Edited Transcript of TRMT.OQ earnings conference call or presentation 19-Feb-20 3:00pm GMT

The 2 transitional bridge loans closed during the fourth quarter were for total commitments of $33 million, of which $31 million was funded at closing and $2 million was retained for future funding requirements. These 2 loans are secured by a 576-bed student housing community and an 87,000 square foot office building.

Subsequent to year-end, we closed 2 transitional bridge loans secured by an industrial property and a 3-building office campus with a lab component. These loans have a total commitment of $36.8 million, of which $26.1 million was funded at closing and $10.7 million was retained for future funding requirements. As a result of these 4 loan closings, the trust has a portfolio of 14 first mortgage whole loans that fully committed our capital at $297 million, of which $27 million remains unfunded.

Turning to 2020. Our strategic plan for 2020 is to asset manage our existing loans and reinvest capital as loans are repaid. Our manager, Tremont Realty Advisors, recently established a separate managed account with $50 million of equity from the Portnoy Family Office that is being invested in transitional bridge loans consistent with the trust’s investment strategy.

As a result, our manager continues to maintain an active pipeline of quality middle-market transitional bridge loans that should allow us to redeploy trust capital efficiently when loans are repaid. Our manager is exploring strategies to raise other private capital to grow this separate managed account business.

Besides the benefit of remaining active in the bridge loan market, our managers separate accounts business creates an opportunity to spread the reimbursement of shared service expenses over a broader base and reduce the trust operating expenses. Based upon our current forecast, we expect the trust to begin realizing shared service expense synergies in the first quarter of 2020 with a potential positive impact to core earnings of $0.05 to $0.07 per share for the full year 2020.

Turning to the dividend. In January, we declared a distribution of $0.22 per share, consistent with what we paid in November 2019. For the full year, the trust paid distributions to common shareholders of $0.77 per share compared to 2019 core earnings of $0.83 per share or a 93% payout ratio.

As we look ahead to 2020 and assuming shared service expense synergies, the reinstatement of TRA’s management fee beginning in the third quarter and no early loan repayments, we expect to have a modest shortfall in core earnings to cover the trust’s current distribution rate. We currently believe the shortfall is manageable, but expect to monitor the shortfall with the Board on a quarterly basis.

I will now turn the call over to Doug to review our portfolio and financial results. Doug?

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G. Douglas Lanois, Tremont Mortgage Trust – CFO, Treasurer & Assistant Secretary [4]

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Thank you, David, and good morning, everyone. Let’s begin with the review of the income statement.

Our fourth quarter core earnings was $1.4 million or $0.17 per weighted average diluted share, a year-over-year improvement of $0.09 per share. This increase is largely attributable to our growth in loans held for investment from 7 loans totaling $135.8 million at the end of 2018 to 12 loans totaling $242.1 million at the end of 2019.

When compared to third quarter core earnings of $0.26 per share, there was a $0.09 per share decrease in the fourth quarter, which was well within our expectations. As announced on last quarter’s call, third quarter core earnings benefited from a nonrecurring prepayment premium of $449,000 from early repayment of 2 loans.

Additionally, the $53.6 million of capital proceeds we received from the repayment was not fully redeployed during the quarter, resulting in lower interest income in the fourth quarter. Interest income from investments for the quarter was $3.6 million, reflecting full quarter interest payments on 10 loans and partial quarter interest payments on the 2 loans that closed late in the fourth quarter.

Interest and related expenses incurred from borrowings on our master repurchase facility was approximately $1.5 million, leaving us with income from investments of $2.1 million for the quarter. As presented in our supplemental financial package, our weighted average all-in yield on our investments as of December 31, 2019, is LIBOR plus 424 basis points, and our weighted average LIBOR floor is 215 basis points.

Our expenses in the fourth quarter totaled approximately $815,000 and included G&A expenses of $468,000, of which $44,000 was noncash stock compensation expense. We expect that our 2019 G&A will remain relatively level and is an appropriate run rate for 2020.

