Q1 2021 Tremont Mortgage Trust Earnings Call
Good morning, welcome to pay my mortgage Trust first quarter 2021 financial results conference call.
Participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions. Please note that this event is being recorded I would now like to turn the conference over to Kevin Berry manager of Investor Relations. Please go ahead.
Thank you and good morning, everyone. Thanks for joining us today with me on the call, our President and Tom Lauren <unk>, and Chief Financial Officer, and Treasurer, Doug, Illinois, and just a moment they will provide details about our business and our performance and the first quarter of 2021 as well as details about our proposed merger with RMR and mortgage Trust. We will then open the.
Call to a question and answer session with sell side analysts and.
And many of you know from on mortgage Trust and RMR and mortgage Trust issued a joint press release on Monday on April 26th announcing that we've entered into a definitive agreement to merge with our MRM and we've also provided and investor presentation that can be accessed on our website www Dot T RMT reef dot com.
Which presentation has also been filed with the Securities and Exchange Commission, our FCC and we encourage you to access the presentation is our management team will be referencing and their prepared remarks.
I would like to note that the recording and retransmission of today's conference call is strictly prohibited without <unk>. Prior written consent 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 statements are based on CRM piece.
Beliefs and expectations as of today Wednesday April 28, 2021, and actual results may differ materially from those that we project CRM T undertakes no obligation to revise and publicly release the results of any revision to the forward looking statements made on today's conference call a number of risks and uncertainties.
And as exist that could cause <unk> actual results to differ materially from those expressed or implied additional information concerning factors that could cause those differences is contained in our filings with the SEC, which can be accessed from the SEC's website.
Investors are cautioned not to place undue reliance upon any forward looking statements and.
In addition, our discussion regarding the proposed merger of TRP and RMR around does not constitute an offer to sell or.
<unk> and have an offer to buy any securities or solicitation of any vote or approval RMR Ram expects to file with the SEC a registration statement on form S. Four containing a joint proxy statement prospectus and other documents with respect to the merger and other transactions with respect to both our MRM and T RMT.
Investors are urged to read the joint proxy statement prospectus, including all amendments and supplements if and when they become available and any other documents, we filed with the SEC and in connection with the merger or incorporated by reference and the joint proxy statement prospectus, because they will contain important information about the merger.
Information regarding potential participants and any proxy solicitation of Trs <unk> and RMR M shareholders.
And a description of their direct and indirect interest by security holdings or otherwise will be contained and the joint proxy statement prospectus filed in connection with the proposed merger.
Finally, we will be discussing non-GAAP numbers during this call, including distributable earnings for a reconciliation of net income 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 morning, everyone and thank you for joining us on.
Monday April 26, T. RMT issued a press release announcing that we have entered into a definitive agreement to merge with RMR mortgage Trust and yesterday <unk> issued a press release reported its results for the first quarter of 2021.
I'll begin today's call with some commentary about the proposed merger and then provide a brief update on <unk> first quarter performance.
Doug will then run through the details of our recent investment activity and financial results and then we will open up the call for Q&A.
On Monday, we posted a presentation to our website, which was also filed with the SEC certain pages on which I will refer to during my remarks today.
Before we get started and I encourage you to look over the warning regarding forward looking statements and other disclaimers that can be found on slides two and three of the presentation.
Let's start with the transaction summary on slide four with unanimous approval of our special Committee and our board and our entire board of Trustees, we're still thrilled to be bringing together two highly complementary businesses and from a mortgage trust and RMR mortgage trust.
The transaction will be a stock for stock exchange, whereby <unk> shareholders will receive <unk> five two shares of RMR M for each common share of <unk>.
Based on Friday's closing price for RMR M. The implied offer price per share of approximately $6 55.
Representing a six 3% premium to the closing price of <unk> common stock on April 23.
And a 9% premium to the volume weighted average price for the 30 trading days ended April 23rd.
RMR and.
And <unk> shareholders will own approximately 70% and 30% of the combined company respectively.
In terms on the financial impact of the transaction is expected to be accretive to distributable earnings in 2022, because we eliminate certain duplicative public company costs.
