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What changed in Seven Hills Realty Trust's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Seven Hills Realty Trust's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+314 added−298 removedSource: 10-K (2024-02-20) vs 10-K (2023-02-13)

Top changes in Seven Hills Realty Trust's 2023 10-K

314 paragraphs added · 298 removed · 220 edited across 4 sections

Item 1. Business

Business — how the company describes what it does

67 edited+15 added−8 removed295 unchanged
Biggest changeWe generally seek to match the terms of our financing, including benchmark indices and duration, to the loans we originate and pledge as collateral. As of December 31, 2022, all amounts outstanding under our financing agreements pay interest at floating rates that are not subject to floors.
Biggest changeAs of December 31, 2023, 96.3% of our loan portfolio by principal outstanding had interest rate floors in place with a weighted average floor of 1.36%. 7 Table of Contents We generally seek to match the terms of our financing, including benchmark indices and duration, to the loans we originate and pledge as collateral.
Even if we retain our qualification for taxation as a REIT, if TRMT did not qualify for taxation as a REIT for a taxable year before the Merger or for its taxable year that included the Merger and if no relief is available, then we would face the following tax consequences: • as the successor by merger to TRMT, we would generally inherit any corporate income tax liabilities of TRMT, including penalties and interest; 25 Table of Contents • we would be subject to tax on the built-in gain on each asset of TRMT existing at the time we acquired it if we were to dispose of such an asset during the five-year period following the date that we acquired TRMT; and • we could be required to pay a special distribution and/or employ applicable deficiency dividend procedures (including interest payments to the IRS) to eliminate any earnings and profits accumulated by TRMT for taxable periods that it did not qualify for taxation as a REIT.
Even if we retain our qualification for taxation as a REIT, if TRMT did not qualify for taxation as a REIT for a taxable year before the Merger or for its taxable year that included the Merger and if no relief is available, then we would face the following tax consequences: • as the successor by merger to TRMT, we would generally inherit any corporate income tax liabilities of TRMT, including penalties and interest; • we would be subject to tax on the built-in gain on each asset of TRMT existing at the time we acquired TRMT if we were to dispose of such an asset during the five-year period following the date that we acquired TRMT; and 25 Table of Contents • we could be required to pay a special distribution and/or employ applicable deficiency dividend procedures (including interest payments to the IRS) to eliminate any earnings and profits accumulated by TRMT for taxable periods that it did not qualify for taxation as a REIT.
Assuming that each class of our shares will be “widely held” and that no other facts and circumstances exist that restrict transferability of these shares, our counsel, Sullivan & Worcester LLP, is of the opinion that our shares will not fail to be “freely transferable” for purposes of the regulation due to the restrictions on transfer of our shares in our declaration of trust and that under the regulation each class of our currently outstanding shares is publicly offered and our assets will not be deemed to be “plan assets” of any ERISA Plan or Non-ERISA Plan that acquires our shares in a public offering.
Assuming that each class of our shares will be “widely held” and that no other facts and circumstances exist that restrict transferability of these shares, our tax counsel, Sullivan & Worcester LLP, is of the opinion that our shares will not fail to be “freely transferable” for purposes of the regulation due to the restrictions on transfer of our shares in our declaration of trust and that under the regulation each class of our currently outstanding shares is publicly offered and our assets will not be deemed to be “plan assets” of any ERISA Plan or Non-ERISA Plan that acquires our shares in a public offering.
Our tax counsel’s opinions are conditioned upon the assumption that our declaration of trust and all other legal documents to which we have been or are a party have been and will be complied with by all parties to those documents, upon the accuracy and completeness of the factual matters described in this Annual Report on Form 10-K and upon representations made by us to our tax counsel as to certain factual matters relating to our organization and operations and our expected manner of operation.
Our tax counsel’s opinions are conditioned upon the assumption that our leases, declaration of trust and all other legal documents to which we have been or are a party have been and will be complied with by all parties to those documents, upon the accuracy and completeness of the factual matters described in this Annual Report on Form 10-K and upon representations made by us to our tax counsel as to certain factual matters relating to our organization and operations and our expected manner of operation.
The summary does not discuss all of the particular tax considerations that might be relevant to you if you are subject to special rules under U.S. federal income tax law, for example if you are: • a bank, insurance company or other financial institution; • a regulated investment company or REIT; • a subchapter S corporation; • a broker, dealer or trader in securities or foreign currencies; • a person who marks-to-market our shares for U.S. federal income tax purposes; • a U.S. shareholder (as defined below) that has a functional currency other than the U.S. dollar; • a person who acquires or owns our shares in connection with employment or other performance of services; • a person subject to alternative minimum tax; • a person who acquires or owns our shares as part of a straddle, hedging transaction, constructive sale transaction, constructive ownership transaction or conversion transaction, or as part of a “synthetic security” or other integrated financial transaction; • a person who owns 10% or more (by vote or value, directly or constructively under the IRC) of any class of our shares; • a U.S. expatriate; • a non-U.S. shareholder (as defined below) whose investment in our shares is effectively connected with the conduct of a trade or business in the United States; • a nonresident alien individual present in the United States for 183 days or more during an applicable taxable year; • a “qualified shareholder” (as defined in Section 897(k)(3)(A) of the IRC); • a “qualified foreign pension fund” (as defined in Section 897(l)(2) of the IRC) or any entity wholly owned by one or more qualified foreign pension funds; • a non-U.S. shareholder that is a passive foreign investment company or controlled foreign corporation; • a person subject to special tax accounting rules as a result of their use of applicable financial statements (within the meaning of Section 451(b)(3) of the IRC); or • except as specifically described in the following summary, a trust, estate, tax-exempt entity or foreign person.
The summary does not discuss all of the particular tax considerations that might be relevant to you if you are subject to special rules under U.S. federal income tax law, for example if you are: • a bank, insurance company or other financial institution; • a regulated investment company or REIT; • a subchapter S corporation; • a broker, dealer or trader in securities or foreign currencies; • a person who marks-to-market our shares for U.S. federal income tax purposes; • a U.S. shareholder (as defined below) that has a functional currency other than the U.S. dollar; • a person who acquires or owns our shares in connection with employment or other performance of services; • a person subject to alternative minimum tax; • a person who acquires or owns our shares as part of a straddle, hedging transaction, constructive sale transaction, constructive ownership transaction or conversion transaction, or as part of a “synthetic security” or other integrated financial transaction; • a person who owns 10% or more (by vote or value, directly or constructively under the IRC) of any class of our shares; • a U.S. expatriate; • a non-U.S. shareholder (as defined below) whose investment in our shares is effectively connected with the conduct of a trade or business in the United States; • a nonresident alien individual present in the United States for 183 days or more during an applicable taxable year; • a “qualified shareholder” (as defined in Section 897(k)(3)(A) of the IRC); • a “qualified foreign pension fund” (as defined in Section 897(l)(2) of the IRC) or any entity wholly owned by one or more qualified foreign pension funds; 11 Table of Contents • a non-U.S. shareholder that is a passive foreign investment company or controlled foreign corporation; • a person subject to special tax accounting rules as a result of their use of applicable financial statements (within the meaning of Section 451(b)(3) of the IRC); or • except as specifically described in the following summary, a trust, estate, tax-exempt entity or foreign person.
In addition, if we so elect by making a timely designation to our shareholders, a shareholder would be taxed on its proportionate share of our undistributed capital gain and would generally be expected to receive a credit or refund for its proportionate share of the tax we paid. • If we have net income from “prohibited transactions”—that is, dispositions at a gain of inventory or property held primarily for sale to customers in the ordinary course of a trade or business other than dispositions of foreclosure property and other than dispositions excepted by statutory safe harbors—we will be subject to tax on this income at a 100% rate. • If we elect to treat property that we acquire in connection with a foreclosure of a mortgage loan as “foreclosure property,” as described in Section 856(e) of the IRC, we may thereby avoid both (a) the 100% tax on gain from a resale of that property (if the sale would otherwise constitute a prohibited transaction) and (b) the inclusion of any income from such property not qualifying for purposes of the REIT gross income tests discussed below, but in exchange for these benefits we will be subject to tax on the foreclosure property income at the highest regular corporate income tax rate. • If we fail to satisfy the 75% gross income test or the 95% gross income test discussed below, due to reasonable cause and not due to willful neglect, but nonetheless maintain our qualification for taxation as a REIT because of specified cure provisions, we will be subject to tax at a 100% rate on the greater of the amount by which we fail the 75% gross income test or the 95% gross income test, with adjustments, multiplied by a fraction intended to reflect our profitability for the taxable year. • If we fail to satisfy any of the REIT asset tests described below (other than a de minimis failure of the 5% or 10% asset tests) due to reasonable cause and not due to willful neglect, but nonetheless maintain our qualification for taxation as a REIT because of specified cure provisions, we will be subject to a tax equal to the greater of $50,000 or the highest regular corporate income tax rate multiplied by the net income generated by the nonqualifying assets that caused us to fail the test. • If we fail to satisfy any provision of the IRC that would result in our failure to qualify for taxation as a REIT (other than violations of the REIT gross income tests or violations of the REIT asset tests described below) due to reasonable cause and not due to willful neglect, we may retain our qualification for taxation as a REIT but will be subject to a penalty of $50,000 for each failure. • If we fail to distribute for any calendar year at least the sum of 85% of our REIT ordinary income for that year, 95% of our REIT capital gain net income for that year and any undistributed taxable income from prior periods, we will be subject to a 4% nondeductible excise tax on the excess of the required distribution over the amounts actually distributed. 14 Table of Contents • If we acquire a REIT asset where our adjusted tax basis in the asset is determined by reference to the adjusted tax basis of the asset in the hands of a C corporation, under specified circumstances we may be subject to federal income taxation on all or part of the built-in gain (calculated as of the date the property ceased being owned by the C corporation) on such asset.
In addition, if we so elect by making a timely designation to our shareholders, a shareholder would be taxed on its proportionate share of our undistributed capital gain and would generally be expected to receive a credit or refund for its proportionate share of the tax we paid. • If we have net income from “prohibited transactions”—that is, dispositions at a gain of inventory or property held primarily for sale to customers in the ordinary course of a trade or business other than dispositions of foreclosure property and other than dispositions excepted by statutory safe harbors—we will be subject to tax on this income at a 100% rate. 13 Table of Contents • If we elect to treat property that we acquire in connection with a foreclosure of a mortgage loan or certain property that we dispose of as “foreclosure property,” as described in Section 856(e) of the IRC, we may thereby avoid both (a) the 100% tax on gain from a resale of that property (if the sale would otherwise constitute a prohibited transaction) and (b) the inclusion of any income from such property not qualifying for purposes of the REIT gross income tests discussed below, but in exchange for these benefits we will be subject to tax on the foreclosure property income at the highest regular corporate income tax rate. • If we fail to satisfy the 75% gross income test or the 95% gross income test discussed below, due to reasonable cause and not due to willful neglect, but nonetheless maintain our qualification for taxation as a REIT because of specified cure provisions, we will be subject to tax at a 100% rate on the greater of the amount by which we fail the 75% gross income test or the 95% gross income test, with adjustments, multiplied by a fraction intended to reflect our profitability for the taxable year. • If we fail to satisfy any of the REIT asset tests described below (other than a de minimis failure of the 5% or 10% asset tests) due to reasonable cause and not due to willful neglect, but nonetheless maintain our qualification for taxation as a REIT because of specified cure provisions, we will be subject to a tax equal to the greater of $50,000 or the highest regular corporate income tax rate multiplied by the net income generated by the nonqualifying assets that caused us to fail the test. • If we fail to satisfy any provision of the IRC that would result in our failure to qualify for taxation as a REIT (other than violations of the REIT gross income tests or violations of the REIT asset tests described below) due to reasonable cause and not due to willful neglect, we may retain our qualification for taxation as a REIT but will be subject to a penalty of $50,000 for each failure. • If we fail to distribute for any calendar year at least the sum of 85% of our REIT ordinary income for that year, 95% of our REIT capital gain net income for that year and any undistributed taxable income from prior periods, we will be subject to a 4% nondeductible excise tax on the excess of the required distribution over the amounts actually distributed. • If we acquire a REIT asset where our adjusted tax basis in the asset is determined by reference to the adjusted tax basis of the asset in the hands of a C corporation, under specified circumstances we may be subject to federal income taxation on all or part of the built-in gain (calculated as of the date the property ceased being owned by the C corporation) on such asset.
Section 856(a) of the IRC defines a REIT as a corporation, trust or association: (1) that is managed by one or more trustees or directors; (2) the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest; (3) that would be taxable, but for Sections 856 through 859 of the IRC, as a domestic C corporation; (4) that is not a financial institution or an insurance company subject to special provisions of the IRC; (5) the beneficial ownership of which is held by 100 or more persons; (6) that is not “closely held,” meaning that during the last half of each taxable year, not more than 50% in value of the outstanding shares are owned, directly or indirectly, by five or fewer “individuals” (as defined in the IRC to include specified tax-exempt entities); (7) that does not have (and has not succeeded to) the post-December 7, 2015 tax-free spin-off history proscribed by Section 856(c)(8) of the IRC; and (8) that meets other tests regarding the nature of its income and assets and the amount of its distributions, all as described below.
Section 856(a) of the IRC defines a REIT as a corporation, trust or association: (1) that is managed by one or more trustees or directors; (2) the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest; (3) that would be taxable, but for Sections 856 through 859 of the IRC, as a domestic C corporation; (4) that is not a financial institution or an insurance company subject to special provisions of the IRC; 15 Table of Contents (5) the beneficial ownership of which is held by 100 or more persons; (6) that is not “closely held,” meaning that during the last half of each taxable year, not more than 50% in value of the outstanding shares are owned, directly or indirectly, by five or fewer “individuals” (as defined in the IRC to include specified tax-exempt entities); (7) that does not have (and has not succeeded to) the post-December 7, 2015 tax-free spin-off history proscribed by Section 856(c)(8) of the IRC; and (8) that meets other tests regarding the nature of its income and assets and the amount of its distributions, all as described below.
Because our TRSs are taxed as C corporations that are separate from us, their assets, liabilities and items of income, deduction and credit generally are not imputed to us for purposes of the REIT qualification requirements described in this summary.
Moreover, because our TRSs are taxed as C corporations that are separate from us, their assets, liabilities and items of income, deduction and credit generally are not imputed to us for purposes of the REIT qualification requirements described in this summary.
We generally do not expect to sell assets if doing so would result in the imposition of a material built-in gains tax liability; but if and when we do sell assets that may have associated built-in gains tax exposure, then we expect to make appropriate provision for the associated tax liabilities on our financial statements. • Our subsidiaries that are C corporations, including our “taxable REIT subsidiaries”, as defined in Section 856(l) of the IRC, or TRSs, generally will be required to pay federal corporate income tax on their earnings, and a 100% tax may be imposed on any transaction between us and one of our TRSs that does not reflect arm’s length terms. • We acquired TRMT by merger in 2021.
We generally do not expect to sell assets if doing so would result in the imposition of a material built-in gains tax liability; but if and when we do sell assets that may have associated built-in gains tax exposure, then we expect to make appropriate provision for the associated tax liabilities on our financial statements. • Our subsidiaries that are C corporations, including our “taxable REIT subsidiaries”, as defined in Section 856(l) of the IRC, or TRSs, generally will be required to pay federal corporate income tax on their earnings, and a 100% tax may be imposed on any transaction between us and one of our TRSs that does not reflect arm’s length terms. • We acquired Tremont Mortgage Trust, or TRMT, by merger in 2021, or the Merger.
Our tax counsel, Sullivan & Worcester LLP, is of the opinion that we have been organized and have qualified for taxation as a REIT under the IRC for our 2020 through 2022 taxable years, and that our current and anticipated investments and plan of operation will enable us to continue to meet the requirements for qualification and taxation as a REIT under the IRC.
Our tax counsel, Sullivan & Worcester LLP, is of the opinion that we have been organized and have qualified for taxation as a REIT under the IRC for our 2020 through 2023 taxable years, and that our current and anticipated investments and plan of operation will enable us to continue to meet the requirements for qualification and taxation as a REIT under the IRC.
While we cannot be sure, we believe that Tremont, through RMR, is positioned to leverage its established relationships with tenants and operators across a wide variety of real estate asset sectors, and in particular its established relationships with managers of lodging facilities and health care facilities, to facilitate our goals in this regard.
While we cannot be sure, we believe that TRMT, through RMR, is positioned to leverage its established relationships with tenants and operators across a wide variety of real estate asset sectors, and in particular its established relationships with managers of lodging facilities and health care facilities, to facilitate our goals in this regard.
We also operate our business in a manner that permits us to maintain our exemption from registration under the 1940 Act. Our principal executive offices are located at Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458-1634, and our telephone number is 617-332-9530.
We also operate our business in a manner that permits us to maintain our exemption from registration under the 1940 Act. Our principal executive offices are located at Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458-1634, and our telephone number is 617-332-9530. Our Investment and Leverage Strategies.
Interest income that we receive from a mortgage loan in which all or a portion of the interest income payable is contingent on the earnings of the borrower will generally be qualifying income for purposes of both the 75% and 95% gross income tests if it is based upon the gross receipts or sales, and not the net income or profits, of the 18 Table of Contents borrower.
Interest income that we receive from a mortgage loan in which all or a portion of the interest income payable is contingent on the earnings of the borrower will generally be qualifying income for purposes of both the 75% and 95% gross income tests if it is based upon the gross receipts or sales, and not the net income or profits, of the borrower.