Reimbursed shared services expenses amounted to $347,000 in the fourth quarter. As David mentioned, we expect that our shared services expense levels will decrease in 2020 as a result of our manager originating and managing investments for Center Street Finance. We also expect that the reduced shared services expenses will partially offset the impact of the reinstatement of the management fee on July 1, 2020. That fee was waived by our manager for the period July 1, 2018 through June 30, 2020, and amounted to savings of $319,000 and $1.1 million for the quarter and full year, respectively.

Now turning to our balance sheet. At the end of the fourth quarter, we had $8.7 million in cash and cash equivalents. Our loans held for investment at quarter end totaled $242.1 million, an increase of $34.6 million from last quarter. At quarter end, we had $17.3 million in unfunded loan commitments.

During the quarter, we borrowed an additional $34.3 million on our master repurchase agreement to fund 2 loans and advances on existing loans, resulting in a balance of $164.7 million. As of December 31, we had $213.5 million of total capacity on our master repurchase facility, of which $47.9 million is undrawn and $15.8 million is available from existing pledged loans. As of today’s call, the balance of our master repurchase agreement is $195.1 million, and we have fully committed our capital with $297 million of loan commitments.

Operator, this concludes our prepared remarks. We will now take questions from sell-side research analysts.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Steve Delaney from JMP Securities.

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Steven Cole Delaney, JMP Securities LLC, Research Division – MD, Director of Specialty Finance Research & Senior Research Analyst [2]

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And first, I want to commend you and your team on the progress made in 2019, as evidenced by core earnings more than doubling in the fourth quarter year-over-year. Good presentation in terms of laying out your situation. We — I think we understand what fully invested means. And thank you, Doug, for putting us in the ballpark. I had come up with like $270 million on a funded basis compared to your total commitments. So I should take it, just to clarify, no repayments seen so far in the first quarter this year. And can you comment on whether you expect any between now and March 31?

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G. Douglas Lanois, Tremont Mortgage Trust – CFO, Treasurer & Assistant Secretary [3]

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Well, this is Doug. Thank you. We have not received any notice from any of our borrowers. So no, we don’t actually have any expectation of that during the quarter.

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David M. Blackman, Tremont Mortgage Trust – President, CIO, COO, CEO & Managing Trustee [4]

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Steve, we do have a couple of loans that have expiration dates this year. But at this point, we don’t expect any early repayments.

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Steven Cole Delaney, JMP Securities LLC, Research Division – MD, Director of Specialty Finance Research & Senior Research Analyst [5]

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Okay. And as far as volatility around the size of the portfolio, it sounds like what you’re saying is, you’re maxed out. If you get a payoff, you’ll be in a position to try to reinvest those proceeds. But as you sit today, a portfolio that would somewhat average somewhere between $270 million, $290 million is probably what we’re going to be looking at?

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David M. Blackman, Tremont Mortgage Trust – President, CIO, COO, CEO & Managing Trustee [6]

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Yes. I think that’s fair. I mean we obviously — given where our stock price is right now, we’re not in a position to try to raise additional common equity. We do continue to try to think of other potential ways that we might be able to raise accretive capital, permanent accretive capital, maybe something like a preferred or something like that. But right now, we don’t have that into our business plan nor have we modeled that through 2020.

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Steven Cole Delaney, JMP Securities LLC, Research Division – MD, Director of Specialty Finance Research & Senior Research Analyst [7]

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Okay. And the base management fee waiver, it looks like, quarterly, that’s going to increase costs by maybe $0.04 per quarter. And would you — for modeling purpose, would you advise us to go ahead and just assume that, that is going to pick up starting in the third, that is going to be reflected in the third quarter?

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David M. Blackman, Tremont Mortgage Trust – President, CIO, COO, CEO & Managing Trustee [8]

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Yes. Steve, at this point, we have not had conversations with the Board about continuing that waiver. So I think you should plan on the reinstatement on July 1.