We expect little to no integration risk as both companies are under a common management and Paramount Realty advisors and our existing senior management team will continue to lead the company.
We intend to close the transaction as soon as possible and expect that to be sometime during the third quarter.
Turning to slide five I would like to highlight the merits of this transaction.
First we believe the combination of <unk> and RMR and represent a unique opportunity to quickly achieve scale and create a larger more diversified commercial mortgage REIT.
By coming together the transaction is expected to immediately positioned the company to approach $1 billion and assets and fully invested.
Second we expect this accretive transaction will help us increase our collective financial strength and create enhanced returns for our shareholders over time.
We will generate savings by eliminating redundant public company costs with the potential to drive further operating efficiencies as we scale the business.
To this and we expect to realize annual cost savings of $1 4 million to $1 6 million or 10 to <unk> 11 on a per share basis with the right sizing of public company overhead costs.
Third following the close of the transaction, we believe shareholders will benefit from an increase and trading liquidity and investor base diversity with and expanded public common share flow.
We also expect our expanded capital base to improve our ability to access the capital markets with more efficient sources of financing to fund our growth as we leverage the combined company's liquidity and debt capacity.
CRM team currently has limited investment capacity and due to size lacks the ability to access potentially attractive sources of capital such as the CLO market and more competitive repo terms, which are necessary to support future earnings growth.
This merger represents a compelling opportunity to address this challenge and potentially lower our cost of capital to further enhance our return on equity.
The combined company will not only have greater scale, but broader investment diversity among loans across geographies and asset classes.
The investments on the combined company will be more evenly balanced across commercial real estate nationwide and secured by property types that continued to demonstrate solid fundamentals.
The highest mix and industrial multifamily and office properties.
And finally, we believe this proposed merger will provide greater market visibility and increased deal flow as we become a more significant player and the commercial mortgage market.
We expect there to be strong demand for bridge loans over the next several years as the pandemic has increased the number of unstable light properties and needle financing and we believe now is the right time to execute on this opportunity to strengthen our position and capture a greater percentage of the maturing loan volume that is not being refinanced by traditional lending sources.
To further highlight the benefits of the merger, let's review the portfolio from the combined company on page eight of the presentation.
The combined company has much greater scale of 'twenty to first mortgage whole loans with approximately $519 million and aggregate loan commitments and a principal balance of $471 million with.
And with a weighted average loan to value of 66% and a weighted average maximum maturity of three two years.
The pro forma portfolio has a weighted weighted average coupon of five 4% and and all in yield of 6%.
To achieve our fully invested target of approximately $1 billion and total loan commitments, we plan to originate and approximately 20 additional loans, assuming a similar average commitment loan size as the existing portfolios.
In summary, we believe the merger of <unk> and our MRM provides a tremendous opportunity to build strong growth momentum and provides compelling benefits to the shareholders of both companies.
Weighted to larger more diversified business with increased financial strength and attractive portfolio metrics. We believe the combined company will be better positioned to pursue which focus on commercial mortgage lending and drive earnings growth and deliver attractive risk adjusted returns over the long term.
Yeah.
Now, let me update you on mortgage trust results and investment activities during the first quarter.
Our business continued to perform well with all of our loans remaining current on debt service and further improvement on our portfolio risk rating and strong growth and distributable earnings compared to a year ago.
Based on the healthy performance of our portfolio. We are pleased to have reinstated a quarterly distribution to our shareholders or <unk> 10 per share.
During the quarter, our attention remains focused on managing our portfolio and actively communicating with our borrowers as they continued to execute their business plans and our portfolio of first mortgage whole loans is healthy and well supported by quality sponsors and business plans that generally remain on track.
The weighted average risk rating and on our portfolio improved from three two last quarter to $2 nine during the quarter. We upgraded the ratings on five loans that have demonstrated better performance and experienced less disruption from the pandemic than initially anticipated.
Conversely, we downgraded one loan and related to an office property and Yardley, Pennsylvania as a result of the borrower's business plan, taking longer to execute the unexpected due to the challenges and the leasing market during COVID-19.
And none of our loans are rated a five.