Subject to the discussion below, we believe that we and each of our TRSs have complied with, and 17 Table of Contents will continue to comply with, the requirements for TRS status at all times during which the subsidiary’s TRS election is intended to be in effect, and we believe that the same will be true for any TRS that we later form or acquire.
Subject to the discussion below, we believe that we and each of our TRSs have complied with, and will continue to comply with, the requirements for TRS status at all times during which the subsidiary’s TRS election is intended to be in effect, and we believe that the same will be true for any TRS that we later form or acquire.
If we were to designate any portion of our net capital gain as undistributed capital gain, a non-U.S. shareholder should consult its tax advisors regarding taxation of such undistributed capital gain. Dispositions of Our Shares .
If we were to designate any portion of our net capital gain as undistributed capital gain, a non-U.S. shareholder should consult their tax advisors regarding taxation of such undistributed capital gain. Dispositions of Our Shares .
Our investment and leverage strategies may be changed, amended, supplemented or waived at any time by our Board of Trustees without shareholder approval. 9 Table of Contents Our Financing Policies.
Our investment and leverage strategies may be changed, amended, supplemented or waived at any time by our Board of Trustees without shareholder approval. 8 Table of Contents Our Financing Policies.
Even if this relief provision does apply, a 100% tax is imposed upon the greater of the amount by which we failed the 75% gross income test or the amount by which we failed the 95% gross income test, with adjustments, multiplied by a fraction intended to reflect our profitability for the taxable year.
Even if this relief provision does apply, a 100% tax is imposed upon the greater of the amount by which we failed the 75% gross income test or the amount by which we failed the 95% gross income test, with adjustments, multiplied by a fraction intended to reflect 21 Table of Contents our profitability for the taxable year.
Rents received by us, if any, will qualify as “rents from real property” in satisfying the gross income requirements described above only if several conditions are met.
Rents received by us qualify as “rents from real property” in satisfying the gross income requirements described above only if several conditions are met.
Although we cannot be sure, we expect that the interest that we will receive from such investments will generally be qualifying income for purposes of both the 75% and 95% gross income tests. 19 Table of Contents Fee Income. We expect to receive fee income in a number of circumstances, including from loans that we originate.
Although we cannot be sure, we expect that the interest that we will receive from such investments will generally be qualifying income for purposes of both the 75% and 95% gross income tests. Fee Income. We expect to receive fee income in a number of circumstances, including from loans that we originate.
Other fees generally are not qualifying income for purposes of either gross income test. Fees earned by our TRSs are not included in computing the 75% and 95% gross income tests, and thus neither assist nor hinder our compliance with these tests. Foreclosure Property .
Other fees generally are not qualifying income for purposes of either gross income test. Fees earned by our TRSs are not included in computing the 75% and 95% gross income tests, and thus neither assist nor hinder our compliance with these tests. 19 Table of Contents Foreclosure Property .
In order to qualify the rental payments that we receive as “rents from real property,” we may find it useful or necessary in such circumstances to utilize our TRSs to provide services to our tenants at these properties or, in the case of lodging facilities or health care facilities, utilize our TRSs as our captive tenants and engage eligible independent contractors as managers for our TRSs.
In order to qualify the rental payments that we receive as “rents from real property,” it is often useful or necessary in such circumstances to utilize our TRSs to provide services to our tenants at these properties or, in the case of lodging facilities or health care facilities, utilize our TRSs as our captive tenants and engage eligible independent contractors as managers for our TRSs.
From time to time, we may find it necessary to foreclose on loans that we originate or acquire. In such instances, we intend to do so in a manner that maintains our qualification for taxation as a REIT and, if possible, minimizes our liability for foreclosure property income taxes, all as described below.
From time to time, we have found and may in the future find it necessary to foreclose on loans that we originate or acquire. In such instances, we intend to do so in a manner that maintains our qualification for taxation as a REIT and, if possible, minimizes our liability for foreclosure property income taxes, all as described below.
While we expect that additional new regulations in these areas will be adopted and existing regulations may change in the future, it is not possible at this time to forecast the exact nature of any future legislation, regulations, judicial decisions, orders or interpretations, nor their impact upon our future business, financial condition or our results of operations or prospects.
While we expect that additional new regulations in these areas will be adopted and existing regulations may change in the future, it is not possible at this time to forecast the exact nature of any future legislation, regulations, judicial decisions, orders or interpretations, nor their impact upon our future business, financial condition or our results of operations or prospects. 10 Table of Contents Internet Website.
However, this grace period terminates and foreclosure property ceases to be foreclosure property on the first day: • on which a lease is entered into for the property that, by its terms, will give rise to income that does not qualify for purposes of the 75% gross income test (disregarding income from foreclosure property), or any nonqualified income under the 75% gross income test is received or accrued by the REIT, directly or indirectly, pursuant to a lease entered into on or after such day; 20 Table of Contents • on which any construction takes place on the property, other than completion of a building or any other improvement where more than 10% of the construction was completed before default became imminent and other than specifically exempted forms of maintenance or deferred maintenance; or • which is more than 90 days after the day on which the REIT acquired the property and the property is used in a trade or business which is conducted by the REIT, other than through an independent contractor from whom the REIT itself does not derive or receive any income or a TRS.
However, this grace period terminates and foreclosure property ceases to be foreclosure property on the first day: • on which a lease is entered into for the property that, by its terms, will give rise to income that does not qualify for purposes of the 75% gross income test (disregarding income from foreclosure property), or any nonqualified income under the 75% gross income test is received or accrued by the REIT, directly or indirectly, pursuant to a lease entered into on or after such day; • on which any construction takes place on the property, other than completion of a building or any other improvement where more than 10% of the construction was completed before default became imminent and other than specifically exempted forms of maintenance or deferred maintenance; or • which is more than 90 days after the day on which the REIT acquired the property and the property is used in a trade or business which is conducted by the REIT, other than through an independent contractor from whom the REIT itself does not derive or receive any income or a TRS. 20 Table of Contents We have had and may in the future have the option to foreclose on mortgage loans when a borrower is in default.
We expect that all or substantially all the rents and related service charges that we may receive will be “rents from real property” and will to that extent be qualifying income for purposes of both the 75% and 95% gross income tests. Prohibited Transactions .
We expect that all or substantially all the rents and related service charges that we have received or may in the future receive will be “rents from real property” and will to that extent be qualifying income for purposes of both the 75% and 95% gross income tests. Prohibited Transactions .
Based on the discussion above, we believe that we have satisfied, and will continue to satisfy, the 75% and 95% gross income tests outlined above on a continuing basis beginning with our first taxable year as a REIT. 21 Table of Contents Asset Tests .
Based on the discussion above, we believe that we have satisfied, and will continue to satisfy, the 75% and 95% gross income tests outlined above on a continuing basis beginning with our first taxable year as a REIT. Asset Tests .
In addition to inheriting TRMT’s tax liabilities, if TRMT failed to qualify for taxation as a REIT for federal income tax purposes in any period prior to the consummation of the Merger, we could lose our qualification for taxation as a REIT should the disqualifying activities continue after the Merger.
If TRMT failed to qualify for taxation as a REIT for federal income tax purposes in any period prior to the consummation of the Merger, we could lose our qualification for taxation as a REIT should the disqualifying activities continue after the Merger.
If new laws or regulations are enacted which impact us directly or indirectly, we may change our intentions or beliefs. 12 Table of Contents Your federal income tax consequences generally will differ depending on whether or not you are a “U.S. shareholder.” For purposes of this summary, a “U.S. shareholder” is a beneficial owner of our shares that is: • an individual who is a citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or meets the substantial presence residency test under the federal income tax laws; • an entity treated as a corporation for federal income tax purposes that is created or organized in or under the laws of the United States, any state thereof or the District of Columbia; • an estate the income of which is subject to federal income taxation regardless of its source; or • a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or, to the extent provided in Treasury regulations, a trust in existence on August 20, 1996 that has elected to be treated as a domestic trust; whose status as a U.S. shareholder is not overridden by an applicable tax treaty.
Your federal income tax consequences generally will differ depending on whether or not you are a “U.S. shareholder.” For purposes of this summary, a “U.S. shareholder” is a beneficial owner of our shares that is: • an individual who is a citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or meets the substantial presence residency test under the federal income tax laws; • an entity treated as a corporation for federal income tax purposes that is created or organized in or under the laws of the United States, any state thereof or the District of Columbia; • an estate the income of which is subject to federal income taxation regardless of its source; or • a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or, to the extent provided in Treasury regulations, a trust in existence on August 20, 1996 that has elected to be treated as a domestic trust; whose status as a U.S. shareholder is not overridden by an applicable tax treaty.
The charts below detail the geographic region and property type of the properties securing the loans in our portfolio by carrying value as of December 31, 2022: For further information regarding our loans held for investment, see Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and Note 5 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
The charts below detail the geographic region and property type of the properties securing the loans in our portfolio by amortized cost as of December 31, 2023: For further information regarding our loans held for investment, see Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Pursuant to our master repurchase agreement with UBS AG, or UBS, or our UBS Master Repurchase Agreement, our master repurchase agreement with Citibank, N.A., or Citibank, or our Citibank Master Repurchase Agreement and our master repurchase agreement with Wells Fargo, National Association, or Wells Fargo, or our Wells Fargo Master Repurchase Agreement, or collectively, our Master Repurchase Agreements, we nominally sell assets to the counterparty and simultaneously agree to repurchase those assets.
Pursuant to our master repurchase agreement with UBS AG, or UBS, or our UBS Master Repurchase Agreement, our master repurchase agreement with Citibank, N.A., or Citibank, or our Citibank Master Repurchase Agreement and our master repurchase agreement with Wells Fargo, National Association, or Wells Fargo, or our Wells Fargo Master Repurchase Agreement, each as amended from time to time, or collectively, our Master Repurchase Agreements, we nominally sell assets to the counterparty and simultaneously agree to repurchase those assets.
Following a foreclosure, we will generate income that satisfies the 75% and 95% gross income tests if existing tenants at the real property or new tenants that we place at the property begin paying us rents that satisfy the requirements for “rents from real property” as described below under “—Rents from Real Property.” Such qualifying rents will not be subject to the foreclosure property income taxes described below.
Following a foreclosure, we generate income that satisfies the 75% and 95% gross income tests to the extent existing tenants at the real property or new tenants that we place at the property pay us rents that satisfy the requirements for “rents from real property” as described below under “—Rents from Real Property.” Such qualifying rents are not subject to the foreclosure property income taxes described below.
As of December 31, 2022, RMR Inc. had over $37 billion of real estate assets under management and the combined RMR managed companies had more than $16 billion of annual revenues, nearly 2,100 properties and over 38,000 employees. In addition, RMR, on behalf of its managed companies, manages significant capital expenditure budgets for building improvements and property redevelopment.
As of December 31, 2023, RMR Inc. had over $41 billion of real estate assets under management and the combined RMR managed companies had more than $5 billion of annual revenues, over 2,000 properties and over 20,000 employees. In addition, RMR, on behalf of its managed companies, manages significant capital expenditure budgets for building improvements and property redevelopment.
We funded our loan originations to date using cash on hand and advancements under our debt facilities, and we acquired TRMT's loan portfolio in the Merger with our common shares. For further information regarding our debt agreements, see Note 6 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
We funded our loan originations to date using cash on hand and advancements under our debt facilities. For further information regarding our debt agreements, see Note 5 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
We may have the option to foreclose on mortgage loans when a borrower is in default. The foregoing rules related to foreclosure property, and our goal to foreclose in a tax efficient manner when possible, could affect our decision of whether and when to foreclose on a particular mortgage loan. Rents from Real Property .
The foregoing rules related to foreclosure property, and our goal to foreclose in a tax efficient manner when possible, could affect our decision of whether and when to foreclose on a particular mortgage loan. Rents from Real Property .
Sy, are officers and employees of Tremont and/or RMR. For further information about these and other such relationships and related person transactions, see Item 1A, "Risk Factors—Risks Relating to Our Relationships with Tremont and RMR" and Notes 9 and 10 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. Board Diversity.
For further information about these and other such relationships and related person transactions, see Item 1A, "Risk Factors—Risks Relating to Our Relationships with Tremont and RMR" and Notes 8 and 9 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. Sustainability, Environmental and Climate Change Matters.
We intend to use our website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Those disclosures will be included on our website in the “Investors” section.
We intend to use our website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Those disclosures will be included on our website in the “Investors” section. Accordingly, investors should monitor our website, in addition to following our press releases, SEC filings and public conference calls and webcasts.
Bridge loans may lead to future investment opportunities for us, including making mortgage loans to repay our transitional loans, otherwise known as “takeout mortgage loans.” We may also originate or acquire subordinated and mezzanine loans, which are loans secured by junior mortgages on the underlying collateral property or loans secured by a pledge of the ownership interests of either the entity owning the property or a pledge of the ownership interests in the entity that owns the interest in the entity owning the property. 8 Table of Contents Our strategy to invest in floating rate first mortgage loans generally will result in an increase to our net income in periods of rising interest rates and a decrease to our net income in periods of declining interest rates.
Bridge loans may lead to future investment opportunities for us, including making mortgage loans to repay our transitional loans, otherwise known as “takeout mortgage loans.” We may also originate or acquire subordinated and mezzanine loans, which are loans secured by junior mortgages on the underlying collateral property or loans secured by a pledge of the ownership interests of either the entity owning the property or a pledge of the ownership interests in the entity that owns the interest in the entity owning the property.
Our direct leverage is from repurchase facilities and other secured financing facilities for which we may pledge our first mortgage loans as collateral. If we employ structural leverage, we expect it will involve the sale of senior interests in first mortgage loans, such as A-Notes, to third parties and our retention of B-Notes and other subordinated interests in the loans.
If we employ structural leverage, we expect it will involve the sale of senior interests in first mortgage loans, such as A-Notes, to third parties and our retention of B-Notes and other subordinated interests in the loans.
Accordingly, investors should monitor our website, in addition to following our press releases, SEC filings and public conference calls and webcasts. 11 Table of Contents MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS The following summary of material United States federal income tax considerations is based on existing law and is limited to investors who own our shares as investment assets rather than as inventory or as property used in a trade or business.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS The following summary of material United States federal income tax considerations is based on existing law and is limited to investors who own our shares as investment assets rather than as inventory or as property used in a trade or business.
If the IRS were to disagree with any such determinations made or with the method used by us, the amount of any excess inclusion or similar income required to be taken into account by one or more of our shareholders could be significantly increased. 15 Table of Contents In addition, if we own a residual interest in a REMIC, we will be taxed at the highest corporate income tax rate on the percentage of our excess inclusion income that corresponds to the percentage of our shares of beneficial interest that are held in record name by “disqualified organizations.” Although the law is unsettled, the IRS asserts that similar rules apply to a REIT that generates income similar to excess inclusion income as a result of owning specified non-REMIC collateralized mortgage pools.
In addition, if we own a residual interest in a REMIC, we will be taxed at the highest corporate income tax rate on the percentage of our excess inclusion income that corresponds to the percentage of our shares of beneficial interest that are held in record name by “disqualified organizations.” Although the law is unsettled, the IRS asserts that similar rules apply to a REIT that generates income similar to excess inclusion income as a result of owning specified non-REMIC collateralized mortgage pools.
Our intentions and beliefs described in this summary are based upon our understanding of applicable laws and regulations that are in effect as of the date of this Annual Report on Form 10-K.
Our intentions and beliefs described in this summary are based upon our understanding of applicable laws and regulations that are in effect as of the date of this Annual Report on Form 10-K. If new laws or regulations are enacted which impact us directly or indirectly, we may change our intentions or beliefs.
As a REIT, we generally are not subject to federal income tax on our net income distributed as dividends to our shareholders. Distributions to our shareholders generally are included in our shareholders’ income as dividends to the extent of our available current or accumulated earnings and profits.
Distributions to our shareholders generally are included in our shareholders’ income as dividends to the extent of our available current or accumulated earnings and profits.
We also believe that Tremont provides us with significant experience and expertise in investing in middle market and transitional CRE. 10 Table of Contents As of the date of this Annual Report on Form 10-K, the executive officers of RMR are: Adam D. Portnoy, president and chief executive officer; Jennifer B.
We also believe that Tremont provides us with significant experience and expertise in investing in middle market and transitional CRE. 9 Table of Contents As of February 15, 2024, the executive officers of RMR are: Adam D. Portnoy, president and chief executive officer; Christopher J. Bilotto, executive vice president; Jennifer B.
Although we cannot be sure, we believe that from and after our 2020 taxable year we have been organized and have operated, and will continue to be organized and to operate, in a manner that qualified us and will continue to qualify us to be taxed as a REIT under the IRC.
Although we cannot be sure, we believe that from and after our 2020 taxable year we have been organized and have operated, and will continue to be organized and to operate, in a manner that qualified us and will continue to qualify us to be taxed as a REIT under the IRC. 12 Table of Contents As a REIT, we generally are not subject to federal income tax on our net income distributed as dividends to our shareholders.
Although we cannot be sure, we believe that we have met conditions (1) through (8) during each of the requisite periods ending on or before the close of our most recently completed taxable year, and that we will continue to meet these conditions in our current and future taxable years. 16 Table of Contents To help comply with condition (6), our declaration of trust restricts transfers of our shares that would otherwise result in concentrated ownership positions.
Although we cannot be sure, we believe that we have met conditions (1) through (8) during each of the requisite periods ending on or before the close of our most recently completed taxable year, and that we will continue to meet these conditions in our current and future taxable years.
