Q4 2020 Tremont Mortgage Trust Earnings Call
Good morning, and welcome to the trim on mortgage trust fourth quarter.
'twenty financial results conference call, all participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be and opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Kevin Berry manager of Investor Relations.
Relations. Please go ahead.
Thank you and good morning, everyone. Thanks for joining us today with me on the call our president Tom or Dean.
And Chief Financial Officer, and Treasurer, and Doug, Illinois, and just a moment they will provide details about our business and our performance for the fourth quarter of 2020. We will then open the call to a question and answer session with sell side.
Analysts first I'd like to note that the recording and retransmission of today's conference call is strictly prohibited without the prior written consent of the company.
Also note that todays 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.
Looking statements are based on <unk> beliefs and expectations as of today Monday February 22021, and actual results may differ materially from those that we project. The company undertakes no obligation to revise or publicly release the results of any revision to the forward looking statements made in today's conference call and additional information.
Information concerning factors that could cause those differences is contained in our filings with the securities and exchange Commission or SEC, which can be accessed from our website T. RMT reached dot com or the SEC's website investors are cautioned not to place undue reliance upon any forward looking statements and addition, we will.
We'll be discussing non-GAAP numbers during this call, including distributable earnings for a reconciliation of net income and 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.
Good morning, everyone and thank you for joining us.
On Friday, we reported solid results for the fourth quarter that reflect our proactive measures over the past year to actively manage our loans.
<unk> liquidity and enhance the stability of our balance sheet.
<unk> portfolio delivered stable investment performance with 100% of our loans remaining current and that.
Yeah.
The strength and resiliency of our portfolio. During this period of unprecedented economic uncertainty underscores the expertise and experience of our team and the value of our relationship with the RMR group.
Our collective knowledge and resources across <unk> capital and the depth of Rmr's National CRE platform.
<unk> provides our investment program with and enhance the ability to understand market conditions.
<unk>, our borrowers business plans and Mt and or the ongoing repositioning activities of our loan collateral.
During the fourth quarter <unk> capital remained fully committed which eliminated our ability to originate new loans, we were focused.
On managing our portfolio and actively communicating with our borrowers as they continued to execute their business plans.
While the ongoing pandemic continues to weigh and some of our borrowers and tenants are loans continued to perform well with strong support from their sponsors.
The weighted average risk rating of our portfolio improved during the fourth quarter.
We upgraded the ratings and two loans as a result of better performance of the underlying loan collateral and our borrowers progress implementing their business plans.
We did not have any downgrades during the quarter.
On a five point scale with one representing lowest risk and five representing highest risk.
The weighted average risk rating.
<unk> from three four and Q3 to three two at year end.
None of our loans are rated at five.
As we have discussed on prior calls and early 2020, we reduced <unk> quarterly dividend to protect our balance sheet amid the economic uncertainty and disruption brought on by the health crisis.
During this disruption.
Business has remained stable.
As a result, I am pleased to announce that our board intends to reinstate a quarterly dividend the amount of which will be declared in April.
While we expect the dividend to increase compared to last year's regularly scheduled dividend. It remains subject to further board discussion and we are not providing further guidance at this time.
<unk> are turning to our loan portfolio at year end.
Our assets consisted of 14 first mortgage whole loans with approximately $294 million aggregate loan commitments with a weighted average loan to value of 67% and a weighted average maximum maturity of two six years, when including extension options.
And the portfolio had a weighted.
And a coupon of five 7% and and all in yield of six 4%.
Our investments are geographically diverse with exposure to commercial real estate nationwide.
Proximately, 75% of our loans are secured by industrial and multifamily and office properties, which continue to demonstrate solid fundamentals.
Our.
The remaining loans are secured by retail assets that are either grocery or drug store anchored as well as one hotel.
In terms of recent loan activity to loans scheduled to mature in November of 2020 were extended during the fourth quarter.
The borrower for our financing secured by a retail center and Paradise Valley, Arizona exercise.
Weighted average this rate and met all the conditions for a one year loan extension until November of 2021.
We also amended our financing secured by a multifamily property in Houston as part of the amendment the borrower funded and interest reserve of $500000 and the loan maturity date was also extended by one year until November of.
Exercise and one at.
And at the current cash flow run rate interest reserve should be more than adequate to maintain debt service for the remaining loan term.
Subsequent to quarter, and we amended our loan related to our retail property and Coppell, Texas and extended the maturity by six months until August of 2021.
As part of the amendment the spots.
2012, and interest reserve of $500000 and repaid $250000 of the outstanding principal balance, which reduced the total loan commitment to $19 9 million.
As a reminder, all of our loans are structured with risk mitigation mechanisms such as cash flow sweeps and interest reserves to help protect us.
Funded investment losses.