Turning to our portfolio at quarter, and we had approximately $268 million and aggregate loan commitments consisting of a diverse portfolio of 13 first mortgage whole loans with a weighted average loan to value of 67%.
And a weighted average maximum maturity of two four years, when including extension options.
Our portfolio and 100% floating rate and all of our loans have active LIBOR floors. The portfolio had a weighted average coupon of five 7% and and all in yield of six 4%.
And the relationship with our master repurchase facility lender remains strong and city continues to advance money and normal course to fund our loan commitments to our borrowers.
Based on our liquidity and the status of our loans, we are well positioned to finance new investments as loans repay.
As such we intend to keep our finite amount of equity and fully invested.
Our manager Jeumont Realty advisors under their trade named Paramount Realty capital remains active and the market with a robust pipeline of potential opportunities to reinvest available capital. According to our loan allocation policy.
The current pipeline is strong with more than $600 million and transactions in various stages of review underwriting and diligence.
One opportunity currently and diligence to backfill <unk> recent loan repayment as a $15 $3 million bridge loans to refinance a 125000 square foot office building on side of Denver. The loan has not yet closed and remains subject to final diligence.
Jeumont really capital also has five term sheets out sandy and respect the financing opportunities with an aggregate loan amount of approximately $135 million.
These opportunities have quoted financing terms with an effort to win the business and convert them to loan applications.
In addition to the outstanding term sheets, <unk> Realty capital and more than 20 potential transactions totaling over $450 million and various stages on review for possible investment.
The next step for these transactions would be to issue term sheets, if we believe the credit risk and the risk adjusted return on capital is acceptable.
And with that I'll turn it over to Doug to review our financial results Doug.
Doug.
Thank you Tom and good morning, everyone I'll.
I'll begin with a brief update on our recent loan activity and then run through our first quarter financial results.
In February we amended our loans related to our retail property and Capella, Texas and extended the maturity by six months to August of 2021 as part of the Amendment PMT collected and extension fee and the sponsor funded and interest reserve of $500000 and repaid $250000 of the hour.
Standing principal balance.
Total loan commitments decreased to $19 9 million.
We also received the early repayment of our multifamily loan in Rochester, New York with proceeds totaling $24 8 million.
And we use these proceeds to pay down our Citi repurchase facility by $22 4 million.
And retained approximately $2 4 million.
And for liquidity purposes.
Additionally, our borrower under our Barrington, New Jersey loans has entered into an agreement to sell the underlying industrial property and accordingly.
That loan of $36 2 million made prepaid during the second quarter.
Following the end of the quarter, we amended our loans secured by an office building and <unk>, Louisiana.
And the sponsor paid TMT and extension fee and the loan was extended.
Six months until October of 2021.
While they refinance our position.
Turning to our first quarter financial results distributable earnings came in at $2 2 million or 27 per weighted average diluted share compared to 21.
And the prior year period, and 28 and the prior quarter.
Our loans continued to benefit from our LIBOR floors as interest rates remain at historic lows.
Interest income from investments for the quarter was $4 5 million compared to $4 6 million and the prior quarter interest and related expenses incurred from borrowings on our master repurchase facility was approximately $1 1 million compared.
Compared to $1 $2 million last quarter and <unk>.
Come from investments net was stable at $3 4 million.
As presented in our supplemental financial package, our weighted average all in yield on our investments.
As of March 31 was six 4%.
This includes our weighted average LIBOR floor of 210 basis points and a weighted average spread on 364 basis points any amortization of our loan fees.
All of our investments remained current on debt service and we had no loan losses during the quarter.
Total expenses were $1 8 million and the first quarter compared to $1 1 million and the prior quarter. The sequential increase was primarily driven by the reinstatement of management and incentive fees totaling $962000.
Partially offset by a decline and shared services expenses and general and administrative costs.
As Tom mentioned, we recently declared a quarterly distribution of <unk> 10 per common share or approximately $831000.
Turning to our balance sheet.
At the end of the first quarter, we had $10 9 million and cash.
Our loans held for investment net totaled $262 million.
A decrease of $22 $1 million from last quarter, reflecting the early repayment of our New York loan and February.
