Business Context and Reporting Period
RMR Mortgage Trust, which subsequently changed its name and strategy toward becoming Seven Hills Realty Trust, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. On January 5, 2021, the Trust deregistered under the Investment Company Act and began operating as a mortgage REIT focused primarily on originating and investing in first mortgage whole loans secured by middle-market and transitional commercial real estate.
Because the business changed from an investment company to a mortgage REIT, management stated that comparisons with 2020 predecessor-period results are not meaningful. The 2021 financial statements use a “Successor Basis,” while prior periods use a “Predecessor Basis.”
Key Financial Metrics
| Metric | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2021 |
|---|---|---|
| Interest income | $3.055 million | $5.056 million |
| Net income from investments | $2.863 million | $4.864 million |
| Total expenses | $1.710 million | $3.343 million |
| Net income | $1.160 million | $1.510 million |
| Net income per common share | $0.11 | $0.15 |
| Distributable Earnings | $1.342 million | $1.692 million |
| Distributable Earnings per share | $0.13 | $0.17 |
The filing does not provide a conventional net margin percentage. Based on reported net income divided by interest income, net income represented approximately 38.0% of quarterly interest income and 29.9% of six-month interest income; these ratios are not presented by management as operating margins.
Balance Sheet, Portfolio and Liquidity
- Total assets were $244.474 million, including $210.742 million of loans held for investment and $30.402 million of cash and cash equivalents.
- Total liabilities were $51.419 million, including $48.775 million carrying value of the master repurchase facility.
- Shareholders’ equity was $193.055 million, or $18.90 per common share, based on 10.217 million shares outstanding at June 30, 2021.
- The loan portfolio consisted of nine first mortgage loans with $250.710 million of commitments, $212.515 million of principal balance and $38.291 million of unfunded commitments.
- Weighted average coupon rate was 4.98%, weighted average all-in yield was 5.62%, weighted average loan-to-value ratio was 68%, and weighted average risk rating was 2.9.
- There were no impaired, non-accrual or defaulted loans at June 30, 2021, and no loan-loss allowance was recorded.
- Cash, cash equivalents and restricted cash declined from $103.564 million at December 31, 2020 to $30.607 million at June 30, 2021.
- Net cash used in operating activities was $2.093 million; net cash used in investing activities was $118.075 million, primarily for loan originations; and net cash provided by financing activities was $47.211 million.
Debt and Distributions
- The UBS master repurchase facility had $49.172 million of outstanding principal, $143.883 million of unused capacity as presented in the liquidity table, and a February 18, 2024 maturity date.
- The facility bears interest based on one-month LIBOR plus a premium; the weighted average borrowing rate was 2.39% for the quarter and six-month period.
- The facility generally advances up to 75% of the lesser of collateral market value and unpaid principal balance and includes margin maintenance provisions, cash-flow sweeps and financial covenants.
- The Trust was in compliance with its debt covenants at June 30, 2021. Outstanding repurchase borrowings increased to $69.172 million as of July 30, 2021.
- The Trust paid a $0.15 per share distribution, totaling $1.530 million, during the six months ended June 30, 2021, and declared another $0.15 per share distribution payable in August 2021.
Material Changes Versus the Prior Comparable Period
Direct year-over-year comparisons are not useful because the Trust transitioned from an equity investment company to a mortgage REIT in January 2021. Compared with the March 31, 2021 quarter, second-quarter interest income increased 52.7% to $3.055 million, primarily because of a full quarter of income from loans originated in the first quarter and income from two second-quarter originations. Net income increased 231.4% to $1.160 million, while earnings per share increased to $0.11 from $0.03.
Second-quarter interest and related expenses increased to $192,000 from none in the first quarter as borrowings under the UBS facility began. General and administrative expenses increased 20.6% to $714,000, primarily due to share-based compensation from trustee share grants. Total loan carrying value increased from $91.879 million at December 31, 2020 to $210.742 million at June 30, 2021, and the number of loans increased from five to nine.
Guidance, Outlook, Risks and Unusual Items
- The Trust entered into an agreement to merge with Tremont Mortgage Trust. Subject to shareholder and other required approvals, the merger was expected to close in the third quarter of 2021. The exchange ratio was fixed at 0.52 RMR Mortgage Trust shares for each Tremont common share, subject to the agreement’s terms.
- Following the merger, the company expected to change its name to Seven Hills Realty Capital Trust and its Nasdaq ticker to SHRC. The filing itself was issued under the name RMR Mortgage Trust.
- The Trust incurred $2.183 million of merger transaction costs, included in prepaid expenses and other assets, and reported $2.270 million of cash transaction costs during the six-month period.
- Four shareholder lawsuits had been filed challenging the merger disclosure and related conduct. The Trust denied the allegations and stated that it believed the claims were without merit.
- Management stated that COVID-19 had not significantly affected the business through the reporting date, but warned that future effects on borrowers, collateral values, liquidity and loan performance remained uncertain.
- Key portfolio risks include borrower defaults, transitional-property execution risk, office and retail market weakness, competition among lenders, collateral value declines, margin calls, refinancing risk and the availability and cost of leverage.
- The loan portfolio and repurchase facility use floating rates tied to LIBOR. The planned LIBOR phaseout could require replacement benchmark provisions and may affect loan income and borrowing costs.
- The Trust expected its cash sources, including cash on hand, loan collections and available borrowing capacity, to satisfy operating needs, debt service and distributions for the next 12 months, subject to economic and borrower conditions.
Most Important Facts to Verify
- Confirm completion and final terms of the Tremont merger, including shareholder approvals, exchange-ratio adjustments, legal proceedings and the subsequent name and ticker change to Seven Hills Realty Trust.
- Verify the growth, funding and credit performance of the nine-loan portfolio, including the $38.291 million of unfunded commitments, 68% weighted average LTV and absence of recorded loan-loss reserves.
- Monitor repurchase-facility borrowings, collateral values, margin requirements, covenant compliance and the increase in borrowings to $69.172 million at July 30, 2021.
- Assess liquidity after the substantial decline in cash and the Trust’s ability to fund commitments while maintaining distributions.
- Review the impact of COVID-19, office and retail property conditions, borrower performance and the LIBOR transition on future earnings and asset values.
- Consider related-party management fees, shared-service reimbursements and governance relationships with the RMR organization when evaluating operating expenses and conflicts of interest.