRA shall have waived its right to receive payment of the termination fee pursuant to such agreement.
In consideration of this waiver, we have agreed that, effective upon consummation of the Merger and the termination of TRMT’s management
agreement with TRA, certain of the expenses TRA had paid pursuant to such management agreement will be included in the “Termination
Fee” under and as defined in our existing management agreement with TRA. The TRA Letter Agreement further provides that such termination
by TRMT and waiver by TRA shall apply only in respect of the Merger and will not apply in respect of any competing proposal or superior
proposal (as those terms are defined in the Merger Agreement) or to any other transaction or arrangement. See Note 1 for further information
regarding the TRA Letter Agreement and the Merger.
Note 10. Related Person Transactions
We have relationships and historical and continuing
transactions with our Manager, RMR LLC, The RMR Group Inc., or RMR Inc., and others related to them, including other companies to which
RMR LLC or its subsidiaries provide management services and some of which have trustees, directors or officers who are also our Trustees
or officers. Our Manager is a subsidiary of RMR LLC, which is a majority owned subsidiary of RMR Inc., and RMR Inc. is the managing member
of RMR LLC. RMR LLC provides certain shared services to our Manager that are applicable to us, and we reimburse our Manager for the amounts
it pays for those services. One of our Managing Trustees, Adam Portnoy, is the sole trustee, an officer and the controlling shareholder
of ABP Trust, which is the controlling shareholder of RMR Inc., and he is also a director of our Manager, a managing director and the
president and chief executive officer of RMR Inc., and an officer and employee of RMR LLC. In connection with the Business Change, our
Board of Trustees appointed Thomas J. Lorenzini as our President and G. Douglas Lanois as our Chief Financial Officer and Treasurer. Mr. Lorenzini
and Mr. Lanois succeeded Fernando Diaz and Brian E. Donley, respectively, who each resigned from our Company, effective January 5,
2021. In addition, on January 5, 2021, Jennifer B. Clark resigned as our Managing Trustee, and our Board of Trustees elected Matthew
P. Jordan as successor Managing Trustee to fill the vacancy created by Ms. Clark’s resignation. Also effective January 1,
2021, Mr. Jordan was appointed as a director and the president and chief executive officer of our Manager. Mr. Jordan is an
officer of RMR Inc. and an officer and employee of RMR LLC, and Messrs. Lorenzini and Lanois are officers of RMR LLC and officers
and employees of our Manager and/or RMR LLC.
Our Independent Trustees also serve as independent
directors or independent trustees of other public companies to which RMR LLC or its subsidiaries provide management services. Adam Portnoy
serves as the chair of the boards of trustees and boards of directors of several of these public companies and as a managing director
or managing trustee of all of these companies. Other officers of RMR LLC, including Mr. Jordan and certain of our other officers
and officers of our Manager, serve as managing trustees, managing directors or officers of certain of these companies.
Our
Manager, Tremont Realty Advisors LLC. We have a management agreement with our Manager to provide management services to us.
See Note 9 for further information regarding our management agreement with our Manager. Our Manager also provides management services
to TRMT.
Tremont
Mortgage Trust. As described further in Note 1, on April 26, 2021, we and TRMT entered into the Merger Agreement. Adam
D. Portnoy and Matthew P. Jordan, our Managing Trustees, are also TRMT’s managing trustees. Thomas J. Lorenzini, our President,
also serves as president of TRMT, and G. Douglas Lanois, our Chief Financial Officer and Treasurer, also serves as chief financial officer
and treasurer of TRMT. John L. Harrington serves as one of our Independent Trustees and is also an independent trustee of TRMT, and Joseph
L. Morea, one of our Independent Trustees, previously served as an independent trustee of TRMT; Jeffrey P. Somers, one of our Independent
Trustees, previously served as an independent trustee of TRMT. See Note 1 for further information regarding the Merger and the other Transactions.
For further information about these and other such
relationships and certain other related person transactions, refer to our definitive Proxy Statement for our 2021 Annual Meeting of Shareholders,
to our Current Report on Form 8-K dated April 26, 2021 and to our joint proxy statement/prospectus that is included in our registration
statement on Form S-4 filed with the SEC on June 9, 2021, as subsequently amended and declared effective on July 26, 2021,
or the Form S-4.
Note 11. Income Taxes
We intend to elect to be taxed as a REIT under
the Internal Revenue Code of 1986, as amended, or the IRC, effective for our 2020 taxable year. Accordingly, we generally are not, and
will not be, subject to U.S. federal income tax, provided that we meet certain distribution and other requirements. We are subject to
certain state and local taxes, certain of which amounts are or will be reported as income taxes in our condensed consolidated statements
of operations.
RMR MORTGAGE TRUST
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(dollars
in thousands, except per share data)
Note 12. Commitments and Contingencies
As of June 30, 2021, we had unfunded commitments
of $38,291 related to our loans held for investment that are not reflected in our condensed consolidated balance sheet. These unfunded
commitments had a weighted average initial maturity of 2.5 years as of June 30, 2021. See Note 5 for further information related
to our loans held for investment.
Note 13. Legal Proceedings and Claims
As of July 30, 2021, four lawsuits have been
filed by purported shareholders of ours and TRMT in connection with the proposed Merger between us and TRMT. The lawsuits were brought
by the plaintiffs individually and are captioned Bishins v. Tremont Mortgage Trust, et al., Case No. 1:21-cv-05435 (S.D.N.Y.,
filed June 21, 2021), Lee v. Tremont Mortgage Trust, et al., Case No. 1:21-cv-05618 (S.D.N.Y., filed June 29, 2021),
Merewether v. Tremont Mortgage Trust, et al., Case No. 1:21-cv-13116 (D.N.J., filed June 29, 2021) and Parthenakis
v. RMR Mortgage Trust, et al., Case No. 1:21-cv-05694 (S.D.N.Y, filed July 1, 2021), each, a complaint, and collectively,
the complaints. The Bishins, Lee and Merewether complaints name as defendants TRMT and the TRMT board of trustees.
The Bishins and Lee complaints also name RMRM as a defendant. The Parthenakis complaint names as defendants us and
our Board of Trustees.
The plaintiffs generally assert claims under Section 14(a) and
Section 20(a) of the Exchange Act, contending that the registration statement on Form S-4 filed with the SEC on June 9,
2021, and serving as the preliminary joint proxy statement/prospectus, omitted or misrepresented material information regarding the proposed
merger between us and TRMT. The complaints generally seek injunctive relief preventing us and TRMT from consummating the Merger, rescission
or rescissory damages, an award of plaintiffs’ costs, including attorneys’ fees and expenses, and such other relief the court
may deem just and proper. The Bishins complaint also seeks a declaration that the Merger Agreement was entered into in breach of
the Bishins individual defendants’ fiduciary duties and is therefore unlawful and unenforceable. The Lee and Merewether
complaints additionally seek a declaration that the defendants violated Sections 14(a) and 20(a) of the Exchange Act and an
order directing the defendants to disseminate a registration statement that does not contain any untrue or misleading statements of material
fact. The Parthenakis complaint also seeks an order requiring the Parkthenakis defendants to account to plaintiffs for all
damages suffered as a result of their wrongdoing.
We and our Board of Trustees deny that we have
violated any laws or breached any duties to our shareholders and believe the claims asserted in the complaints are without merit.