We had total loan commitments of $268 4 million of which $9 million was unfunded.
As of March 31, we and outstanding principal balance on our master repurchase facility.
$188 million.
We ended the quarter with approximately $24 million of capital available to reinvest.
Operator, this concludes our prepared remarks.
We will now take questions from sell side analysts.
We will now begin the question and answer session.
To ask a question you May press.
And then one on your Capex downtown.
Using a speakerphone please pick up your handset before pressing the keys.
Your question. Please press Star then two at this time of a pause momentarily.
And bill our roster.
Yeah.
Our first question is from Jason Stewart from Jones trading.
Yes.
Hey, good morning, Thanks for taking the question and.
And thanks for the update on the pipeline and I was hoping you could give us a little bit more information in terms of structure of those.
Loans that are in term sheet spreads do.
Do you expect it to be accretive to the spread and LIBOR towards where those being struck me kind of.
Information on that would be helpful. Thanks.
Sure Jason This is Tom.
Regarding LIBOR floors and.
For our pipeline now for transactions that we either have quoted are term sheets outstanding and even applications for that matter.
Spreads right, our Florida range anywhere from <unk>.
25 basis points to 50 basis points across those transactions.
Spreads.
And our generally and the $3 85 to 400 range.
We do have one transaction and look a little bit higher than that which is on all of the transaction that we're that we're looking at right now, but as a general rule.
We're kind of and the.
For a fourth quarter range.
And.
And on those on those new transactions.
Okay, Okay, great. Thanks, and then.
And the Louisiana Office I, assuming you under re underwrote that there was it didn't look like there was and moving the risk rating.
It felt okay, making the extension any color you could give us in terms of.
Additional color on that loan would be it would also be helpful.
Sure Jason This is Doug, Illinois.
That's actually.
And one of the.
Loans that we upgraded and our loan rating. So we felt we felt very confident about that day.
Theyre looking to lower their cost of capital and are interested and <unk>.
<unk> to another lender, so thats, how thats working out.
They've got several term sheets and are working towards a refi.
And.
<unk>.
And that's a pretty good.
Lateral.
Got it Okay. That's super helpful. And then one question on the merger.
For all of the strategic rationale for it.
How does book value for T. RMT play into your thoughts on this transaction in terms of a price multiple to book and.
And maybe if you could weigh that against your thoughts in terms of doing just.
And capital equity capital raise at CRM T that perhaps would have been dilutive or comparably dilutive to book value.
If you could give us some thoughts on those two that'd be helpful. Thanks.
Yes, Jason.
And the equity markets for CRM.
That happened and is really not not an option for us given where we're trading relative to book value.
And in regards to the merger both both entities are trading at quite a fairly substantial discount to book value and Thats really one of the primary benefits. We believe is that by putting these together, we should be able to narrow that gap over time.
To reward the shareholders.
Yes.
Great. Okay. Thanks for taking the questions.
Our next question is from Chris Mueller from J P. Securities go ahead.
Hey, guys. Thanks for taking my question I'm on for Steve today.
So it looks like roughly half of loans are set.
And mature and most of the back half of 2021 and I was wondering if you guys could talk about.
If those pay off as scheduled what the impact would be.
Bar floors roll off.
You guys being at 2.1%, that's I think probably one of the highest and the growth.
And a follow up on that.
And I've seen several notes on loan modifications and extensions.
Are there other conversations ongoing with borrowers on any further extensions.
And that offset some of my first question. Thanks.
Okay.
Chris Doug, Illinois.
And youre focusing on the floors that day.
And quite strong floors that PMT has it at 210 basis points.
Our expectation is as those loans roll and.
And don't renew they will that floor will gravitate down towards current market, which is.
The 25% to 50 basis points.
And that will that will impact earnings.
And as.
And as long as.
And we stay at this low interest LIBOR level.
And.
Regarding.
Extensions.
Oliver loans.
Current well most of our loans currently have extension options and depending on weather.
The borrower.
Qualifies for the for the conditions of those extensions.
They will either extend or we may enter into discussions to.
And to extend them.
And then the loan agreement to accommodate that.
<unk>.