The current individual cash flows and structured interest reserves should be more than sufficient to maintain debt service for the next 12 months on each of our loans with the exception of our hospitality loan and Atlanta, Georgia.
However, the sponsor for this hotel loan has continued to support the asset with additional equity investments to maintain that service and operations.
So again, while we did not have any loan repayments during the fourth quarter last week. We received the early repayment of our multifamily housing loan and Rochester, New York with proceeds totaling $24 $8 million.
And the short term from these proceeds we retained approximately $2 4 million for liquidity purposes, and pay down our Citi repurchase facility.
$22 $4 million. In addition, we are aware that our borrower under our Barrington, New Jersey alone has entered into an agreement to sell the underlying industrial property and accordingly, net loan of $35 $2 million may prepay and April.
Going forward, we plan to keep our portfolio of fully committed we remain active with a robust.
By 20 per line of potential opportunities to reinvest this capital as loans are repaid.
The relationship with our master repurchase facility lender remains strong we have maintained consistent dialogue regarding our liquidity and the status of our loans and Citi has advanced money and normal course to fund our loan commitments to borrowers during the fourth quarter.
<unk> probably extended this facility by one year until November of 2022, which reflects our mutual confidence and <unk> loan portfolio and positions us to re invest the proceeds we received from repayments.
Looking ahead, we are excited about the future and the strength of our CRE lending platform as the economy improves and returns to a more.
State and there will be significant opportunities for alternative lenders like us to provide creative flexible debt capital for a wide array of circumstances and business plans.
We are well positioned to continue to navigate the current economic climate and preserve invested capital and generate attractive risk adjusted returns for our shareholders.
And with that I'll turn it over to Doug to review our financial results.
Doug.
Thank you Tom and good morning, everyone.
First I would like to note that beginning this quarter, we have changed our terminology on non-GAAP earnings from from core earnings to distributable earnings. This reflects a.
Normal transition across and mortgage REIT industry.
To adopt terminology that better describes what this metric represents which is a measure of our results, let's start with GAAP net income and as adjusted for certain noncash items to be more indicative of our performance and the context of a potential distribution.
<unk> is only a change and terminology and does not alter our calculation of this non-GAAP metric.
Turning now to our financial results for the fourth quarter distributable earnings came in at $2 3 million or 28 per weighted average diluted share compared to <unk> 17.
And the prior European.
Period and.
And 33 per share last quarter.
Our loans continued to benefit from our LIBOR floors, and this historically low rate environment income from investments net was stable quarter over quarter at $3 4 million during the fourth quarter.
And this reflects interest income from investments of four.
<unk> million dollars and interest from and related interest and related expenses from borrowings on our master repurchase facility of $1 2 million.
As presented in our supplemental financial package.
Our weighted average all in yield on our investments as of December 31.
With six 4% this.
So our weighted average LIBOR floor.
210 basis points and weighted average spread of 360 basis points.
And the amortization of loan fees.
All of our investments remained current on debt service and we have had no loan losses at year end.
Total expenses were $1 2 million.
Includes fourth quarter compared to $765000 and the prior quarter. This sequential increase was primarily driven by shared services and state taxes as well as other public company costs, while shared services expense came in above our run rate for the fourth quarter.
For the full year it declined approximately.
And a 20% year over year.
Turning to our balance sheet.
At the end of the fourth quarter, we had $10 5 million and cash our loans held for investment net totaled $282 million million.
And increase of $2 million from last quarter, and we had total loan.
One commitments of $294 million of which $12 $3 million was unfunded.
Our GAAP book value as of December 31 was $10 and 71 per share.
As of December 31, we had $213 5 million of total capacity on our master repurchase facility.
<unk> of which $12 4 million was undrawn.
We are slightly under Levered on our portfolio was approximately $99 $6 million currently available.
We ended the quarter with an outstanding principal balance of $201 1 million.
And from the prior quarter.
After paying down our facility with the proceeds we received from the early repayment of our Rochester, New York loan last week.
We have approximately $24 million of capital to reinvest.
In December our board declared and in January we paid.
A one time cash distribution of <unk> 53.
Per common share to ensure we satisfy minimum distribution requirements to maintain our tax status.
For the full year, we paid or declared to <unk> 78 per common share.
Looking ahead, we expect our cash flows and liquidity.
To remain healthy.
As Tom discussed our board.
To reinstate our regular quarterly dividend in 2021.
As a reminder from modeling purposes.
<unk> management fee waiver expired at the end of 2020, beginning in the first quarter of 2021, we are required to pay or mandatory and annual base fee of one five.
Percent of our equity payable on a quarterly basis.
We also expect to recognize and incentive fee based on our level of profitability over the trailing 12 months.
For context at our manager and not waive. These fees, we would have recognized $1 $3 million of base management fee.