As of December 31, 2022, we had a portfolio of 27 floating rate first mortgage loans with aggregate loan commitments of $727.6 million with a weighted average maximum maturity of 3.3 years, weighted average coupon rate of 8.07% and 8.57% all in yield.
As of December 31, 2023, we had a portfolio of 24 floating rate first mortgage loans with aggregate loan commitments of $670.3 million with a weighted average maximum maturity of 3.0 years, weighted average coupon rate of 9.19% and 9.64% all in yield.
The opinions of our tax counsel are based upon the law as it exists today, but the law may change in the future, possibly with retroactive effect. 13 Table of Contents Given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in our circumstances, neither Sullivan & Worcester LLP nor we can be sure that we will qualify as or be taxed as a REIT for any particular year.
Given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in our circumstances, neither Sullivan & Worcester LLP nor we can be sure that we will qualify as or be taxed as a REIT for any particular year.
Relief provisions under the IRC may allow us to continue to qualify for taxation as a REIT even if we fail to comply with various REIT requirements, all as discussed in more detail below. However, it is impossible to state whether in any particular circumstance we would be entitled to the benefit of these relief provisions.
Relief provisions under the IRC may allow us to continue to qualify for taxation as a REIT even if we fail to comply with various REIT requirements, all as discussed in more detail below.
All services that would otherwise be provided to us by employees are provided to or arranged by Tremont, which is a subsidiary of RMR. As of December 31, 2022, RMR had approximately 600 employees, including Tremont’s employees, located at its headquarters and more than 30 offices throughout the United States. Environmental, Social and Governance.
All services that would otherwise be provided to us by employees are provided or arranged by Tremont. As of December 31, 2023, RMR had over 1,100 employees, including Tremont’s employees, located at its headquarters and more than 35 offices throughout the United States. Corporate Citizenship.
Thus, in applying all of the REIT qualification requirements described in this summary, all assets, liabilities and items of income, deduction and credit of our QRSs are treated as ours, and our investment in the stock and other securities of such QRSs will be disregarded.
Thus, in applying all of the REIT qualification requirements described in this summary, all assets, liabilities and items of income, deduction and credit of our QRSs are treated as ours, and our investment in the stock and other securities of such QRSs will be disregarded. 16 Table of Contents We may in the future invest in one or more entities that are treated as partnerships for federal income tax purposes.
These restrictions, however, do not ensure that we have previously satisfied, and may not ensure that we will in all cases be able to continue to satisfy, the share ownership requirements described in condition (6).
To help comply with condition (6), our declaration of trust restricts transfers of our shares that would otherwise result in concentrated ownership positions. These restrictions, however, do not ensure that we have previously satisfied, and may not ensure that we will in all cases be able to continue to satisfy, the share ownership requirements described in condition (6).
Finally, if there is an adjustment to TRMT’s real estate investment trust taxable income or dividends paid deductions, we could elect to use the deficiency dividend procedure in respect of preserving TRMT’s REIT qualification. That deficiency dividend procedure could require us to make significant distributions to our shareholders and to pay significant interest to the IRS.
If there is an adjustment to TRMT’s real estate investment trust taxable income or dividends paid deductions, and to the extent that the IRC remedial provisions are available to us to address TRMT’s REIT qualification and taxation, we could elect to use the deficiency dividend procedure in respect of preserving TRMT’s REIT qualification.
The U.S. federal income tax treatment of our distributions will vary based on the status of the recipient shareholder as more fully described below under the headings “—Taxation of Taxable U.S. Shareholders,” “—Taxation of Tax-Exempt U.S. Shareholders,” and “—Taxation of Non-U.S.
These distributions may include cash distributions, in kind distributions of property, and deemed or constructive distributions resulting from capital market activities. The U.S. federal income tax treatment of our distributions will vary based on the status of the recipient shareholder as more fully described below under the headings “—Taxation of Taxable U.S. Shareholders,” “—Taxation of Tax-Exempt U.S.
We do not intend to acquire or otherwise own assets or to conduct financing or other activities if doing so would produce “excess inclusion” or similar income for us or our shareholders, except that we may own assets or conduct activities through a TRS such that no excess inclusion or similar income results for us and our shareholders.
However, it is impossible to state whether in any particular circumstance we would be entitled to the benefit of these relief provisions. 14 Table of Contents We do not intend to acquire or otherwise own assets or to conduct financing or other activities if doing so would produce “excess inclusion” or similar income for us or our shareholders, except that we may own assets or conduct activities through a TRS such that no excess inclusion or similar income results for us and our shareholders.
We inherited the historical tax bases and holding periods of TRMT with respect to the assets we acquired in the Merger. As the successor by merger to TRMT, we are also generally liable for unpaid taxes, including penalties and interest (if any), of TRMT.
As the successor by merger to TRMT, we are generally liable for unpaid taxes, including penalties and interest (if any), of TRMT.
To the extent possible, our goal would be to deploy one or more of these tax efficient solutions in respect of property that we acquire through foreclosure.
We have deployed and in the future expect to deploy one or more of these tax efficient solutions in respect of property that we acquire through foreclosure.
Clark, executive vice president, general counsel and secretary; Jennifer F. Francis, executive vice president; Matthew P. Jordan, executive vice president, chief financial officer and treasurer; John G. Murray, executive vice president; and Jonathan M. Pertchik, executive vice president. Messrs. Portnoy and Jordan are our Managing Trustees. Our President, Thomas J. Lorenzini, and our Chief Financial Officer and Treasurer, Tiffany R.
Clark, executive vice president, general counsel and secretary; Matthew P. Jordan, executive vice president, chief financial officer and treasurer; and John G. Murray, executive vice president. Messrs. Portnoy and Jordan are our Managing Trustees. Our President and Chief Investment Officer, Thomas J. Lorenzini, and our Chief Financial Officer and Treasurer, Fernando Diaz, are officers and employees of Tremont and/or RMR.
As of December 31, 2022, we had a portfolio of 27 loans held for investment with a total commitment of $727.6 million, of which $49.0 million remained unfunded.
As of December 31, 2023, we had a portfolio of 24 loans held for investment with a total commitment of $670.3 million, of which $40.4 million remained unfunded.
Our Acquisition of Tremont Mortgage Trust In September 2021, we acquired TRMT in a transaction that was intended to qualify as a “reorganization” within the meaning of Section 368(a) of the IRC, and our tax counsel, Sullivan & Worcester LLP, so opined.
Our Acquisition of Tremont Mortgage Trust In September 2021, we acquired TRMT in a transaction that was intended to qualify as a “reorganization” within the meaning of Section 368(a) of the IRC. We believe that our acquisition of TRMT’s assets has not and will not materially impact our qualification for taxation as a REIT.
This limitation does not apply, however, where the borrower leases substantially all of its interest in the property to tenants or subtenants, to the extent that the rental income derived by the borrower or lessee, as the case may be, would qualify as “rents from real property,” as described below under “—Rents from Real Property,” had we earned the income directly.
This limitation does not apply, however, where the borrower leases substantially all of its interest in the property to tenants or subtenants, to the extent that the rental income derived by the borrower or lessee, as the case may be, would qualify as “rents from real property,” as described below under “—Rents from Real Property,” had we earned the income directly. 18 Table of Contents We may invest in CMBS or specified securities backed by mortgages and issued by government sponsored enterprises, including Fannie Mae, Freddie Mac and the Federal Home Loan Bank (such government issued securities, “agency securities”) that are either pass-through certificates or collateralized mortgage obligations.
Decreases to our net income during periods of declining interest rates may be mitigated by active interest rate floors that are higher than the applicable benchmark index. As of December 31, 2022, 96.5% of our loan portfolio by principal outstanding had interest rate floors in place with a weighted average floor of 0.62%.
Decreases to our net income during periods of declining interest rates may be mitigated by active interest rate floors that are higher than the applicable benchmark index.
If this assumption or a description or representation is inaccurate or incomplete, our tax counsel’s opinions may be adversely affected and may not be relied upon.
If this assumption or a description or representation is inaccurate or incomplete, our tax counsel’s opinions may be adversely affected and may not be relied upon. The opinions of our tax counsel are based upon the law as it exists today, but the law may change in the future, possibly with retroactive effect.
We are committed to responsibly managing risk and preserving capital. We consider the environmental, social and governance, or ESG, characteristics of potential borrowers and collateral property when evaluating investment opportunities, performing due diligence procedures and making capital allocation decisions. We are managed by Tremont, a subsidiary of RMR.
We consider the ESG characteristics of potential borrowers and collateral properties when evaluating investment opportunities, performing due diligence procedures and making capital allocation decisions.
As discussed above, we may utilize a TRS to own assets or conduct activities that would otherwise result in excess inclusion income for us and our shareholders. Income Tests. We must satisfy two gross income tests annually to maintain our qualification for taxation as a REIT.
As discussed above, we may utilize a TRS to own assets or conduct activities that would otherwise result in excess inclusion income for us and our shareholders or to perform services for our tenants, if any, without disqualifying the rents we receive from those tenants under the 75% gross income test or the 95% gross income test. 17 Table of Contents Income Tests.
As such, many of the ESG initiatives employed by RMR apply to us. In addition to the consideration of ESG in the investment process, key ESG initiatives we share with Tremont and RMR include corporate sustainability and environmental improvements at our office locations and diversity, equality and inclusion programs. Government Regulation.
In addition to incorporating ESG diligence practices in our investment process, where available, we also share key ESG initiatives with Tremont and RMR, including corporate sustainability and environmental improvements at our office locations and diversity, equality and inclusion programs. Investments in Human Capital. We have no employees.
The 100% excise tax also applies to the underpricing of services provided by a TRS to its affiliated REIT or the REIT’s tenants.
A safe harbor exception to this excise tax applies if the TRS has been compensated at a rate at least equal to 150% of its direct cost in furnishing or rendering the service. Finally, the 100% excise tax also applies to the underpricing of services provided by a TRS to its affiliated REIT or the REIT’s tenants.
We currently expect that our leverage, on a debt to equity basis, will generally be below a ratio of 3:1. As of December 31, 2022, our debt to equity ratio was 1.7:1. We employ direct leverage, and we may employ structural leverage, on our first mortgage loan investments.
As of December 31, 2023, all amounts outstanding under our financing agreements pay interest at floating rates that are not subject to floors. We currently expect that our leverage, on a debt to equity basis, will generally be below a ratio of 3:1. As of December 31, 2023, our debt to equity ratio was 1.7:1.
Removed
On January 5, 2021, the SEC issued an order granting our request to deregister as an investment company under the 1940 Act, or the Deregistration Order. On September 30, 2021, we merged with Tremont Mortgage Trust, or TRMT, or the Merger.
Added
Our strategy to invest in floating rate first mortgage loans generally will result in an increase to our net income in periods of rising interest rates and a decrease to our net income in periods of declining interest rates.
Removed
For information about the Deregistration Order and the Merger, see Part I, Item 1, “Business” in our A n nual Report on Form 10-K for the year ended December 31, 2021 . Our Investment and Leverage Strategies.
Added
We employ direct leverage, and we may employ structural leverage, on our first mortgage loan investments. Our direct leverage is from repurchase facilities and other secured financing facilities for which we may pledge our first mortgage loans as collateral.
Removed
As of December 31, 2022, our Board of Trustees was comprised of seven Trustees, of which five were independent, two, or approximately 29%, were female and one, or approximately 14%, was a member of underrepresented minorities. Human Capital. We have no employees.
Added
We are managed by Tremont, a subsidiary of RMR. As such, many of the environmental, social and governance, or ESG, initiatives employed by RMR apply to us. RMR periodically publishes its Sustainability Report, which summarizes the ESG initiatives employed by RMR and its clients, including us. RMR’s Sustainability Report may be accessed on the RMR Inc. website at www.rmrgroup.com/corporate-sustainability/default.aspx.
Removed
Internet Website. Our internet website address is www.sevnreit.com.
Added
The information on or accessible through RMR Inc.’s website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this report. We are committed to responsibly managing risk and preserving capital.
Removed
We may in the future invest in one or more entities that are treated as partnerships for federal income tax purposes.
Added
We seek to be a responsible corporate citizen and to strengthen the communities in which we operate. Tremont regularly encourages its employees to engage in a variety of charitable and community programs, including participating in a company-wide service day and charitable gift giving matching program. Diversity & Inclusion. We value a diversity of backgrounds, experience and perspectives.
Removed
We may invest in CMBS or specified securities backed by mortgages and issued by government sponsored enterprises, including Fannie Mae, Freddie Mac and the Federal Home Loan Bank (such government issued securities, “agency securities”) that are either pass-through certificates or collateralized mortgage obligations.
Added
As of December 31, 2023, our Board was comprised of six Trustees, of which four were independent and one, or approximately 17%, was female. RMR is an equal opportunity employer, with all qualified applicants receiving consideration for employment without regard to race, color, religion, sex, sexual orientation, gender identity, national origin, disability or protected veteran status. Government Regulation.
Removed
The assets that we acquired in the Merger generally (a) qualify as real estate assets that satisfy the REIT asset tests that are described below under the heading “—REIT Qualification Requirements—Asset Tests,” and (b) generate gross income that satisfies the REIT gross income tests that are described below under the heading “—REIT Qualification Requirements—Income Tests.” As a result, we believe that our acquisition of TRMT’s assets has not and will not materially impact our qualification for taxation as a REIT.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeIf these risks are realized, they may have a material adverse effect on our investment returns, ability to grow our investment portfolio, results of operations, financial condition and ability to pay distributions to our shareholders. We have a limited operating history investing in mortgage loans and have made a limited number of target investments to date.
Biggest changeIf these risks are realized, they may have a material adverse effect on our investment returns, ability to grow our investment portfolio, results of operations, financial condition and ability to pay distributions to our shareholders. 35 Table of Contents Additionally, events leading to limited liquidity, defaults, non-performance or other adverse developments that affect one industry, such as the financial services industry, or concerns or rumors about any events of these kinds, have in the past and may in the future lead to market-wide liquidity problems, may spread to other industries, and could negatively affect our business.
Net operating income of an income producing property can be affected by, among other things: • tenant mix and tenant bankruptcies; • success of tenant businesses; • property management decisions, including with respect to capital improvements, particularly in older building structures; • property location, condition and design; • competition from comparable properties; • changes in market practice, such as those that arose or were intensified in response to the COVID-19 pandemic; • changes in national, regional or local economic conditions and/or specific industry segments, including current and future economic conditions caused by pandemics, such as the COVID-19 pandemic; • rising inflationary pressures and effects of inflation on borrower and tenant businesses; • supply chain constraints, commodity pricing and other inflation; • borrowers’ and tenants’ ability to attract, retain and motivate sufficient qualified personnel in a challenging labor market and to effectively manage their labor costs; • declines in regional or local real estate values; • declines in regional or local rental or occupancy rates; • changes in interest rates, and in the state of the debt and equity capital markets, including diminished availability or lack of CRE debt financing; • changes in real estate tax rates, tax credits and other operating expenses; • costs of remediation and liabilities associated with environmental conditions; • adverse impacts to properties from short term and long term effects of global climate change; • the potential for uninsured or underinsured property losses; • changes in laws and regulations, including fiscal policies, zoning ordinances and environmental legislation and the related costs of compliance; and 38 Table of Contents • acts of God, earthquakes, hurricanes, health epidemics, pandemics and other public health safety events or concerns, such as the COVID-19 pandemic, and other natural disasters, or acts of war, terrorism, social unrest or civil disturbances, in each case which may result in uninsured or underinsured losses.
Net operating income of an income producing property can be affected by, among other things: • tenant mix and tenant bankruptcies; • success of tenant businesses; • property management decisions, including with respect to capital improvements, particularly in older building structures; • property location, condition and design; 38 Table of Contents • competition from comparable properties; • changes in market practice, such as those that arose or were intensified in response to the COVID-19 pandemic; • changes in national, regional or local economic conditions and/or specific industry segments, including current and future economic conditions caused by pandemics, such as the COVID-19 pandemic; • rising inflationary pressures and effects of inflation on borrower and tenant businesses; • supply chain constraints, commodity pricing and other inflation; • borrowers’ and tenants’ ability to attract, retain and motivate sufficient qualified personnel in a challenging labor market and to effectively manage their labor costs; • declines in regional or local real estate values; • declines in regional or local rental or occupancy rates; • changes in interest rates, and in the state of the debt and equity capital markets, including diminished availability or lack of CRE debt financing; • changes in real estate tax rates, tax credits and other operating expenses; • costs of remediation and liabilities associated with environmental conditions; • adverse impacts to properties from short term and long term effects of global climate change; • the potential for uninsured or underinsured property losses; • changes in laws and regulations, including fiscal policies, zoning ordinances and environmental legislation and the related costs of compliance; and • acts of God, earthquakes, hurricanes, health epidemics, pandemics and other public health safety events or concerns, such as the COVID-19 pandemic, and other natural disasters, or acts of war, sabotage, terrorism, social unrest or civil disturbances, in each case which may result in uninsured or underinsured losses.
In addition to the other risks discussed herein, the CRE loans that we originate or acquire expose us to risks associated with real estate investments, generally, including: • economic and market fluctuations; • political instability or changes; • changes in environmental, zoning and other laws; • casualty or condemnation losses; • cost of remediation and removal of hazardous substances and liabilities associated with environmental conditions; • regulatory limitations on rents; • decreases in property values; • changes in the appeal of properties to tenants; • changes in supply and demand for CRE properties and debt; • changes in valuation of collateral underlying CRE properties and CRE loans, resulting from inherently subjective and uncertain valuations; • energy supply shortages; • various uninsured or uninsurable risks; • adverse weather, natural disasters and adverse impacts from climate change; • acts of God, earthquakes, hurricanes, pandemics or other public health safety events or concerns, such as the COVID-19 pandemic, and other natural disasters, climate change, or acts of war, terrorism, social unrest and civil disturbances, in each case which may result in uninsured or underinsured losses; • changes in government regulations, such as rent control; and 39 Table of Contents • changes in the availability of debt financing and/or mortgage funds, which may render the sale or refinancing of properties difficult or impracticable.