The.
And the.
Houston Office building.
A discussion with them Theyre looking at refinancing options as well as.
Possibly extending.
And kind of preliminary discussions at this point.
Thank you that's very helpful and then just on.
Beside of that what kind of loans are you guys seeing in the pipeline and are you guys focused on multifamily office and I guess why do you like out there right now.
Yeah.
Multifamily and certainly industrial and office.
Those are really kind of the three top product types for us at the moment, certainly like life science as well.
We don't want to.
Dissuade anybody from from us from looking at other retail or hospitality, but those opportunities are it would be.
It would be much more unique for us right now and.
And we think that as a general rule, we'd rather.
Yes.
B pack and sponsors with.
And more traditional office the office industrial and multifamily at this stage and that's where we're seeing most of our deal flow and therefore, we are having most of our execution as well.
Thank you very much very helpful and congrats on a great start here.
Thank you Frank.
And again.
Jim Please press Star then one.
Our next question is from Brock Vandervliet from UBS go ahead.
Oh, thanks for taking the question.
You could.
And just noted the <unk>.
Conservative setting of the <unk> of the train them on dividend going forward and the new.
Template.
And new structure do you anticipate and all.
Also having a dividend that's well below the distributor level.
Income and as you've done here or is it do you think you can run it much closer to the distributable level.
Hey, Brock its Doug, Illinois.
RMS.
<unk>.
Has declared a <unk> 15 distribution.
We expect.
Annual savings from public company costs, and the new combined entity and of 10 to 11 per share. So we expect that to impact distributable earnings and.
And as well and as RMR completes the investment of its capital.
Its board and we'll certainly review the distribution level.
And.
The other thing to always do we have to comply with and.
Is that we need to distribute all over it.
Least 90% of our taxable income.
As we did in <unk> in January and we did a catch up distribution.
So all of those play into this and our expectation with not only the.
We expect the savings to impact distributable earnings and potentially distributions and we expect other synergies to come to play where we can access capital and the new combined entity.
And and drive earnings.
Got it and just just stepping back a little bit and you've talked about some of the spreads available now and you know.
Can you back up and just.
And now versus a year ago say on new.
New opportunities and what's the spread profile better worse same and number two.
And in the wake of COVID-19 has that created.
New discussions and you're observing in the marketplace as owners.
And we'll look to reposition buildings or.
You know I'm really not so much.
And what's been the COVID-19 kind of impact thanks.
Yeah.
Rockets time from a year ago or.
Let's even say nine months ago really a year ago, everybody was pretty much paused and the and.
And the industry, but.
The COVID-19 premium.
And what ill call. It was kind of a short lived window really probably over about six months.
The spreads that we are seeing today are lower than than transactions that we were able to.
Lend against.
Through our MRM during.
And I'll call it.
And last summer through through the end of the year.
Those spreads are probably on <unk>.
<unk> 50 to 75 basis points from that point in time and.
And as far as the real estate as it relates to COVID-19 and we're seeing.
Borrowers now.
Opting for a more flexible capital rather than.
Potentially they could they could qualify for permanent capital.
And because.
Having gone through maybe some difficulties during COVID-19 with Servicers and what have you.
But theyre looking into our balance sheet execution, which I think puts us on a good place.
We're also hearing and seeing really more suburban type office and we are CBD office.
People on the major cities, you'll have not come back fully although now and press lately theyre talking about allowing greater capacity and so things have changed a little bit from month on that perspective multifamily was the surprising.
Winter throughout the pandemic I think people expected that the fall off.
But we really didn't see that in fact, we saw it become more competitive.
So.
Industrial as well as Ben has really.
Proven to be the shining star throughout the entire COVID-19.
Pandemics.
Got it Brock, we're seeing a lot of lap deals as well and.
And it closed a few of them and <unk>.
Active to us.
Yes lifestyle.
Thanks for the color.
Thank you.
And Dan if you have a question.
And then.
On one.
At this time, we have no more questions. So this concludes the question and answer session I would like to turn the conference back over to Thomas Lorenzini President of Tim on mortgage Trust.
For closing remarks.
Thank you Kate 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.