Business Context and Reporting Period
Registrant: RMR Mortgage Trust, the predecessor entity to Seven Hills Realty Trust, for the quarter ended March 31, 2021. The company deregistered as an investment company on January 5, 2021 and began operating as a REIT focused primarily on originating and investing in first mortgage whole loans secured by middle-market and transitional commercial real estate.
The quarter is presented on a successor basis after the business change and is not directly comparable with the predecessor investment-company results for the first quarter of 2020. The filing states that the January 1–4, 2021 results were immaterial and are included in the quarter’s results.
Financial and Operating Metrics
| Metric | March 31, 2021 / Three Months Ended |
|---|---|
| Total assets | $195.1 million |
| Cash and cash equivalents | $46.8 million |
| Cash, cash equivalents and restricted cash | $47.1 million |
| Loans held for investment, net | $147.2 million |
| Total liabilities | $1.8 million |
| Shareholders’ equity | $193.2 million |
| Net income | $350 thousand |
| Net income per common share | $0.03 |
| Interest income | $2.0 million |
| Total expenses | $1.6 million |
| Operating cash flow | $(1.4) million |
| Investing cash flow | $(55.0) million |
| Financing cash flow | $(76) thousand |
| Book value per common share | $18.94 |
Net income was approximately 17.5% of interest income; this is not presented as a formal net margin because the company’s revenue base and business model changed during the period. Distributable Earnings equaled GAAP net income for the quarter.
Loan Portfolio and Liquidity
- The portfolio increased from five loans with a $91.9 million carrying value at December 31, 2020 to seven loans with a $147.2 million carrying value at March 31, 2021.
- Total loan commitments were $177.2 million, including $28.6 million of unfunded commitments. Principal balance was $148.7 million.
- Weighted average coupon rate was 4.99%, weighted average all-in yield was 5.65%, weighted average maximum maturity was 4.3 years, weighted average loan-to-value ratio was 67%, and weighted average risk rating was 3.0.
- All seven loans were rated 3, described as acceptable risk. The company reported no impaired, non-accrual or defaulted loans and recorded no loan-loss allowance as of March 31, 2021.
- Cash declined by $56.5 million during the quarter, primarily because of $55.0 million of loan originations and additional loan fundings.
- The company had no outstanding balance under its UBS master repurchase facility at March 31, 2021. The facility permits advances generally up to 75% of the lesser of market value or unpaid principal balance, subject to lender approval and covenants. The April 30, 2021 balance was $23.2 million.
- Unfunded loan commitments of $28.6 million are expected to be funded primarily over the next one to three years.
Material Changes Versus Prior Comparable Period
- The business shifted from investing in real estate company equity securities to originating and holding first mortgage commercial real estate loans.
- Compared with December 31, 2020, loan commitments increased 58% and the loan carrying value increased 60%, while cash and cash equivalents decreased from $103.3 million to $46.8 million.
- The company did not provide a conventional year-over-year operating comparison because the prior-year period reflected the former investment-company business. In the first quarter of 2020, the predecessor reported a $119.9 million net decrease in net assets attributable to common shareholders, largely due to $123.3 million of unrealized investment losses; that result is not comparable to the 2021 successor-basis results.
- Effective January 5, 2021, a new management agreement with Tremont Realty Advisors LLC replaced the former investment advisory arrangement. First-quarter 2021 base management fees were $715 thousand, and no incentive fees were payable for the quarter.
Guidance, Outlook, Risks and Unusual Items
- On April 26, 2021, the company entered into an agreement to merge with Tremont Mortgage Trust. The proposed exchange ratio is 0.52 Seven Hills/RMRM common shares for each Tremont common share, subject to the agreement. The transaction was expected to close in the third quarter of 2021, subject to shareholder, regulatory, SEC registration, Nasdaq and tax-related conditions.
- Upon completion, the company planned to change its name to Seven Hills Realty Capital and its Nasdaq ticker to SHRC. The filing does not provide a definitive closing date or assurance that the merger will be completed.
- The merger is expected to dilute existing shareholders; the filing estimated that existing company shareholders would own approximately 70% of the combined company and Tremont shareholders approximately 30%, based on shares outstanding at signing.
- The company declared a $0.15 per common share distribution for the first quarter of 2021, totaling approximately $1.5 million, payable on or about May 20, 2021.
- Management expects cash on hand, loan collections, operating cash flows and available financing capacity to be sufficient for operating needs, commitments, debt service and distributions for the next 12 months, subject to COVID-19 conditions and borrower performance.
- COVID-19 may adversely affect borrowers, property cash flows, collateral values, loan performance and access to capital. Office, retail and hospitality assets remain areas of particular uncertainty, while industrial and multifamily assets were viewed more favorably.
- The company’s floating-rate loans and borrowings reference one-month LIBOR. LIBOR phaseout, interest-rate changes, lender margin requirements and replacement benchmark terms could affect earnings, financing costs and liquidity.
- Key risks include borrower defaults, transitional-property execution risk, competition for loans, dependence on the external manager and related parties, limited operating history in the new strategy, REIT qualification requirements, financing and margin-call risk, and potential merger-related costs, litigation or termination fees.
- Subsequent to quarter-end, the company originated two loans totaling $73.5 million of commitments, subject to initial fundings and future funding allowances.
Investor Verification Items
- Verify the actual closing status, consideration, dilution and final terms of the proposed Tremont Mortgage Trust merger and any resulting name or ticker changes.
- Reconcile the successor-basis 2021 results with predecessor-basis 2020 results before assessing growth, profitability or margin trends.
- Review the seven-loan portfolio’s property concentrations, borrower business plans, collateral values, risk ratings and the $28.6 million of unfunded commitments.
- Monitor borrower payment performance, non-accruals, impairments and potential loan-loss allowances as COVID-19 effects and commercial real estate conditions evolve.
- Confirm utilization, advance rates, covenants, margin-call provisions and outstanding borrowings under the UBS repurchase facility.
- Assess the sustainability of the $0.15 per share distribution relative to distributable earnings, cash flows, REIT distribution requirements and future funding needs.
- Evaluate LIBOR replacement provisions and the effect of benchmark changes on loan yields and financing costs.
- Review related-party management fees, shared-service reimbursements, termination-fee provisions and potential conflicts associated with the external manager and affiliated entities.