In addition to the other risks discussed herein, the CRE loans that we originate or acquire expose us to risks associated with real estate investments, generally, including: • economic and market fluctuations; • political instability or changes; 39 Table of Contents • changes in environmental, zoning and other laws; • casualty or condemnation losses; • cost of remediation and removal of hazardous substances and liabilities associated with environmental conditions; • regulatory limitations on rents; • decreases in property values; • changes in the appeal of properties to tenants; • changes in supply and demand for CRE properties and debt; • changes in valuation of collateral underlying CRE properties and CRE loans, resulting from inherently subjective and uncertain valuations; • energy supply shortages; • various uninsured or uninsurable risks; • adverse weather, natural disasters and adverse impacts from climate change; • acts of God, earthquakes, hurricanes, pandemics or other public health safety events or concerns, such as the COVID-19 pandemic, and other natural disasters, climate change, or acts of war, sabotage, terrorism, social unrest and civil disturbances, in each case which may result in uninsured or underinsured losses; • changes in government regulations, such as rent control; and • changes in the availability of debt financing and/or mortgage funds, which may render the sale or refinancing of properties difficult or impracticable.
We may enter into one or more alternative or additional repurchase facilities in the future and expect any such facility to contain covenants and conditions that may restrict our operations and ability to make investments and distributions; • third party expectations relating to ESG factors may impose additional costs on us and expose us, our borrowers and their tenants to new risks; • any material failure, inadequacy, interruption or security breach of our, RMR’s or Tremont’s technology systems could materially and adversely affect us; • our management structure and management agreement with Tremont and its relationships with related parties may create conflicts of interest; • ownership limitations and certain provisions in our declaration of trust and bylaws, as well as certain provisions of Maryland law, may deter, delay or prevent a change in control of us or an unsolicited acquisition proposal and could limit shareholders’ ability to obtain a judicial forum they deem favorable for certain disputes; • we may incur adverse tax consequences if we fail to remain qualified for taxation as a REIT for U.S. federal income tax purposes; • REIT distribution requirements could adversely affect us and our shareholders; • distributions to shareholders generally will not qualify for reduced tax rates applicable to “qualified dividends,” and we may also choose to pay distributions in shares, in which case shareholders may be required to pay income taxes in excess of the cash distributions that they receive; • the failure of assets subject to our Master Repurchase Agreements and our BMO Loan Program Agreement to qualify as real estate assets could adversely affect our ability to qualify for taxation as a REIT under the IRC; • REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities; • if we own assets or conduct operations that generate “excess inclusion income” outside a TRS, doing so could adversely affect shareholders’ taxation; and • we may change our operational, financing and investment policies without shareholder approval and may become highly leveraged.
We may enter into one or more alternative or additional repurchase facilities in the future and expect any such facility to contain covenants and conditions that may restrict our operations and ability to make investments and distributions; • third party expectations relating to ESG factors may impose additional costs on us and expose us, our borrowers and their tenants to new risks; • any material failure, inadequacy, interruption or security breach of our, RMR’s or Tremont’s technology systems could materially and adversely affect us; • our management structure and management agreement with Tremont and its relationships with related parties may create conflicts of interest; • ownership limitations and certain provisions in our declaration of trust and bylaws, as well as certain provisions of Maryland law, may deter, delay or prevent a change in control of us or an unsolicited acquisition proposal and could limit shareholders’ ability to obtain a judicial forum they deem favorable for certain disputes; • we may incur adverse tax consequences if we fail to remain qualified for taxation as a REIT for U.S. federal income tax purposes; • we are subject to various risks related to our ownership of certain real property; • REIT distribution requirements could adversely affect us and our shareholders; • distributions to shareholders generally will not qualify for reduced tax rates applicable to “qualified dividends,” and we may also choose to pay distributions in shares, in which case shareholders may be required to pay income taxes in excess of the cash distributions that they receive; • the failure of assets subject to our Master Repurchase Agreements and our BMO Loan Program Agreement to qualify as real estate assets could adversely affect our ability to qualify for taxation as a REIT under the IRC; • REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities; • if we own assets or conduct operations that generate “excess inclusion income” outside a TRS, doing so could adversely affect shareholders’ taxation; and • we may change our operational, financing and investment policies without shareholder approval and may become highly leveraged.
Additionally, provisions contained in our declaration of trust and bylaws or under Maryland law may have a similar impact, including, for example, provisions relating to: • the division of our Trustees into three classes, with the term of one class expiring each year; • limitations on shareholder voting rights with respect to certain actions that are not approved by our Board of Trustees; • the authority of our Board of Trustees, and not our shareholders, to adopt, amend or repeal our bylaws and to fill vacancies on our Board of Trustees; • shareholder voting standards which require a supermajority of shares for approval of certain actions; • the fact that only our Board of Trustees, or, if there are no Trustees, our officers, may call shareholder meetings and that shareholders are not entitled to act without a meeting; • required qualifications for an individual to serve as a Trustee and a requirement that certain of our Trustees be “managing trustees” and other Trustees be “independent trustees,” as defined in our governing documents; • limitations on the ability of our shareholders to propose nominees for election as Trustees and propose other business to be considered at a meeting of our shareholders; • limitations on the ability of our shareholders to remove our Trustees; • the authority of our Board of Trustees to create and issue new classes or series of shares (including shares with voting rights and other rights and privileges that may deter a change of control of us) and issue additional common shares; 52 Table of Contents • restrictions on business combinations between us and an interested shareholder that have not first been approved by our Board of Trustees (including a majority of Trustees not related to the interested shareholder); and • the authority of our Board of Trustees, without shareholder approval, to implement certain takeover defenses.
Additionally, provisions contained in our declaration of trust and bylaws or under Maryland law may have a similar impact, including, for example, provisions relating to: • the division of our Trustees into three classes, with the term of one class expiring each year; • limitations on shareholder voting rights with respect to certain actions that are not approved by our Board of Trustees; • the authority of our Board of Trustees, and not our shareholders, to adopt, amend or repeal our bylaws and to fill vacancies on our Board of Trustees; • shareholder voting standards which require a supermajority of shares for approval of certain actions; • the fact that only our Board of Trustees, or, if there are no Trustees, our officers, may call shareholder meetings and that shareholders are not entitled to act without a meeting; • required qualifications for an individual to serve as a Trustee and a requirement that certain of our Trustees be “managing trustees” and other Trustees be “independent trustees,” as defined in our governing documents; • limitations on the ability of our shareholders to propose nominees for election as Trustees and propose other business to be considered at a meeting of our shareholders; • limitations on the ability of our shareholders to remove our Trustees; • the authority of our Board of Trustees to create and issue new classes or series of shares (including shares with voting rights and other rights and privileges that may deter a change of control of us) and issue additional common shares; • restrictions on business combinations between us and an interested shareholder that have not first been approved by our Board of Trustees (including a majority of Trustees not related to the interested shareholder); and • the authority of our Board of Trustees, without shareholder approval, to implement certain takeover defenses.
Funding distributions to our shareholders from our future borrowings or asset sales may constitute a return of capital to our investors, which would have the effect of reducing our shareholders’ bases in our common shares. Item 1B. Unresolved Staff Comments None. Item 2.
Funding distributions to our shareholders from our future borrowings or asset sales may constitute a return of capital to our investors, which would have the effect of reducing our shareholders’ bases in our common shares. Item 1B. Unresolved Staff Comments None.
Consistent with the foregoing, the risks we face include, but are not limited to, the following: • we operate in a highly competitive market for investment opportunities, may not obtain sufficient additional capital, and may be adversely affected by Tremont's diligence processes, any defaults on our loan investments, the rate of prepayments on our loan investments, changes in interest rates, including as a result of the expected phase out of LIBOR, or changes in credit spreads due to the size of our loan portfolio; • unfavorable market, economic, CRE and capital market conditions may have a material adverse effect on our investment returns, ability to grow our investment portfolio, results of operations, financial condition and ability to pay distributions to our shareholders; • the lack of liquidity of our loan investments may make it difficult for us to sell our investments if the need or desire arises; • loans secured by properties in transition or requiring significant renovation involve a greater risk of loss than loans secured by stabilized properties; 33 Table of Contents • the CRE loans that we originate or acquire are subject to the ability of the property owner to generate net operating income from the underlying property, as well as the risks of defaults and foreclosure, which may be impacted by current economic conditions, including inflation, rising or sustained high interest rates, supply chain challenges, labor availability, geopolitical instability and economic downturn, among other factors; • we are subject to the covenants and conditions contained in our Master Repurchase Agreements and in our facility loan agreement and security agreement with BMO Harris Bank N.A., or BMO, or the BMO Loan Program Agreement, which may restrict our operations and ability to make investments and distributions.
Consistent with the foregoing, the risks we face include, but are not limited to, the following: • we operate in a highly competitive market for investment opportunities, may not obtain sufficient additional capital, and may be adversely affected by Tremont's diligence processes, any defaults on our loan investments, the rate of prepayments on our loan investments, changes in interest rates or changes in credit spreads due to the size of our loan portfolio; • unfavorable market, economic, CRE and capital market conditions may have a material adverse effect on our investment returns, ability to grow our investment portfolio, results of operations, financial condition and ability to pay distributions to our shareholders; • the lack of liquidity of our loan investments may make it difficult for us to sell our investments if the need or desire arises; • loans secured by properties in transition or requiring significant renovation involve a greater risk of loss than loans secured by stabilized properties; • the CRE loans that we originate or acquire are subject to the ability of the property owner to generate net operating income from the underlying property, as well as the risks of defaults and foreclosure, which may be impacted by 33 Table of Contents current economic conditions, including inflation, rising or sustained high interest rates, supply chain challenges, labor availability, geopolitical instability and economic downturn, among other factors; • we are subject to the covenants and conditions contained in our Master Repurchase Agreements and in our facility loan agreement and security agreement with BMO Harris Bank N.A., or BMO, or the BMO Loan Program Agreement, which may restrict our operations and ability to make investments and distributions.
State licensing statutes vary from state to state and may prescribe or impose, among other things: • various recordkeeping requirements; • restrictions on loan origination and servicing practices, including limits on finance charges and the type, amount and manner of charging fees; • disclosure requirements; • requirements that licensees submit to periodic examination; • surety bond and minimum specified net worth requirements; • periodic financial reporting requirements; • notification requirements for changes in principal officers, share ownership or corporate control; • restrictions on advertising; and • requirements that loan forms be submitted for review.
State licensing statutes vary from state to state and may prescribe or impose, among other things: • various recordkeeping requirements; • restrictions on loan origination and servicing practices, including limits on finance charges and the type, amount and manner of charging fees; • disclosure requirements; • requirements that licensees submit to periodic examination; • surety bond and minimum specified net worth requirements; • periodic financial reporting requirements; • notification requirements for changes in principal officers, share ownership or corporate control; • restrictions on advertising; and 42 Table of Contents • requirements that loan forms be submitted for review.
However, there are certain types of losses, generally losses of a catastrophic nature, such as those caused by hurricanes, flooding, climate change, volcanic eruptions and earthquakes, among other things, losses as a result of outbreaks of pandemics, or losses from terrorism or acts of war, that may be uninsurable or not commercially insurable.
However, there are certain types of losses, generally losses of a catastrophic nature, such as those caused by hurricanes, flooding, climate change, volcanic eruptions and earthquakes, among other things, losses as a result of pandemics or disease outbreaks, or losses from terrorism, sabotage or acts of war, that may be uninsurable or not commercially insurable.
Nonetheless, Tremont’s diligence may not reveal all of the risks associated with our investments. We evaluate our potential investments based upon criteria Tremont deems appropriate for the relevant investment. Our underwriting assumptions and loss estimates may not prove accurate, and actual results may vary from estimates.
Tremont’s diligence may also not reveal all of the risks associated with our investments. We evaluate our potential investments based upon criteria Tremont deems appropriate for the relevant investment. Our underwriting assumptions and loss estimates may not prove accurate, and actual results may vary from estimates.
We may be unable to raise reasonably priced capital because of reasons related to our business, market perceptions of our prospects, the terms of our debt, the extent of our leverage or for reasons beyond our control, such as capital market volatility, rising interest rates and other market conditions.
We may be unable to raise reasonably priced capital because of reasons related to our business, market perceptions of our prospects, the terms of our debt, the extent of our leverage or for reasons beyond our control, such as capital market volatility, high interest rates and other market conditions.
Current economic conditions, including rising interest rates, inflation, reduced availability of financing or financing on favorable terms and increased CRE financing costs, have resulted in a reduction in CRE transaction volume and adversely impacted CRE lending, including alternative CRE lenders like us.
Current economic conditions, including high interest rates, inflation, reduced availability of financing or financing on favorable terms and increased CRE financing costs, have resulted in a reduction in CRE transaction volume and adversely impacted CRE lending, including alternative CRE lenders like us.
Portnoy holds equity investments in other companies to which RMR or its subsidiaries provide management services and some of these companies have significant cross ownership interests, including, for example: as of December 31, 2022, Mr.
Portnoy holds equity investments in other companies to which RMR or its subsidiaries provide management services and some of these companies have significant cross ownership interests, including, for example: as of December 31, 2023, Mr.
In addition, the ability to collect attorneys’ fees or other damages may be limited in the arbitration proceedings, which may discourage attorneys from agreeing to represent parties wishing to bring such litigation. 51 Table of Contents We may be at an increased risk for dissident shareholder activities and shareholder litigation due to perceived conflicts of interest arising from our management structure and relationships.
In addition, the ability to collect attorneys’ fees or other damages may be limited in the arbitration proceedings, which may discourage attorneys from agreeing to represent parties wishing to bring such litigation. We may be at an increased risk for dissident shareholder activities and shareholder litigation due to perceived conflicts of interest arising from our management structure and relationships.
Current economic conditions, including inflation, rising interest rates, supply chain challenges, labor availability, geopolitical instability and economic downturn, have materially adversely impacted CRE transaction activity and valuations and have caused disruptions in the CRE lending market.
Current economic conditions, including inflation, high interest rates, supply chain challenges, labor availability, geopolitical instability and economic downturn, have materially adversely impacted CRE transaction activity and valuations and have caused disruptions in the CRE lending market.
As a result, our ability to adjust our loan portfolio in response to changes in economic and other conditions may be limited, which could adversely affect our financial condition and results of operations. Loans secured by properties in transition or requiring significant renovation involve a greater risk of loss than loans secured by stabilized properties.
As a result, our ability to adjust our loan portfolio in response to changes in economic and other conditions may be limited, which could adversely affect our financial condition and results of operations. 36 Table of Contents Loans secured by properties in transition or requiring significant renovation involve a greater risk of loss than loans secured by stabilized properties.
We cannot be sure that such claims will not arise or that we will not be subject to significant liability and losses if claims of this type arise. 43 Table of Contents Insurance proceeds with respect to a property may not cover all losses, which could result in the corresponding non-performance of or loss on our investment related to such property.
We cannot be sure that such claims will not arise or that we will not be subject to significant liability and losses if claims of this type arise. Insurance proceeds with respect to a property may not cover all losses, which could result in the corresponding non-performance of or loss on our investment related to such property.
As of December 31, 2022, our primary sources of capital were the facilities governed by our Master Repurchase Agreements, including our master repurchase facility with Wells Fargo, or the Wells Fargo Master Repurchase Facility; our master repurchase facility with Citibank, or the Citibank Master Repurchase Facility and our master repurchase facility with UBS, or the UBS Master Repurchase Facility; and our facility loan program with BMO, or the BMO Facility.
As of December 31, 2023, our primary sources of capital were the facilities governed by our Master Repurchase Agreements, including our master repurchase facility with Wells Fargo, or the Wells Fargo Master Repurchase Facility; our master repurchase facility with Citibank, or the Citibank Master Repurchase Facility and our master repurchase facility with UBS, or the UBS Master Repurchase Facility; and our facility loan program with BMO, or the BMO Facility.
As a result, our income may decline as a result of borrower prepayments, which would have a negative impact on our ability to make or sustain distributions to our shareholders. 37 Table of Contents Difficulty or delays in redeploying the proceeds from repayments of our existing loan investments may cause our financial performance and returns to shareholders to decline.
As a result, our income may decline as a result of borrower prepayments, which would have a negative impact on our ability to make or sustain distributions to our shareholders. Difficulty or delays in redeploying the proceeds from repayments of our existing loan investments may cause our financial performance and returns to shareholders to decline.
These terms of our management agreement may discourage a change of control of us, including a change of control which might result in payment of a premium for our common shares. 50 Table of Contents Tremont does not guaranty our performance; moreover, we could experience poor performance or losses for which Tremont would not be liable.
These terms of our management agreement may discourage a change of control of us, including a change of control which might result in payment of a premium for our common shares. Tremont does not guaranty our performance; moreover, we could experience poor performance or losses for which Tremont would not be liable.
Our Independent Trustees also serve as independent directors or independent trustees of other public companies to which RMR or its subsidiaries provide management services. 48 Table of Contents Tremont, RMR, their affiliates and the entities to which they provide management services are generally not prohibited from competing with us.