And <unk> and $467000 of incentive fee for the year ended December 31 2020.
The calculation of incentive incentive fees is not recognized ratably.
Through the year, and it's reduced by incentive fee payments over the trailing 12 months.
Finally keep in mind that net interest margin has benefited substantially from our LIBOR floors going forward, we'd expect our net interest spreads to narrow as loans prepay or pay off at maturity and new loans come on at prevailing market LIBOR floors.
Operator, this concludes our prepared remarks.
We will now take questions from sell side analysts.
Thank you.
To ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
The first question is from.
Steve Delaney from JMP Securities. Please go ahead.
Good morning, Tom and Doug Thanks for taking my question.
Tom You mentioned are enacted.
And active pipeline could you comment on the pipeline that you're seeing.
Relative to from.
From <unk> and.
And also I noticed I think this is just obviously coincidence you had to pay off in February and I believe that RMR mortgage had made a fairly large loan and January and another and I am curious as part of your pipeline is it possible under the structure of.
So the Companys, where tomorrow it could actually take a participation and a loan that was primarily targeted for RMR. Thank you.
Okay.
Sure and <unk>.
Thanks for the question.
Regarding pipeline and Youre, correct and that with RMR.
And we do have an active pipeline and have been.
Closing transactions inside of that inside of that vehicle.
Tell you right now that we have are our current pipeline is roughly $600 million and transactions that are in various stages from initial diligence through the closing process.
And 10 of those transactions.
Our and the quoted stage through the application stage or diligence.
Narrowing that down to a couple of hundred million dollars. So we would have the ability once it.
And as capital is repaid into T RMT too.
But to replace the loans such as the Rochester, New York and loan.
Regarding your question about the sharing of loans or the.
Participation of loans that certainly is something that.
We could entertain I'm not sure that we are.
And.
Necessarily.
We're going that route there's some additional documentation that would be required to do that.
And the two entities.
And most likely we would prefer to keep those keep the.
And investments whole inside of each of the Reits, but it is certainly something that we could do if we pursue if we decided to go that route.
Well I think I'm hearing you say that the pipeline targeted for tomorrow and for T. R. M. T is sizable enough that it doesn't.
Sounds like you have too much concern about redeploying.
Redeploying that that $24 million and a matter of you know a couple of months is that am I hearing you correctly. There I think that's a fair statement.
We certainly have to look to make sure that we have the right sized loan to go into CRM team.
Mhm right, because we don't want to be we don't want to do too small of a transaction and be left with some capital that's uninvested are uncommitted.
But as additional payoffs come in and that becomes less of a less of an issue for us because we will have additional capacity and with <unk> Realty advisors.
Originating from both for both entities.
And we should be able to transition pretty pretty smoothly into.
Putting that capital back to work inside of tier empty.
Well. Thank you for the comments I'll drop back into the queue. Thanks. Thank you.
Again, if you have a question. Please press Star then one.
The next question is from Brock.
And Andrew Fleet from UBS. Please go ahead.
Thanks for the question and good morning and.
I was wondering if you could talk about the and your expense dynamic and the fourth quarter I understand and the incentive fees as has been well telegraphed that starts here in Q1, but.
What in terms of a.
G&A or our total.
<unk> expense base, what should we be expecting.
Going forward and.
And as respects were there anything and it was there anything one time related and Q4.
Good morning, Brock its Doug, Illinois.
And our expenses in Q4 did run a little bit higher than.
And then the full year so.
The way I view it the full year is a good indicator.
In terms of going forward in terms of G&A.
There were some onetime items.
And and.
So I think the full year is the best indicator with regard to shared service expense.
Our expectation is that we'll continue to.
Reduce at a similar pace as it did from 2019.
2020.
Okay.
Okay and what.
What.
And what level do you think you can hold.
And I guess total expenses ex any incentive payments.
She does b and a rare.
Typically flat or could they even be.
Negative.
And our full year basis, yeah in terms of.
And in terms of G&A and again I would think.
That's typically the typical year over year increase.
Inflation oriented.
And again with shared services, our expectation is that total decrease.
And again at a similar rate.
Got it okay.
And secondly, if I can you.
You mentioned.
Loan yields may be under pressure.
With these new LIBOR floors can you dimension that.
More force.
And I think that if you look at our portfolio of currently with you now.
Average of five 7% and $2 one of that is based on a LIBOR floors going forward.
Spreads shouldnt dramatic dramatically be different however, the reset of the floors to the 50 basis points.
And or less will certainly impact the overall yield on those loans on new loans.
Got it okay very helpful. Thank you.
There are no more questions and the queue. This concludes our question and answer session.
I'd like to turn the conference back over to Tom.
Tom and lorenzini for any closing remarks.
Thank you, Jason and thanks, everyone for joining US today. This concludes our call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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