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Steven Cole Delaney, JMP Securities LLC, Research Division – MD, Director of Specialty Finance Research & Senior Research Analyst [9]

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Okay. And it looks like from the timing of your dividend announcements, whatever the Board decides about the dividend, given the current earnings being under the dividend, especially with the $0.04 per quarter coming, we will — can we expect to hear about that first quarter dividend sometime in April?

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David M. Blackman, Tremont Mortgage Trust – President, CIO, COO, CEO & Managing Trustee [10]

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Yes. I think that’s fair, Steve. I think as we think about it right now from a management perspective and what we would recommend to the Board, we are comfortable from a cash flow perspective with the distribution remaining the same for the first quarter. But again, I think we need to evaluate that quarterly with the Board given how tight cash flow is relative to the current distribution rate.

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Steven Cole Delaney, JMP Securities LLC, Research Division – MD, Director of Specialty Finance Research & Senior Research Analyst [11]

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Yes. And the yield, obviously, the market yield of 14% is almost twice, not quite twice the commercial mortgage REIT peer group. So you certainly — it would seem to me, just given where the yield is, you certainly would — could have some flexibility there.

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Operator [12]

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(Operator Instructions) The next question is from Brocker Vandervliet from UBS.

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Vilas T. Abraham, UBS Investment Bank, Research Division – Equity Research Associate [13]

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This is Vilas Abraham for Brock. Just on the shared services costs going down, can you just give some color on the cadence of that? Is that a step down in Q1? Or does that gradually decline over the year?

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David M. Blackman, Tremont Mortgage Trust – President, CIO, COO, CEO & Managing Trustee [14]

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It will gradually decline. It will step down based upon Center Street Finance origination cadence as well as its total loan outstandings.

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Vilas T. Abraham, UBS Investment Bank, Research Division – Equity Research Associate [15]

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Got you, okay. And then just on loan spread, they seem to be — it seems to be holding in. Can you speak to that? And then also, specifically, if you can, to that Dublin, Ohio loan, looked like the all-in yield was much higher than that coupon rate. Any color there would be great, too.

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G. Douglas Lanois, Tremont Mortgage Trust – CFO, Treasurer & Assistant Secretary [16]

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Sure. This is Doug. You’re correct. And we found that our loan spreads have held over the last several quarters different than much earlier in the year where there was a lot more pressure on loan spreads. Our existing portfolio at year-end had a coupon rate of L plus 3.59%, and the prior quarter was L plus 3.60%. So we’ve — they have held relatively well. The difficulty here is that L has been going down, LIBOR has been reducing. So — and we have a healthy weighted average LIBOR floor of 2.15%. But as loans roll off, we will see some pressure there.

With regard to the Dublin, Ohio property, that’s a office and lab space. There’s a large component of future funding on that, approximately $10 million. And the all-in yield is calculated on the reasonable balance of the loan at the time of the calculation. So as we advance additional funds, the all-in yield will come down some. We also had a pretty healthy spread on that at 375 over LIBOR. So that helps also.

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Vilas T. Abraham, UBS Investment Bank, Research Division – Equity Research Associate [17]

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Okay. And then I guess, lastly, from a core net interest spread perspective, you mentioned that there should be some expected repayments this year, not necessarily prepayment. As you get those proceeds and redeploy them, is that going to be neutral, dilutive, accretive to where the core spread has been in the last few quarters?

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G. Douglas Lanois, Tremont Mortgage Trust – CFO, Treasurer & Assistant Secretary [18]

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Well, again, I think that, right now, we benefit from a very strong LIBOR floor in our loans. And we typically are able to negotiate a LIBOR floor that’s, at the time we make the deal, sign-up an application with a borrower, at about 25 basis points below the existing LIBOR rate. With LIBOR having reduced, we’re going to — I think that’s where we’re going to see a little bit of erosion in the [investment] count.