Our Independent Trustees also serve as independent directors or independent trustees of other public companies to which RMR or its subsidiaries provide management services. Tremont, RMR, their affiliates and the entities to which they provide management services are generally not prohibited from competing with us.
However, the SEC’s guidance is more than 30 years old and was issued in accordance with factual situations that may be different from ours. 54 Table of Contents We cannot be sure that the SEC staff will concur with our classification of our assets.
However, the SEC’s guidance is more than 30 years old and was issued in accordance with factual situations that may be different from ours. We cannot be sure that the SEC staff will concur with our classification of our assets.
Incurring substantial debt could subject us to many risks that, if realized, would materially and adversely affect us, including the risk that: • our cash flow from operations may be insufficient to make required payments of principal and interest on the debt or we may fail to comply with covenants contained in our Secured Financing Facilities, which would likely result in: (1) acceleration of such debt (and any other debt arrangements containing a cross default or cross acceleration provision) that we may be unable to repay from internal funds or to refinance on favorable terms, or at all; (2) our inability to borrow unused or undrawn amounts under our Secured Financing Facilities, even if we are current in payments on borrowings under those arrangements; and/or (3) the loss of some or all of our assets to foreclosures or forced sales; • our debt may increase our vulnerability to adverse economic, market and industry conditions with no assurance that our investment yields will increase to match our higher financing costs; • we may be required to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for operations, future business opportunities, distributions to our shareholders or other purposes; and • we may not be able to refinance maturing debts.
Leverage can enhance our potential returns but can also exacerbate our losses. 45 Table of Contents Incurring substantial debt could subject us to many risks that, if realized, would materially and adversely affect us, including the risk that: • our cash flow from operations may be insufficient to make required payments of principal and interest on the debt or we may fail to comply with covenants contained in our Secured Financing Facilities, which would likely result in: (1) acceleration of such debt (and any other debt arrangements containing a cross default or cross acceleration provision) that we may be unable to repay from internal funds or to refinance on favorable terms, or at all; (2) our inability to borrow unused or undrawn amounts under our Secured Financing Facilities, even if we are current in payments on borrowings under those arrangements; and/or (3) the loss of some or all of our assets to foreclosures or forced sales; • our debt may increase our vulnerability to adverse economic, market and industry conditions with no assurance that our investment yields will increase to match our higher financing costs; • we may be required to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for operations, future business opportunities, distributions to our shareholders or other purposes; and • we may not be able to refinance maturing debts.
We are currently the only mortgage REIT to which Tremont is providing management services, but Tremont may provide management services to other mortgage REITs in the future. In addition, we may in the future enter into additional transactions with Tremont, RMR, their affiliates or entities managed by them or their subsidiaries.
We are currently the only mortgage REIT to which Tremont is providing management services, but Tremont may provide management services to other mortgage REITs in the future. 48 Table of Contents In addition, we may in the future enter into additional transactions with Tremont, RMR, their affiliates or entities managed by them or their subsidiaries.
Our Independent Trustees will review Tremont’s performance and the management fees annually and, following the initial term ending December 31, 2023, our management agreement may be terminated annually without a cause event upon the affirmative vote of at least two-thirds of our Independent Trustees based upon a determination that: (1) Tremont’s performance is unsatisfactory and materially detrimental to us; or (2) the base management fee and incentive fee, taken as a whole, payable to Tremont are not fair to us (in the case of (2), provided that Tremont will be afforded the opportunity to renegotiate the base management fee and incentive fee prior to termination).
Our Independent Trustees will review Tremont’s performance and the management fees annually and, our management agreement may be terminated annually without a cause event upon the affirmative vote of at least two-thirds of our Independent Trustees based upon a determination that: (1) Tremont’s performance is unsatisfactory and materially detrimental to us; or (2) the base management fee and incentive fee, taken as a whole, payable to Tremont are not fair to us (in the case of (2), provided that Tremont will be afforded the opportunity to renegotiate the base management fee and incentive fee prior to termination).
As of December 31, 2022, we had $255.8 million of available liquidity from cash and amounts available under our Secured Financing Facilities to fund future loan originations and advances. After we invest these sources, we may not be able to obtain additional capital to make investments that we determine are attractive.
As of December 31, 2023, we had $304.3 million of available liquidity from cash and amounts available under our Secured Financing Facilities to fund future loan originations and advances. After we invest these sources, we may not be able to obtain additional capital to make investments that we determine are attractive.
Sy have duties to RMR and to Tremont, as well as to us, and we do not have their undivided attention. They and other RMR personnel may have conflicts in allocating their time and resources between us and RMR and other companies to which RMR or its subsidiaries provide services.
Portnoy, Jordan, Lorenzini and Diaz have duties to RMR and to Tremont, as well as to us, and we do not have their undivided attention. They and other RMR personnel may have conflicts in allocating their time and resources between us and RMR and other companies to which RMR or its subsidiaries provide services.
In a period of rising interest rates, our interest income on our loan investments will increase; however, defaults on our loan investments may also increase.
In a period of rising or sustained high interest rates, our interest income on our loan investments will increase; however, defaults on our loan investments may also increase.
As with other publicly traded equity securities and REIT securities, the market value of our common shares and other securities depends on various market conditions that are subject to change from time to time.
Changes in market conditions could adversely affect the market value of our securities. As with other publicly traded equity securities and REIT securities, the market value of our common shares and other securities depends on various market conditions that are subject to change from time to time.
Changes in interest rates may be sudden and may significantly reduce our revenues or impede our growth. In efforts to combat rising inflation, the Federal Open Market Committee of the U.S. Federal Reserve (the “FOMC”) has raised interest rates multiple times since March 2022 and has indicated an expectation that it will continue to raise interest rates in 2023.
Changes in interest rates may be sudden and may significantly reduce our revenues or impede our growth. In efforts to combat rising inflation, the Federal Open Market Committee of the U.S. Federal Reserve (the “FOMC”) has raised interest rates multiple times since March 2022 and may continue to raise interest rates in 2024.
There is a general market perception that REIT shares outperform in low interest rate environments and underperform in rising interest rate environments when compared to the broader market. In efforts to combat rising inflation, the FOMC raised interest rates multiple times since March 2022 and has indicated an expectation that it will continue to raise interest rates in 2023.
There is a general market perception that REIT shares outperform in low interest rate environments and underperform in rising interest rate environments when compared to the broader market. In efforts to combat rising inflation, the FOMC raised interest rates multiple times since March 2022 and may continue to raise interest rates in 2024.
We are subject to various restrictive covenants contained in our Secured Financing Facilities and we may be subject to similar or additional covenants in connection with future financing arrangements.
Our Secured Financing Facilities require us to comply with restrictive covenants and any future financings may require us to comply with similar or more restrictive covenants. We are subject to various restrictive covenants contained in our Secured Financing Facilities and we may be subject to similar or additional covenants in connection with future financing arrangements.
We may be unable to find suitable replacements if our management agreement is terminated. We do not have an office separate from Tremont and do not have any employees. Our executive officers also serve as officers of Tremont and of RMR.
Risks Relating to our Relationships with Tremont and RMR We are dependent upon Tremont and its personnel. We may be unable to find suitable replacements if our management agreement is terminated. We do not have an office separate from Tremont and do not have any employees. Our executive officers also serve as officers of Tremont and of RMR.
Additionally, in the event our management agreement is terminated by us without a cause event or by Tremont for a material breach, we will be required to pay Tremont a termination fee equal to (i) three times the sum of (a) the average annual base management fee and (b) the average annual incentive fee, in each case paid or payable to Tremont during the twenty-four (24) month period immediately preceding the most recently completed calendar quarter prior to the date of termination or, if such termination occurs prior to December 31, 2023, the base management fee and the incentive fee will be annualized for such two year period based on such fees earned by Tremont from January 5, 2021 through the most recently completed calendar quarter prior to the termination date, plus (ii) $1.6 million.
Additionally, in the event our management agreement is terminated by us without a cause event or by Tremont for a material breach, we will be required to pay Tremont a termination fee equal to (i) three times the sum of (a) the average annual base management fee and (b) the average annual incentive fee, in each case paid or payable to Tremont during the twenty-four (24) month period immediately preceding the most recently completed calendar quarter prior to the date of termination, plus (ii) $1.6 million.
If we fail to satisfy the expectations of investors or if our borrowers or their tenants fail to satisfy expectations of their customers, employees and other stakeholders or if any goals or initiatives we or they announce are not executed as planned, our and their reputations and financial results could be adversely affected, net operating income from operations of our borrowers’ and their tenants’ businesses may decrease, our borrowers’ ability to repay our loans may be impaired, risks of default and foreclosure may increase and our results of operations, financial condition, liquidity and our ability to make or sustain distribution to our shareholders may be materially adversely impacted. 41 Table of Contents We, our borrowers and their tenants are subject to risks from adverse weather, natural disasters and climate events, and costs associated with future legislation designed to address climate change could increase our, our borrowers’ and their tenants’ costs.
If we fail to satisfy the expectations of investors or if our borrowers or their tenants fail to satisfy expectations of their customers, employees and other stakeholders or if any goals or initiatives we or they announce are not executed as planned, our and their reputations and financial results could be adversely affected, net operating income from operations of our borrowers’ and their tenants’ businesses may decrease, our borrowers’ ability to repay our loans may be impaired, risks of default and foreclosure may increase and our results of operations, financial condition, liquidity and our ability to make or sustain distribution to our shareholders may be materially adversely impacted.
We cannot be sure that our Code of Conduct, governance guidelines, investment allocation policy or other procedural protections we adopt will be sufficient to enable us to identify, adequately address or mitigate actual or alleged conflicts of interest or ensure that our transactions with related persons are made on terms that are at least as favorable to us as those that would have been obtained with an unrelated person. 49 Table of Contents Our management agreement’s fee and expense structure may not create proper incentives for Tremont.
We cannot be sure that our Code of Conduct, governance guidelines, investment allocation policy or other procedural protections we adopt will be sufficient to enable us to identify, adequately address or mitigate actual or alleged conflicts of interest or ensure that our transactions with related persons are made on terms that are at least as favorable to us as those that would have been obtained with an unrelated person.
We are required to pay Tremont base management fees regardless of the performance of our loan portfolio. Tremont’s entitlement to a base management fee is based only in part upon our performance or results, which might reduce its incentive to devote its time and effort to seeking investments that provide attractive, risk adjusted returns for us.
Tremont’s entitlement to a base management fee is based only in part upon our performance or results, which might reduce its incentive to devote its time and effort to seeking investments that provide attractive, risk adjusted returns for us.
We intend to structure and conduct our business in a manner that does not require our or our subsidiaries’ registration under the 1940 Act and, in so structuring and conducting our business, we may rely on any available exemption from registration, or exclusion from the definition of “investment company,” under the 1940 Act.
We intend to structure and conduct our business in a manner that does not require our or our subsidiaries’ registration under the 1940 Act and, in so structuring and conducting our business, we may rely on any available exemption from registration, or exclusion from the definition of “investment company,” under the 1940 Act. 54 Table of Contents We determine whether an entity is one of our majority owned subsidiaries.
We determine whether an entity is one of our majority owned subsidiaries. The 1940 Act defines a majority owned subsidiary of a person as a company 50% or more of the outstanding voting securities of which are owned by such person, or by another company which is a majority owned subsidiary of such person.
The 1940 Act defines a majority owned subsidiary of a person as a company 50% or more of the outstanding voting securities of which are owned by such person, or by another company which is a majority owned subsidiary of such person.
If any counterparty to a repurchase transaction under a repurchase agreement or the counterparty to any other repurchase financing arrangement we may enter defaults on its obligation to resell the underlying asset back to us at the end of the transaction term, or if the value of the underlying asset has declined as of the end of that term, or if we default on our obligations under such repurchase agreement, we may incur a loss on such repurchase transaction. 47 Table of Contents Risks Relating to our Relationships with Tremont and RMR We are dependent upon Tremont and its personnel.
If any counterparty to a repurchase transaction under a repurchase agreement or the counterparty to any other repurchase financing arrangement we may enter defaults on its obligation to resell the underlying asset back to us at the end of the transaction term, or if the value of the underlying asset has declined as of the end of that term, or if we default on our obligations under such repurchase agreement, we may incur a loss on such repurchase transaction.
In addition, subsequent leasing of the property may take longer to complete and cost more than expected. If the borrower experiences any of these or other risks, the borrower may not generate sufficient cash flows from the property to make payments on or refinance the transitional loan, and we may not recover some or all of our investment.
If the borrower experiences any of these or other risks, the borrower may not generate sufficient cash flows from the property to make payments on or refinance the transitional loan, and we may not recover some or all of our investment.
In order to meet these requirements, it may be necessary for us to sell or forgo attractive investments. 55 Table of Contents If we cease to qualify for taxation as a REIT under the IRC, then our ability to raise capital might be adversely affected, we may be subject to material amounts of federal and state income taxes, our cash available for distribution to our shareholders could be reduced, and the market value of our common shares could decline.
If we cease to qualify for taxation as a REIT under the IRC, then our ability to raise capital might be adversely affected, we may be subject to material amounts of federal and state income taxes, our cash available for distribution to our shareholders could be reduced, and the market value of our common shares could decline.
Any failure by RMR, Tremont or other third party vendors to maintain the security, proper function and availability of their information technology and systems could result in financial losses, interrupt our operations, damage our reputation, cause us to be in default of material contracts and subject us to liability claims or regulatory penalties, any of which could materially and adversely affect our business and the market value of our securities. 45 Table of Contents Risks Relating to our Financing We have debt and expect to incur additional debt, and our governing documents contain no limit on the amount of debt we may incur.
Any failure by RMR, Tremont or other third party vendors to maintain the security, proper function and availability of their information technology and systems could result in financial losses, interrupt our operations, damage our reputation, cause us to be in default of material contracts and subject us to liability claims or regulatory penalties, any of which could materially and adversely affect our business and the market value of our securities.
Because of the relationships among Tremont and RMR and us, the terms of our management agreement were not negotiated on an arm’s length basis, and we cannot be sure that these terms are as favorable to us as they would have been if they had been negotiated on an arm’s length basis with an unrelated party.
Because of the relationships among Tremont and RMR and us, the terms of our management agreement were not negotiated on an arm’s length basis, and we cannot be sure that these terms are as favorable to us as they would have been if they had been negotiated on an arm’s length basis with an unrelated party. 49 Table of Contents Terminating our management agreement without a cause event may be difficult and will require our payment of a substantial termination fee.
If these conditions continue or worsen, or if further declines in the performance of the U.S. or global economies or in real estate debt markets are realized, we may experience a material adverse effect on us and our business, results of operations and financial condition. REIT distribution requirements may adversely impact our ability to carry out our business plan.
If these conditions continue or worsen, or if further declines in the performance of the U.S. or global economies or in real estate debt markets are realized, we may experience a material adverse effect on us and our business, results of operations and financial condition. We are subject to various risks related to the ownership of certain real property.
Our attempts to mitigate the risk of a mismatch with the duration or index of our investments and leverage will be subject to factors outside of our control, such as the availability to us of favorable financing and hedging options, and we may not be successful. 46 Table of Contents Our Secured Financing Facilities require us to comply with restrictive covenants and any future financings may require us to comply with similar or more restrictive covenants.
Our attempts to mitigate the risk of a mismatch with the duration or index of our investments and leverage will be subject to factors outside of our control, such as the availability to us of favorable financing and hedging options, and we may not be successful.
Maintaining our qualification for taxation as a REIT under the IRC will require us to continue to satisfy tests concerning, among other things, the nature of our assets, the sources of our income and the amounts we distribute to our shareholders.
Maintaining our qualification for taxation as a REIT under the IRC will require us to continue to satisfy tests concerning, among other things, the nature of our assets, the sources of our income and the amounts we distribute to our shareholders. In order to meet these requirements, it may be necessary for us to sell or forgo attractive investments.
The term of our management agreement renews for successive one-year periods, subject to non-renewal in accordance with the agreement. If our management agreement or Tremont’s shared services agreement with RMR is terminated and no suitable replacement is found, we may not be able to continue in our business. Tremont has broad discretion in operating our day to day business.
If our management agreement or Tremont’s shared services agreement with RMR is terminated and no suitable replacement is found, we may not be able to continue in our business. 47 Table of Contents Tremont has broad discretion in operating our day to day business.
We cannot be sure that we will be successful in obtaining additional capital to enable us to make additional investments after we invest our existing capital, that any investments we make will achieve our targeted rate of return or other investment objectives, or that we will be able to successfully operate our business, or implement our operating policies and investment strategies. 35 Table of Contents Our loan portfolio consists of a limited number of investments, and losses, repayments or other changes with respect to any of those investments may significantly impact us.
We cannot be sure that we will be successful in obtaining additional capital to enable us to make additional investments after we invest our existing capital, that any investments we make will achieve our targeted rate of return or other investment objectives, or that we will be able to successfully operate our business, or implement our operating policies and investment strategies.
If the value of securities issued by our subsidiaries that are excepted from the definition of “investment company” under Section 3(c)(1) or 3(c)(7) of the 1940 Act, together with any other investment securities we own, exceeds 40% of the value of our total assets (exclusive of U.S.
In addition, the assets we may originate or acquire are limited by the provisions of the 1940 Act and the rules and regulations promulgated under the 1940 Act, which may adversely affect our business. 53 Table of Contents If the value of securities issued by our subsidiaries that are excepted from the definition of “investment company” under Section 3(c)(1) or 3(c)(7) of the 1940 Act, together with any other investment securities we own, exceeds 40% of the value of our total assets (exclusive of U.S.
Portnoy beneficially owned, in aggregate, 13.4% of our outstanding common shares (including through Tremont and ABP Trust), 6.1% of AlerisLife Inc.’s outstanding common stock (including through ABP Trust), 1.1% of Diversified Healthcare Trust’s outstanding common shares, 1.2% of Industrial Logistics Properties Trust’s outstanding common shares, 1.5% of Office Properties Income Trust’s outstanding common shares, 1.1% of Service Properties Trust’s outstanding common shares and 4.4% of TravelCenters of America Inc.’s outstanding common shares (including through RMR).
Portnoy beneficially owned, in aggregate, 13.5% of our outstanding common shares (including through Tremont and ABP Trust), 9.8% of Diversified Healthcare Trust’s outstanding common shares, 1.5% of Office Properties Income Trust’s outstanding common shares, 1.3% of Industrial Logistics Properties Trust’s outstanding common shares, and 1.1% of Service Properties Trust’s outstanding common shares.
Our access to additional capital depends upon a number of factors, some of which we have little or no control over, including: • general economic, market or industry conditions; • the market’s view of the quality of our assets; • the market’s perception of our growth potential; • our current and potential future earnings and distributions to our shareholders; and • the market value of our securities.
Our access to additional capital depends upon a number of factors, some of which we have little or no control over, including: • general economic, market or industry conditions; • the market’s view of the quality of our assets; • the market’s perception of our growth potential; • our current and potential future earnings and distributions to our shareholders; and • the market value of our securities. 37 Table of Contents If regulatory capital requirements imposed on our lenders change, they may be required to limit, or increase the cost of, financing they provide to us.
If we underestimate the risks and potential losses associated with an investment we originate or acquire, we may experience losses from the investment. 36 Table of Contents We may be unable to obtain additional capital sufficient to enable us to grow our loan portfolio.
Therefore, we cannot be sure that Tremont will have knowledge of all circumstances that may adversely affect such investment. If we underestimate the risks and potential losses associated with an investment we originate or acquire, we may experience losses from the investment. We may be unable to obtain additional capital sufficient to enable us to grow our loan portfolio.
The lack of liquidity of our loan investments may make it difficult for us to sell our investments if the need or desire arises. Our investments in CRE mortgage loans are relatively illiquid due to their short life, their potential unsuitability for securitization and the difficulty of recovery in the event of a borrower’s default.
Our investments in CRE mortgage loans are relatively illiquid due to their short life, their potential unsuitability for securitization and the difficulty of recovery in the event of a borrower’s default.
The impact of these adverse effects on our aggregate returns may be greater than if our portfolio consisted of a larger number of loans because an impacted loan may comprise a larger proportion of our loan portfolio. The lack of liquidity of our loan investments may adversely affect our business.
The impact of these adverse effects on our aggregate returns may be greater than if our portfolio consisted of a larger number of loans because an impacted loan may comprise a larger proportion of our loan portfolio. Additionally, our investments could be concentrated in relatively few loans and/or relatively few property types.
In addition, if we lose or revoke our qualification for taxation as a REIT under the IRC for a taxable year, we will generally be prevented from requalifying for taxation as a REIT for the next four taxable years. REIT distribution requirements could adversely affect us and our shareholders.
In addition, if we lose or revoke our qualification for taxation as a REIT under the IRC for a taxable year, we will generally be prevented from requalifying for taxation as a REIT for the next four taxable years. Foreclosures may impact our ability to qualify as a REIT and minimize tax liabilities.
The exclusive forum provision of our bylaws may limit a shareholder’s ability to bring a claim in a judicial forum that the shareholder believes is favorable for disputes with us or our Trustees, officers, manager, agents or employees, which may discourage lawsuits against us and our Trustees, officers, manager, agents or employees. 53 Table of Contents We may change our operational, financing and investment policies without shareholder approval and we may become more highly leveraged, which may increase our risk of default under our debt obligations.
The exclusive forum provision of our bylaws may limit a shareholder’s ability to bring a claim in a judicial forum that the shareholder believes is favorable for disputes with us or our Trustees, officers, manager, agents or employees, which may discourage lawsuits against us and our Trustees, officers, manager, agents or employees.
In the future, changes in laws or regulations governing our operations, changes in the interpretation thereof or newly enacted laws or regulations and any failure by us to comply with these laws or regulations, could have a materially adverse effect on our business.
In the future, changes in laws or regulations governing our operations, changes in the interpretation thereof or newly enacted laws or regulations and any failure by us to comply with these laws or regulations, could have a materially adverse effect on our business. 43 Table of Contents We may be subject to lender liability claims and, if we are held liable under such claims, we could be subject to losses.
Lorenzini, our President, is an officer of RMR and an officer and employee of Tremont. Tiffany R. Sy, our Chief Financial Officer and Treasurer, is an officer and employee of RMR and an officer of Tremont. Messrs. Portnoy, Jordan and Lorenzini and Ms.
Lorenzini, our President and Chief Investment Officer, is an officer of RMR and an officer and employee of Tremont. Fernando Diaz, our Chief Financial Officer and Treasurer, is an officer and employee of RMR and an officer of Tremont. Messrs.
Changes in Tremont’s personnel and processes may result in fewer investment opportunities for us, inferior diligence and underwriting standards or adversely affect the collection of payments on, and the preservation of our rights with respect to, our investments, any of which may adversely affect our operating results.
Changes in Tremont’s personnel and processes may result in fewer investment opportunities for us, inferior diligence and underwriting standards or adversely affect the collection of payments on, and the preservation of our rights with respect to, our investments, any of which may adversely affect our operating results. 50 Table of Contents Our management agreement permits our Trustees and officers, Tremont and its affiliates, including RMR, and their respective directors, trustees, officers, agents and employees to retain business opportunities for their own benefit and to compete with us.
We may be subject to lender liability claims and, if we are held liable under such claims, we could be subject to losses. A number of judicial decisions have recognized the rights of borrowers to sue lending institutions on the basis of various evolving legal theories, collectively termed “lender liability”.
A number of judicial decisions have recognized the rights of borrowers to sue lending institutions on the basis of various evolving legal theories, collectively termed “lender liability”.
As a result of these limitations on liability and indemnification, we and our shareholders may have more limited rights against our present and former Trustees and officers than might exist with other companies, which could limit shareholder recourse in the event of actions that some shareholders may believe are not in our best interest.
As a result of these limitations on liability and indemnification, we and our shareholders may have more limited rights against our present and former Trustees and officers than might exist with other companies, which could limit shareholder recourse in the event of actions that some shareholders may believe are not in our best interest. 52 Table of Contents Our bylaws designate the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for certain actions and proceedings that may be initiated by our shareholders, which could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us or our Trustees, officers, manager or agents.
Further, in order to preserve liquidity, we may elect to pay distributions to our shareholders in part in a form other than cash, such as issuing additional common shares to our shareholders, as permitted by the applicable tax rules. 59 Table of Contents Changes in market conditions could adversely affect the market value of our securities.
For these reasons, among others, our distribution rate may decline, or we may cease paying distributions to our shareholders. Further, in order to preserve liquidity, we may elect to pay distributions to our shareholders in part in a form other than cash, such as issuing additional common shares to our shareholders, as permitted by the applicable tax rules.
Also, as interest rates increase, the cost of interest rate caps could also increase, which may limit borrowers’ ability to afford the loan or increase the risk of default. Additionally, rising interest rates may reduce our ability to make investments, as fixed rate financing may be more attractive to potential borrowers or they may forgo or delay obtaining financing.
Also, as interest rates increase, the cost of interest rate caps could also increase, which may limit borrowers’ ability to afford the loan or increase the risk of default.
Changes in these laws or regulations or their interpretation, or newly enacted laws or regulations, could require us to change our business practices or introduce us to new or increased competition, which may impose additional costs on us or otherwise adversely affect our business. 42 Table of Contents For example, various laws and regulations currently exist that restrict the investment activities of banks and certain other financial institutions but do not apply to us.
Changes in these laws or regulations or their interpretation, or newly enacted laws or regulations, could require us to change our business practices or introduce us to new or increased competition, which may impose additional costs on us or otherwise adversely affect our business.
Government securities and cash items) on an unconsolidated basis. This requirement limits the types of businesses in which we may engage through subsidiaries. In addition, the assets we may originate or acquire are limited by the provisions of the 1940 Act and the rules and regulations promulgated under the 1940 Act, which may adversely affect our business.
Government securities and cash items) on an unconsolidated basis. This requirement limits the types of businesses in which we may engage through subsidiaries.
However, appropriately dealing with conflicts of interest is complex and difficult and if Tremont fails, or appears to fail, to deal appropriately with conflicts of interest, it could face litigation or regulatory proceedings or penalties, any of which could adversely affect its ability to manage our business.
However, appropriately dealing with conflicts of interest is complex and difficult and if Tremont fails, or appears to fail, to deal appropriately with conflicts of interest, it could face litigation or regulatory proceedings or penalties, any of which could adversely affect its ability to manage our business. 51 Table of Contents Risks Relating to our Organization and Structure Ownership limitations and certain provisions in our declaration of trust and bylaws, as well as certain provisions of Maryland law, may deter, delay or prevent a change in our control or unsolicited acquisition proposals.
The renovation, refurbishment or expansion of a property by a borrower involves risks of cost overruns, construction risks and non-completion risks, among others. Estimates of the costs of and timing for completing property improvements may be inaccurate. For instance, during the COVID-19 pandemic, costs of construction materials increased due to inflation relating to supply chain issues and labor availability.
The renovation, refurbishment or expansion of a property by a borrower involves risks of cost overruns, construction risks and non-completion risks, among others. Estimates of the costs of and timing for completing property improvements may be inaccurate. In addition, subsequent leasing of the property may take longer to complete and cost more than expected.
Our Secured Financing Facilities require, and the agreements governing any additional repurchase or bank credit facilities or debt arrangements that we may enter into may require, us to provide additional collateral or pay down debt.
These covenants and restrictions could also make it difficult for us to satisfy the requirements necessary to maintain our qualification for taxation as a REIT under the IRC. 46 Table of Contents Our Secured Financing Facilities require, and the agreements governing any additional repurchase or bank credit facilities or debt arrangements that we may enter into may require, us to provide additional collateral or pay down debt.
We may also be subject to cross default and acceleration rights and, with respect to collateralized debt, the posting of additional collateral or foreclosure upon default. These covenants and restrictions could also make it difficult for us to satisfy the requirements necessary to maintain our qualification for taxation as a REIT under the IRC.
We may also be subject to cross default and acceleration rights and, with respect to collateralized debt, the posting of additional collateral or foreclosure upon default.
Our operating results depend in large part on differences between the income from our investments, net of credit losses and financing costs.
Additionally, rising or sustained high interest rates may reduce our ability to make investments, as fixed rate financing may be more attractive to potential borrowers or they may forgo or delay obtaining financing. Our operating results depend in large part on differences between the income from our investments, net of credit losses and financing costs.
Terminating our management agreement without a cause event may be difficult and will require our payment of a substantial termination fee. Termination of our management agreement without a cause event will be difficult and costly. We may not terminate our management agreement without a cause event during its initial term through December 31, 2023.
Termination of our management agreement without a cause event will be difficult and costly.
In addition, the U.S. and global economies have been experiencing high inflation, constrained labor availability, supply chain challenges, global instability and economic downturn. These conditions have negatively impacted REIT share prices and, if they continue or worsen, may have further adverse impacts on the market value of our securities.
These conditions have negatively impacted REIT share prices and, if they continue or worsen, may have further adverse impacts on the market value of our securities. 59 Table of Contents We may use debt leverage or sell assets to pay distributions to our shareholders in the future.
If regulatory capital requirements imposed on our lenders change, they may be required to limit, or increase the cost of, financing they provide to us. This could potentially increase our financing costs and reduce our liquidity or require us to sell assets at an inopportune time or price.
This could potentially increase our financing costs and reduce our liquidity or require us to sell assets at an inopportune time or price. There can be no assurance that we will be able to obtain additional bank credit facilities or repurchase agreements on favorable terms, or at all.
We believe this regulatory difference may create opportunities for us to successfully grow our business.
For example, various laws and regulations currently exist that restrict the investment activities of banks and certain other financial institutions but do not apply to us. We believe this regulatory difference may create opportunities for us to successfully grow our business.
Sales of our common shares may cause a decline in the market value of our common shares. 40 Table of Contents The phase out or transitioning of LIBOR may negatively impact our business, financial results and cash flows.
Sales of our common shares may cause a decline in the market value of our common shares. 41 Table of Contents Third party expectations relating to ESG factors may impose additional costs and expose us to new risks.
As of December 31, 2022, our debt under our Secured Financing Facilities represented 63.1% of our total assets.
Risks Relating to our Financing We have debt and expect to incur additional debt, and our governing documents contain no limit on the amount of debt we may incur. As of December 31, 2023, our debt under our Secured Financing Facilities represented 62.3% of our total assets.
Removed
As of December 31, 2022, our portfolio consisted of 27 first mortgage loans.
Added
As a result of this competition, desirable loans and investments in our target investments may be limited in the future and we may not be able to take advantage of attractive lending and investment opportunities from time to time.
Removed
Therefore, we cannot be sure that Tremont will have knowledge of all circumstances that may adversely affect such investment.

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Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

3 edited+0 added−0 removed1 unchanged
Biggest changeCalendar Month Number of Shares Purchased (1) Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs October 2022 4,197 $ 9.19 — $ — December 2022 261 $ 9.09 — — Total/weighted average 4,458 $ 9.18 — $ — (1) These common share withholdings and purchases were made to satisfy tax withholding and payment obligations of certain of our current and former officers and employees of Tremont and/or RMR in connection with the vesting of awards of our common shares.
Biggest changeCalendar Month Number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs October 2023 4,164 $ 10.75 — $ — (1) These common share withholdings and purchases were made to satisfy tax withholding and payment obligations of certain of our current and former officers and current and former officers and employees of Tremont and/or RMR in connection with the vesting of awards of our common shares.
The table below provides information about our purchases of our equity securities during the quarter ended December 31, 2022.
The table below provides information about our purchases of our equity securities during the quarter ended December 31, 2023.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common shares are traded on Nasdaq (symbol: SEVN). As of February 9, 2023, there were 76 shareholders of record of our common shares. Issuer purchases of equity securities.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common shares are traded on Nasdaq (symbol: SEVN). As of February 15, 2024, there were 77 shareholders of record of our common shares. Issuer purchases of equity securities.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

73 edited+49 added−50 removed36 unchanged
Biggest change(4) LTV represents the initial loan amount divided by the underwritten in-place value of the underlying collateral at closing. 63 Table of Contents Loan Portfolio Details The table below details our loan portfolio as of December 31, 2022: # Location Property Type Origination Date Committed Principal Amount Principal Balance Coupon Rate All in Yield (1) Maximum Maturity (2) (date) LTV (3) Risk Rating 1 Olmsted Falls, OH Multifamily 01/28/2021 $ 54,575 $ 46,083 L + 4.00% L + 4.64% 01/28/2026 63 % 3 2 Dallas, TX Office 08/25/2021 50,000 43,450 L + 3.25% L + 3.61% 08/25/2026 72 % 4 3 Passaic, NJ Industrial 09/08/2022 47,000 38,440 S + 3.85% S + 4.22% 09/08/2027 69 % 3 4 Brandywine, MD Retail 03/29/2022 42,500 42,200 S + 3.85% S + 4.25% 03/29/2027 62 % 3 5 West Bloomfield, MI Retail 12/16/2021 42,500 37,453 L + 3.85% L + 4.66% 12/16/2024 59 % 3 6 Starkville, MS Multifamily 03/22/2022 37,250 36,787 S + 4.00% S + 4.32% 03/22/2027 70 % 4 7 Summerville, SC Industrial 12/20/2021 35,000 35,000 L + 3.50% L + 3.82% 12/20/2026 70 % 2 8 Farmington Hills, MI Multifamily 05/24/2022 31,520 28,691 S + 3.15% S + 3.50% 05/24/2027 75 % 3 9 Downers Grove, IL Office 09/25/2020 30,000 29,500 L + 4.25% L + 4.69% 11/25/2024 67 % 2 10 Las Vegas, NV Multifamily 06/10/2022 28,950 24,223 S + 3.30% S + 4.05% 06/10/2027 60 % 3 11 St.