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David M. Blackman, Tremont Mortgage Trust – President, CIO, COO, CEO & Managing Trustee [19]

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I mean spreads are really pretty stable right now. Where we run risk as we look at our forecast for the year is a less advantageous LIBOR floor with a reducing LIBOR.

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Vilas T. Abraham, UBS Investment Bank, Research Division – Equity Research Associate [20]

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Okay, okay. Got it. So any benefit, say, from lower financing as LIBOR goes down is not necessarily going to be fully realized just because — so the asset side is going to have some pressure there even with the floors? Is that fair?

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David M. Blackman, Tremont Mortgage Trust – President, CIO, COO, CEO & Managing Trustee [21]

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Well, we’ll realize it on our existing loans. It’s just as we reinvest capital from repaid loans where we’ll have pressure. So we’ll also benefit if LIBOR doesn’t decline based upon the forecast that you can see on Bloomberg because that’s typically what we use in our model.

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Operator [22]

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The next question is from Jason Stewart from JonesTrading.

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Jason Michael Stewart, JonesTrading Institutional Services, LLC, Research Division – Senior VP & Financial Services Analyst [23]

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On the origination platform, have you explored joint ventures? Or is it your expectation that the separate account business is sort of up to the magnitude of scale where it’ll accept the platforms, and now that it’s up and running, the origination of the platform spins off?

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David M. Blackman, Tremont Mortgage Trust – President, CIO, COO, CEO & Managing Trustee [24]

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We had not really explored joint ventures given the current size of our portfolio. We feel that there’s a better opportunity to explore additional private capital either as a separate managed account or to invest side-by-side with our current partner.

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Jason Michael Stewart, JonesTrading Institutional Services, LLC, Research Division – Senior VP & Financial Services Analyst [25]

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Okay. And then with regards to the private versus the public capital platforms, are you as agnostic — is RMR agnostic to the direction of capital raising there? Or is there a preference one way or the other?

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David M. Blackman, Tremont Mortgage Trust – President, CIO, COO, CEO & Managing Trustee [26]

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I think we would like to grow Tremont Mortgage Trust, and we do spend time thinking about ways we could grow that. Right now, clearly, equity — common equity markets aren’t available to us. I think if we felt that we could grow the trust, that would be our preference, but we’re also happy to continue to expand the platform privately.

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Operator [27]

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The next question comes from Kaili Wang from Citi.

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Kaili Wang, Citigroup Inc, Research Division – Senior Associate [28]

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On the CECL front, do you have an estimate on the incremental reserve amount?

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G. Douglas Lanois, Tremont Mortgage Trust – CFO, Treasurer & Assistant Secretary [29]

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Well, Kaili, this is Doug Lanois. We’re not subject to that this year, actually, because we’re a smaller reporting company. We would begin in 2023. And so we haven’t done that analysis. And we’ll be interested to see how our peers handle it.

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Kaili Wang, Citigroup Inc, Research Division – Senior Associate [30]

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Got it. Okay. And just wondering if you could comment on the general competitive environment. How would you characterize the competitive environment today versus a year ago? And what would you say about the number of bidders at the table today versus a year ago?

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David M. Blackman, Tremont Mortgage Trust – President, CIO, COO, CEO & Managing Trustee [31]

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Kaili, that’s a good question. I would say that there continues to be a lot of capital in the market dedicated to the lending business. I wouldn’t necessarily say though it has increased, such that the competitive environment has changed. It’s still very competitive. But as we’ve talked about, spreads have remained relatively stable. And we’re really competing on relationship and our ability to execute and feel like we’ve done a pretty good job with that.

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Operator [32]

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This concludes our question-and-answer session. I would like to turn the conference back over to David Blackman for any closing remarks.

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David M. Blackman, Tremont Mortgage Trust – President, CIO, COO, CEO & Managing Trustee [33]

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Thank you, Jason, and thank you for joining us this morning. That will conclude our call.

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Operator [34]

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