Biggest change(4) LTV represents the initial loan amount divided by the underwritten in-place value of the underlying collateral at closing. 65 Table of Contents Loan Portfolio Details The table below details our loan portfolio as of December 31, 2023: # Location Property Type Origination Date Committed Principal Amount Principal Balance Coupon Rate All in Yield (1) Maximum Maturity (2) (date) LTV (3) Risk Rating 1 Olmsted Falls, OH Multifamily 01/28/2021 $ 54,575 $ 46,083 S + 4.00% S + 4.64% 01/28/2026 63 % 3 2 Dallas, TX Office 08/25/2021 50,000 43,510 S + 3.25% S + 3.61% 08/25/2026 72 % 4 3 Passaic, NJ Industrial 09/08/2022 47,000 38,985 S + 3.85% S + 4.22% 09/08/2027 69 % 3 4 Brandywine, MD Retail 03/29/2022 42,500 42,200 S + 3.85% S + 4.25% 03/29/2027 62 % 2 5 Auburn, AL Multifamily 05/11/2023 37,500 37,500 S + 3.25% S + 3.96% 11/11/2026 67 % 2 6 Starkville, MS Multifamily 03/22/2022 37,250 36,919 S + 4.00% S + 4.32% 03/22/2027 70 % 3 7 Farmington Hills, MI Multifamily 05/24/2022 31,520 29,121 S + 3.15% S + 3.50% 05/24/2027 75 % 3 8 Downers Grove, IL Office 09/25/2020 30,000 29,500 S + 4.25% S + 4.63% 11/25/2024 67 % 3 9 Anaheim, CA Hotel 11/29/2023 29,000 29,000 S + 4.00% S + 4.47% 11/29/2028 55 % 3 10 Las Vegas, NV Multifamily 06/10/2022 28,950 25,185 S + 3.30% S + 4.03% 06/10/2027 60 % 3 11 Fountain Inn, SC Industrial 07/13/2023 27,500 24,300 S + 4.25% S + 4.78% 07/13/2026 76 % 3 12 Plano, TX Office 07/01/2021 27,385 26,463 S + 4.75% S + 5.16% 07/01/2026 78 % 3 13 Fayetteville, GA Industrial 10/06/2023 25,250 25,250 S + 3.35% S + 3.65% 10/06/2028 55 % 3 14 Carlsbad, CA Office 10/27/2021 24,750 24,417 S + 3.25% S + 3.58% 10/27/2026 78 % 4 15 Fontana, CA Industrial 11/18/2022 24,355 22,000 S + 3.75% S + 4.28% 11/18/2026 72 % 3 16 Downers Grove, IL Office 12/09/2021 23,530 23,530 S + 4.25% S + 4.57% 12/09/2026 72 % 3 17 Bellevue, WA Office 11/05/2021 21,000 20,000 S + 3.85% S + 4.19% 11/05/2026 68 % 4 18 Portland, OR Multifamily 07/09/2021 19,688 19,688 S + 3.57% S + 3.97% 07/09/2026 75 % 3 19 Scottsdale, AZ Hotel 09/27/2023 17,250 17,250 S + 4.25% S + 4.56% 09/27/2028 57 % 3 20 Delray Beach, FL Retail 03/18/2022 16,700 15,602 S + 4.25% S + 4.95% 03/18/2026 56 % 3 21 Sandy Springs, GA Retail 09/23/2021 16,488 15,287 S + 3.75% S + 4.10% 09/23/2026 72 % 3 22 Westminster, CO Office 05/25/2021 15,750 15,750 S + 3.75% S + 4.30% 05/25/2026 66 % 2 23 Portland, OR Multifamily 07/30/2021 13,400 13,400 S + 3.57% S + 3.98% 07/30/2026 71 % 3 24 Allentown, PA Industrial 01/24/2020 8,952 8,952 S + 3.50% S + 3.93% 01/24/2025 67 % 3 Total/weighted average $ 670,293 $ 629,892 S + 3.78% S + 4.23% 68 % 3.0 (1) All in yield represents the yield on a loan, including amortization of deferred fees over the initial term of the loan and excluding any purchase discount accretion.
Critical Accounting Policies Our consolidated financial statements are prepared in accordance with GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment regarding future events and other uncertainties. In accordance with SEC guidance, the following discussion addresses the accounting policies that apply to our operations.
Critical Accounting Estimates Our consolidated financial statements are prepared in accordance with GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment regarding future events and other uncertainties. In accordance with SEC guidance, the following discussion addresses the accounting policies that apply to our operations.
“5” impaired/loss likely—Criteria reflects a very high risk of realizing a principal loss or having incurred a principal loss; a sponsor having a history of default payments, trouble fulfilling its credit obligations, deeds in lieu of foreclosures, and/or bankruptcies; collateral performance is significantly worse than performance metrics included in the business plan; loan covenants or performance milestones having been breached or not attained; timely exit via sale or refinancing being uncertain; and/or the property having a very high LTV.
“5” loss likely—Criteria reflects a very high risk of realizing a principal loss or having incurred a principal loss; a sponsor having a history of default payments, trouble fulfilling its credit obligations, deeds in lieu of foreclosures, and/or bankruptcies; collateral performance is significantly worse than performance metrics included in the business plan; loan covenants or performance milestones having been breached or not attained; timely exit via sale or refinancing being uncertain; and/or the property having a very high LTV.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes included elsewhere in this Annual Report on Form 10-K. OVERVIEW (dollars in thousands, except per share data) We are a Maryland REIT.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes included elsewhere in this Annual Report on Form 10-K. OVERVIEW (dollars in thousands, except share data) We are a Maryland REIT.
In addition, Distributable Earnings is used in determining the amount of base management and management incentive fees payable by us to Tremont under our management agreement.
In addition, Distributable Earnings, excluding incentive fees, is used in determining the amount of base management and management incentive fees payable by us to Tremont under our management agreement.
For further information about these and other such relationships and related person transactions, see Notes 9 and 10 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K and our other filings with the SEC, which are incorporated herein by reference, including our definitive Proxy Statement for our 2023 Annual Meeting of Shareholders, or our 2023 Proxy Statement, to be filed with the SEC within 120 days after the fiscal year ended December 31, 2022.
For further information about these and other such relationships and related person transactions, see Notes 8 and 9 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K and our other filings with the SEC, which are incorporated herein by reference, including our definitive Proxy Statement for our 2024 Annual Meeting of Shareholders, or our 2024 Proxy Statement, to be filed with the SEC within 120 days after the fiscal year ended December 31, 2023.
(3) Projected interest payments are attributable only to our debt service obligations at existing rates as of December 31, 2022 and are not intended to estimate future interest costs which may result from debt prepayments, additional borrowings, new debt issuances or changes in interest rates.
(3) Projected interest payments are attributable only to our debt service obligations at existing rates as of December 31, 2023 and are not intended to estimate future interest costs which may result from debt prepayments, additional borrowings, new debt issuances or changes in interest rates.
For further information regarding our loan portfolio and risk rating policy, see Notes 2 and 5 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
For further information regarding our loan portfolio and risk rating policy, see Notes 2 and 3 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
For further information regarding our Secured Financing Facilities, see Note 6 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K and "—Overview-Financing Activities" above.
For further information regarding our Secured Financing Facilities, see Note 5 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K and "—Overview-Financing Activities" above.
Upon the repurchase of a purchased asset, we are required to pay UBS or Citibank, as applicable, the outstanding purchase price of the purchased asset, accrued interest and all accrued and unpaid expenses of UBS or Citibank, as applicable, relating to such purchased asset.
Upon the repurchase of a purchased asset, we are required to pay UBS, Citibank or Wells Fargo, as applicable, the outstanding purchase price of the purchased asset, accrued interest and all accrued and unpaid expenses of UBS, Citibank or Wells Fargo, as applicable, relating to such purchased asset.
Loans that are held for investment are carried at cost, net of unamortized loan origination fees, accreted exit fees, unamortized premiums and unaccreted discounts, as applicable, that are required to be recognized in the carrying value of the loans in accordance with GAAP, unless the loans are deemed to be impaired.
Loans that are held for investment are carried at cost, net of unamortized loan origination fees, accreted exit fees, unamortized premiums and unaccreted discounts, as applicable, that are required to be recognized in the carrying value of the loans in accordance with GAAP, unless the loans are deemed to be collateral dependent.
Financial Statements and Supplementary Data The information required by this Item is included in Item 15 of this Annual Report on Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.
Financial Statements and Supplementary Data The information required by this Item is included in Item 15 of this Annual Report on Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 74 Table of Contents
Our sources of cash flows include cash on hand, payments of principal, interest and fees we receive on our investments, other cash we may generate from our business and operations and any unused borrowing capacity, including under our Secured Financing Facilities or other repurchase agreements or financing arrangements we may obtain, which may also include bank loans or public or private issuances of debt or equity securities.
Our sources of cash flows include cash on hand, payments of principal, interest and fees we receive on our investments, other cash we may generate from our business and operations, any unused borrowing capacity, including under our Secured Financing Facilities or other repurchase agreements or financing arrangements we may obtain, which may also include bank loans or public or private issuances of debt or equity securities and proceeds from any sale of real estate owned.
The decrease in purchase discount accretion was primarily the result of less amounts outstanding on the acquired TRMT loans during the year ended December 31, 2022 as compared to the year ended December 31, 2021. Interest and related expenses.
The decrease in purchase discount accretion was primarily the result of less amounts outstanding on loans acquired in the Merger during the year ended December 31, 2023 as compared to the year ended December 31, 2022. Interest and related expenses.
Decreases in benchmark rates are mitigated by interest rate floor provisions in all but one of our loan agreements with borrowers; therefore, changes to income from investments, net, may not move proportionately with the increase or decrease in benchmark rates.
Decreases in benchmark rates are mitigated by interest rate floor provisions in all but one of our loan agreements with borrowers, ranging from 0.10% to 5.20%; therefore, changes to income from investments, net, may not move proportionately with the increase or decrease in benchmark rates.
In accordance with GAAP, exit fees payable with respect to loans acquired in the Merger were accreted as a component of the purchase discount and were excluded from Distributable Earnings as a non-cash item. Accordingly, these exit fees have been recognized in Distributable Earnings upon collection. (2) Other transaction related costs include expenses related to the Merger.
In accordance with GAAP, exit fees payable with respect to loans acquired in the Merger were accreted as a component of the purchase discount and were excluded from Distributable Earnings as a non-cash item. Accordingly, these exit fees have been recognized in Distributable Earnings upon collection.
Distributable Earnings and Adjusted Distributable Earnings We calculate Distributable Earnings and Distributable Earnings per common share as net income and net income per common share, respectively, computed in accordance with GAAP, including realized losses not otherwise included in net income determined in accordance with GAAP, and excluding: (a) the management incentive fees earned by Tremont, if any; (b) depreciation and amortization, if any; (c) non-cash equity compensation expense; (d) unrealized gains, losses and other similar non-cash items that are included in net income for the period of the calculation (regardless of whether such items are included in or deducted from net income or in other comprehensive income under GAAP), if any; and (e) one-time events pursuant to changes in GAAP and certain non-cash items, if any.
Distributable Earnings and Adjusted Distributable Earnings We calculate Distributable Earnings and Distributable Earnings per common share as net income and net income per common share, respectively, computed in accordance with GAAP, including realized losses not otherwise included in net income determined in accordance with GAAP, and excluding: (a) depreciation and amortization of real estate owned and related intangible assets, if any; (b) non-cash equity compensation expense; (c) unrealized gains, losses and other similar non-cash items that are included in net income for the period of the calculation (regardless of whether such items are included in or deducted from net income or in other comprehensive income under GAAP), if any; and (d) one-time events pursuant to changes in GAAP and certain non-cash items, if any.
The increase in net income was due to the changes noted above.
The decrease in net income was due to the changes noted above.
See "—Market Conditions" above for a discussion of the current market including interest rates. 69 Table of Contents Conversely, decreases in interest rates, in general, may cause: (a) the coupon rates on our variable rate investments to reset, perhaps on a delayed basis, to lower rates; (b) it to become easier and more affordable for our borrowers to refinance, and as a result, repay our loans, but may negatively impact our future returns if any such repayment proceeds were to be reinvested in lower yielding investments; and (c) the interest expense associated with our variable rate borrowings to decrease.
Conversely, decreases in interest rates, in general, may cause: (a) the coupon rates on our variable rate investments to reset, perhaps on a delayed basis, to lower rates; (b) it to become easier and more affordable for our borrowers to refinance, and as a result, repay our loans, but may negatively impact our future returns if any such repayment proceeds were to be reinvested in lower yielding investments; and (c) the interest expense associated with our variable rate borrowings to decrease. 62 Table of Contents The interest income on our loans and interest expense on our borrowings float with benchmark rates, such as SOFR.
LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands, except per share data) Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to fund our lending commitments, repay or meet margin calls resulting from our borrowings, if any, fund and maintain our assets and operations, make distributions to our shareholders and fund other business operating requirements.
(2) Other transaction related costs include expenses related to the Merger. 69 Table of Contents LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands, except per share data) Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to fund our lending commitments, repay or meet margin calls resulting from our borrowings, if any, fund and maintain our assets and operations, make distributions to our shareholders and fund other business operating requirements.
The interest income on our loans and interest expense on our borrowings float with benchmark rates, such as LIBOR and SOFR. Because we generally intend to leverage approximately 75% of the amount of our investments, as benchmark rates increase above the floors of our loans, our income from investments, net of interest and related expenses, will increase.
Because we generally intend to leverage approximately 75% of the amount of our investments, as benchmark rates increase above the floors of our loans, our income from investments, net of interest and related expenses, will increase.
Interest on advancements under the BMO Facility are calculated at SOFR plus a premium. Loans issued under the BMO Facility are secured by a security interest and collateral assignment of the underlying loans to our borrowers which are secured by real property underlying such loans.
Loans issued under the BMO Facility are secured by a security interest and collateral assignment of the underlying loans to our borrowers which are secured by real property underlying such loans.
The decrease in cash provided by financing activities is primarily due to higher repayments on our Secured Financing Facilities during 2022 and an increase in distributions to common shareholders in 2022, partially offset by increased proceeds received from our Secured Financing Facilities during 2022.
The change from cash provided by financing activities to cash used in financing activities is primarily due to decreased proceeds received from our Secured Financing Facilities and an increase in distributions to our common shareholders in 2023, partially offset by decreased repayments on our Secured Financing Facilities in 2023.
As of December 31, 2022, we had $727,562 in aggregate loan commitments, consisting of a diverse portfolio, geographically and by property type, of 27 first mortgage loans. As of December 31, 2022, we had three loans representing approximately 14% of the carrying value of our loan portfolio with a loan risk rating of “4” or “higher risk”.
As of December 31, 2023, we had $670,293 in aggregate loan commitments, consisting of a diverse portfolio, geographically and by property type, of 24 first mortgage loans. As of December 31, 2023, we had three loans representing approximately 14% of the amortized cost of our loan portfolio with a loan risk rating of “4” or “higher risk”.
We believe that Adjusted Book Value per common share is a meaningful measure of our capital adequacy because it excludes the unaccreted purchase discount resulting from the excess of the fair value of the loans TRMT then held for investment and that we acquired as a result of the Merger over the consideration we paid in the Merger.
We believe that Adjusted Book Value per common share is a meaningful measure of our capital adequacy because it excludes the impact of certain non-cash estimates or adjustments, including the unaccreted purchase discount resulting from the excess of the fair value of the loans TRMT then held for investment and that we acquired as a result of the Merger over the consideration we paid in the Merger and our allowance for credit losses for our loan portfolio and unfunded loan commitments.
Size of Portfolio . The size of our loan portfolio, as measured both by the aggregate principal balance and the number of our CRE loans and our other investments, is also an important factor in determining our operating results.
All of our pre-existing contracts have been amended to replace LIBOR with SOFR. Size of Portfolio . The size of our loan portfolio, as measured both by the aggregate principal balance and the number of our CRE loans and our other investments, is also an important factor in determining our operating results.
The purchase discount of $36,443 was allocated to each acquired loan and is being accreted into income over the remaining term of the respective loan. As of December 31, 2022 and 2021, the unaccreted purchase discount was $6,703 and $17,391, respectively.
The purchase discount of $36,443 was allocated to each acquired loan and is being accreted into income over the remaining term of the respective loan. As of December 31, 2023 and 2022, the unaccreted purchase discount was $2,347 and $6,703, respectively. (2) Excludes the impact of our allowance for credit losses.
Reconciliation of Net Income to Distributable Earnings and Adjusted Distributable Earnings The table below demonstrates how we calculate Distributable Earnings, Distributable Earnings per common share, Adjusted Distributable Earnings and Adjusted Distributable Earnings per common share, which are non-GAAP measures, and provides a reconciliation of these non-GAAP measures to net income: Year Ended December 31, 2022 2021 Net income $ 27,640 $ 24,650 Non-cash equity compensation expense 1,018 627 Non-cash accretion of purchase discount (10,689) (18,932) Exit fees collected on loans acquired in Merger (1) 104 — Distributable Earnings 18,073 6,345 Other transaction related costs (2) 37 589 Income tax expense (3) — 282 Adjusted Distributable Earnings $ 18,110 $ 7,216 Weighted average common shares outstanding - basic and diluted 14,540 11,304 Net income per common share - basic and diluted $ 1.89 $ 2.18 Distributable Earnings per common share - basic and diluted $ 1.24 $ 0.56 Adjusted Distributable Earnings per common share - basic and diluted $ 1.25 $ 0.64 (1) Exit fees collected for loans acquired in the Merger represent fees collected upon repayment of loans for which no income relating to those exit fees has previously been recognized in Distributable Earnings.
Reconciliation of Net Income to Distributable Earnings and Adjusted Distributable Earnings The table below demonstrates how we calculate Distributable Earnings, Distributable Earnings per common share, Adjusted Distributable Earnings and Adjusted Distributable Earnings per common share, which are non-GAAP measures, and provides a reconciliation of these non-GAAP measures to net income: Year Ended December 31, 2023 2022 Net income $ 25,965 $ 27,640 Non-cash equity compensation expense 1,121 1,018 Non-cash accretion of purchase discount (4,128) (10,689) Reversal of credit losses (799) — Depreciation and amortization of real estate owned 594 — Exit fees collected on loans acquired in Merger (1) 148 104 Distributable Earnings 22,901 18,073 Other transaction related costs (2) — 37 Adjusted Distributable Earnings $ 22,901 $ 18,110 Weighted average common shares outstanding - basic and diluted 14,625 14,540 Net income per common share - basic and diluted $ 1.76 $ 1.89 Distributable Earnings per common share - basic and diluted $ 1.57 $ 1.24 Adjusted Distributable Earnings per common share - basic and diluted $ 1.57 $ 1.25 (1) Exit fees collected on loans acquired in the Merger represent fees collected upon repayment of loans for which no income has previously been recognized in Distributable Earnings.
GAAP also requires that the excess of contractual cash flows over cash flows expected to be collected (non-accretable difference) not be recognized as an adjustment of yield, loss accrual or valuation allowance. Subsequent increases in cash flows expected to be collected from such loans generally will be recognized prospectively through adjustment of the loan’s yield over its remaining life.
GAAP also requires that the excess of contractual cash flows over cash flows expected to be collected (non-accretable difference) not be recognized as an adjustment of yield, loss accrual or valuation allowance.
Certain of our loan agreements entered into prior to January 1, 2022 require the borrowers to pay us interest at floating rates based upon LIBOR. LIBOR was phased out for new contracts as of December 31, 2021.
Certain of our loan agreements entered into prior to January 1, 2022 required the borrowers to pay us interest at floating rates based upon the London Interbank Offered Rate, or LIBOR. LIBOR was phased out for new contracts as of December 31, 2021 and is no longer available effective June 30, 2023.
As of December 31, 2022, we were in compliance with all covenants and other terms under our Secured Financing Facilities. 72 Table of Contents Related Person Transactions We have relationships and historical and continuing transactions with Tremont, RMR, RMR Inc. and others related to them.
As of December 31, 2023, we had a $87,767 aggregate outstanding principal balance under the BMO Facility. As of December 31, 2023, we were in compliance with all covenants and other terms under our Secured Financing Facilities. Related Person Transactions We have relationships and historical and continuing transactions with Tremont, RMR, RMR Inc. and others related to them.
Decreases in cash flows expected to be collected will be recorded as impairment. Loans Held For Investment. Generally, our loans are classified as held for investment based upon our intent and ability to hold them until maturity.
Generally, our loans are classified as held for investment based upon our intent and ability to hold them until maturity.
For further information regarding the risks associated with our loan portfolio, see the risk factors identified in Part I, Item 1A, "Risk Factors", of this Annual Report on Form 10-K. Credit Risk. We are subject to the credit risk of our borrowers in connection with our investments.
Our operating results are also impacted by general CRE market conditions and unanticipated defaults by our borrowers. For further information regarding the risks associated with our loan portfolio, see the risk factors identified in Part I, Item 1A, "Risk Factors", of this Annual Report on Form 10-K. Credit Risk.
As of December 31, 2022, LIBOR and SOFR were 4.39% and 4.36%, respectively, both of which exceed the floors established by all of our loans, and as a result none of our loan investments currently have active interest rate floors.
As of December 31, 2023, SOFR was 5.35%, which exceed the floors established by all of our loans, and as a result none of our loan investments currently had active interest rate floors.
As such, we generally are not subject to U.S. federal income tax, provided that we meet certain distribution and other requirements. We also operate our business in a manner that permits us to maintain our exemption from registration under the 1940 Act.
We operate our business in a manner that is consistent with our qualification for taxation as a REIT under the IRC. As such, we generally are not subject to U.S. federal income tax, provided that we meet certain distribution and other requirements.
As of December 31, 2022 and February 9, 2023, we had a $473,615 and $462,286, respectively, aggregate outstanding principal balance under our Secured Financing Facilities.
As of December 31, 2023 and February 15, 2024, we had a $455,814 and $439,284, respectively, aggregate outstanding principal balance under our Secured Financing Facilities.
The following is a summary of our sources and uses of cash flows for the period presented: Year Ended December 31, 2022 2021 Cash, cash equivalents and restricted cash at beginning of period $ 26,295 $ 103,564 Net cash provided by (used in): Operating activities 12,751 792 Investing activities (84,067) (283,863) Financing activities 116,088 205,802 Cash, cash equivalents and restricted cash at end of period $ 71,067 $ 26,295 The increase in cash provided by operating activities for 2022 compared to 2021 was primarily the result of interest income generated from our origination activities in 2021 and 2022 and loans acquired in the Merger.
The following is a summary of our sources and uses of cash flows for the period presented: Year Ended December 31, 2023 2022 Cash and cash equivalents at beginning of period $ 71,067 $ 26,295 Net cash provided by (used in): Operating activities 20,270 12,751 Investing activities 35,844 (84,067) Financing activities (39,326) 116,088 Cash and cash equivalents at end of period $ 87,855 $ 71,067 70 Table of Contents The increase in cash provided by operating activities for 2023 compared to 2022 was primarily the result of higher benchmark interest rates during 2023 and our origination activities in 2022 and 2023.
The interest rates related to our Citibank and UBS purchased assets were amended during 2022 as part of the amendments to the Citibank Master Repurchase Agreement and UBS Master Repurchase Agreement to replace LIBOR with SOFR plus a premium within a fixed range, determined by the debt yield and property type of the purchased asset’s real estate collateral.
The interest rates related to our Citibank, UBS and Wells Fargo purchased assets are calculated at SOFR plus a premium within a fixed range, determined by the debt yield and property type of the purchased asset’s real estate collateral.
UBS and Citibank each has the discretion to make advancements at margins higher than 75%. 70 Table of Contents Loans issued under the BMO Facility are coterminous with the corresponding pledged mortgage loan investments, are not subject to margin calls and allow for up to an 80% advance rate, subject to certain loan to cost and LTV limits.
Loans issued under the BMO Facility are coterminous with the corresponding pledged mortgage loan investments, are not subject to margin calls and allow for up to an 80% advance rate, subject to certain loan to cost and LTV limits. Interest on advancements under the BMO Facility are calculated at SOFR plus a premium.
The Master Repurchase Guarantees contain financial covenants, which require us to maintain a minimum tangible net worth, a minimum liquidity and a minimum interest coverage ratio and to satisfy a total indebtedness to stockholders' equity ratio.
In addition, the BMO Guaranty contains financial covenants that require us to maintain a minimum tangible net worth and a minimum liquidity and to satisfy a total indebtedness to stockholders’ equity ratio.
Loans that we have a plan to sell or liquidate are held at the lower of cost or fair value less cost to sell. We evaluate each of our loans for impairment at least quarterly by assessing a variety of risk factors in relation to each loan and assigning a risk rating to each loan based on those factors.
We evaluate the credit quality of each of our loans at least quarterly by assessing a variety of risk factors in relation to each loan and assigning a risk rating to each loan based on those factors.
Our Loan Portfolio The table below details overall statistics for our loan portfolio as of December 31, 2022 and 2021: As of December 31, 2022 2021 Number of loans 27 26 Total loan commitments $ 727,562 $ 648,266 Unfunded loan commitments (1) $ 49,007 $ 57,772 Principal balance $ 678,555 $ 590,590 Carrying value $ 669,929 $ 570,780 Weighted average coupon rate 8.07 % 4.54 % Weighted average all in yield (2) 8.57 % 5.08 % Weighted average floor 0.62 % 0.68 % Weighted average maximum maturity (years) (3) 3.3 3.8 Weighted average risk rating 2.9 2.9 Weighted average LTV (4) 68 % 68 % (1) Unfunded loan commitments are primarily used to finance property and building improvements and leasing capital and are generally funded over the term of the loan.
For further information on our adoption of ASU No. 2016-13, see Note 2 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. 64 Table of Contents Our Loan Portfolio The table below details overall statistics for our loan portfolio as of December 31, 2023 and 2022: As of December 31, 2023 2022 Number of loans 24 27 Total loan commitments $ 670,293 $ 727,562 Unfunded loan commitments (1) $ 40,401 $ 49,007 Principal balance $ 629,892 $ 678,555 Carrying value $ 622,086 $ 669,929 Weighted average coupon rate 9.19 % 8.07 % Weighted average all in yield (2) 9.64 % 8.57 % Weighted average floor 1.36 % 0.62 % Weighted average maximum maturity (years) (3) 3.0 3.3 Weighted average risk rating 3.0 2.9 Weighted average LTV (4) 68 % 68 % (1) Unfunded loan commitments are primarily used to finance property improvements and leasing capital and are generally funded over the term of the loan.
We define Adjusted Distributable Earnings and Adjusted Distributable Earnings per common share as Distributable Earnings and Distributable Earnings per common share, respectively, excluding the effects of certain non-recurring transactions. 62 Table of Contents Reconciliation of Book Value per Common Share to Adjusted Book Value per Common Share The table below calculates our book value per common share and demonstrates how we calculate Adjusted Book Value per common share: As of December 31, 2022 2021 Shareholders' equity $ 271,579 $ 257,694 Total outstanding common shares 14,709 14,597 Book value per common share 18.46 17.65 Unaccreted purchase discount per common share 0.46 1.20 Adjusted Book Value per common share (1) $ 18.92 $ 18.85 (1) Adjusted Book Value per common share is a non-GAAP financial measure that excludes the impact of the unaccreted purchase discount resulting from the excess of the fair value of the loans TRMT then held for investment and that we acquired as a result of the Merger over the consideration we paid in the Merger.
Adjusted Book Value per Common Share The table below calculates our book value per common share: As of December 31, 2023 2022 Shareholders' equity $ 271,248 $ 271,579 Total outstanding common shares 14,811 14,709 Book value per common share 18.31 18.46 Unaccreted purchase discount per common share (1) 0.16 0.46 Allowance for credit losses per common share (2) 0.40 — Adjusted Book Value per common share $ 18.87 $ 18.92 (1) Excludes the impact of the unaccreted purchase discount resulting from the excess of the fair value of the loans TRMT then held for investment and that we acquired as a result of the Merger over the consideration we paid in the Merger.
In connection with the BMO Loan Program Agreement, we have agreed to guarantee certain of the obligations under the BMO Loan Program Agreement and the BMO Facility Loan Agreements pursuant to a limited guaranty from us to and for the benefit of the administrative agent for itself and such other lenders, or the BMO Guaranty.
The Master Repurchase Guarantees contain financial covenants, which require us to maintain a minimum tangible net worth, a minimum liquidity and a minimum interest coverage ratio and to satisfy a total indebtedness to stockholders' equity ratio. 71 Table of Contents In connection with the BMO Loan Program Agreement, we have agreed to guarantee certain of the obligations under the BMO Loan Program Agreement and the BMO Facility Loan Agreements pursuant to a limited guaranty from us to and for the benefit of the administrative agent for itself and such other lenders, or the BMO Guaranty.
Financing Activities Our secured financing agreements at December 31, 2022 consisted of agreements that govern our Wells Fargo Master Repurchase Facility, our Citibank Master Repurchase Facility, our BMO Facility and our UBS Master Repurchase Facility. On March 11, 2022, one of our wholly owned subsidiaries entered into our Wells Fargo Master Repurchase Agreement for the Wells Fargo Master Repurchase Facility.
Financing Activities Our secured financing agreements at December 31, 2023 consisted of agreements that govern our Wells Fargo Master Repurchase Facility, our Citibank Master Repurchase Facility, our BMO Facility and our UBS Master Repurchase Facility. In July 2023, we amended and restated the UBS Master Repurchase Agreement.
Availability of Leverage and Equity. We use leverage to make additional investments that may increase our returns. We may not be able to obtain the expected amount of leverage we desire or its cost may exceed our expectation and, consequently, the returns generated from our investments may be reduced.
We may not be able to obtain the expected amount of leverage we desire or its cost may exceed our expectation and, consequently, the returns generated from our investments may be reduced. Our ability to further grow our loan portfolio over time will depend, to a significant degree, upon our ability to obtain additional capital.
Factors Affecting Operating Results Our results of operations are impacted by a number of factors and primarily depend on the interest income from our investments and the financing and other costs associated with our business. Our operating results are also impacted by general CRE market conditions and unanticipated defaults by our borrowers.
We also operate our business in a manner that permits us to maintain our exemption from registration under the 1940 Act. Factors Affecting Operating Results Our results of operations are impacted by a number of factors and primarily depend on the interest income from our investments and the financing and other costs associated with our business.
Our methodology for calculating Adjusted Book Value per common share may differ from the methodologies employed by other companies to calculate the same or similar supplemental capital adequacy measures; therefore, our Adjusted Book Value per common share may not be comparable to the adjusted book value per common share reported by other companies.
Our methodology for calculating Adjusted Book Value per common share may differ from the methodologies employed by other companies to calculate the same or similar supplemental capital adequacy measures; therefore, our Adjusted Book Value per common share may not be comparable to the adjusted book value per common share reported by other companies. 63 Table of Contents In order to maintain our qualification for taxation as a REIT, we are generally required to distribute substantially all of our taxable income, subject to certain adjustments, to our shareholders.
In order to maintain our qualification for taxation as a REIT, we are generally required to distribute substantially all of our taxable income, subject to certain adjustments, to our shareholders. We believe that one of the factors that investors consider important in deciding whether to buy or sell securities of a REIT is its distribution rate.
We believe that one of the factors that investors consider important in deciding whether to buy or sell securities of a REIT is its distribution rate.
As of December 31, 2022, we were in compliance with all covenants and other terms under our Secured Financing Facilities. 66 Table of Contents RESULTS OF OPERATIONS (amounts in thousands, except per share data) Year ended December 31, 2022 Compared to Year Ended December 31, 2021: Year Ended December 31, 2022 2021 Change % Change INCOME FROM INVESTMENTS: Interest income from investments $ 45,303 $ 16,775 $ 28,528 170.1 % Purchase discount accretion 10,689 18,932 (8,243) (43.5 %) Less: interest and related expenses (17,630) (2,253) (15,377) n/m Income from investments, net 38,362 33,454 4,908 14.7 % OTHER EXPENSES: Base management fees 4,260 3,221 1,039 32.3 % General and administrative expenses 4,080 3,091 989 32.0 % Reimbursement of shared services expenses 2,232 1,565 667 42.6 % Other transaction related costs 37 589 (552) (93.7 %) Total other expenses 10,609 8,466 2,143 25.3 % Income before income taxes 27,753 24,988 2,765 11.1 % Income tax expense (113) (338) 225 (66.6 %) Net income $ 27,640 $ 24,650 $ 2,990 12.1 % Weighted average common shares outstanding - basic and diluted 14,540 11,304 3,236 28.6 % Net income per common share - basic and diluted $ 1.89 $ 2.18 $ (0.29) (13.3 %) n/m - not meaningful Interest income from investments .
As of December 31, 2023, we were in compliance with all covenants and other terms under our Secured Financing Facilities. 67 Table of Contents RESULTS OF OPERATIONS (amounts in thousands, except per share data) Year Ended December 31, 2023 Compared to Year Ended December 31, 2022: Year Ended December 31, 2023 2022 Change % Change INCOME FROM INVESTMENTS: Interest and related income $ 66,337 $ 45,303 $ 21,034 46.4 % Purchase discount accretion 4,128 10,689 (6,561) (61.4) % Less: interest and related expenses (33,518) (17,630) (15,888) 90.1 % Income from loan investments, net 36,947 38,362 (1,415) (3.7) % Revenue from real estate owned 1,288 — 1,288 n/m Total revenue 38,235 38,362 (127) (0.3) % OTHER EXPENSES: Base management fees 4,303 4,260 43 1.0 % Incentive fees 968 — 968 n/m General and administrative expenses 3,947 3,837 110 2.9 % Reimbursement of shared services expenses 2,596 2,475 121 4.9 % Reversal of credit losses (799) — (799) n/m Expenses from real estate owned 1,293 — 1,293 n/m Other transaction related costs — 37 (37) (100.0 %) Total other expenses 12,308 10,609 1,699 16.0 % Income before income taxes 25,927 27,753 (1,826) (6.6 %) Income tax benefit (expense) 38 (113) 151 (133.6 %) Net income $ 25,965 $ 27,640 $ (1,675) (6.1 %) Weighted average common shares outstanding - basic and diluted 14,625 14,540 85 0.6 % Net income per common share - basic and diluted $ 1.76 $ 1.89 $ (0.13) (6.9 %) n/m - not meaningful Interest and related income .
For further information regarding the risks associated with our loan portfolio, see Part I, Item 1A, "Risk Factors" of this Annual Report on Form 10-K. Pursuant to the terms of our UBS Master Repurchase Facility and our Citibank Master Repurchase Facility, we may sell to, and later repurchase from, UBS and Citibank, the purchased assets related to the applicable facility.
For further information regarding the risks associated with our loan portfolio, see Note 3 to our Consolidated Financial Statements included in Part IV, Item 15 and Part I, Item 1A, "Risk Factors" of this Annual Report on Form 10-K.
On March 11, 2022, one of our wholly owned subsidiaries entered into the Wells Fargo Master Repurchase Agreement for the Wells Fargo Master Repurchase Facility, pursuant to which we may sell to, and later repurchase from Wells Fargo, the purchased assets related to the facility.
Pursuant to the terms of our UBS Master Repurchase Facility, our Citibank Master Repurchase Facility and Wells Fargo Master Repurchase Facility, we may sell to, and later repurchase from, UBS, Citibank and Wells Fargo, the purchased assets related to the applicable facility.
As a result, they may become unable to pay their debt service obligations owed and due to us, which may result in impairment, increased loan loss reserves and/or recognition of income on a nonaccrual basis with respect to those loans.
Therefore, certain of our borrowers’ business plans will likely take longer to execute than initially expected, and as a result, they may become unable to pay their debt service obligations owed and due to us, which may result in an increased allowance for credit losses and/or recognition of income on a nonaccrual basis.
Distributions During the year ended December 31, 2022, we declared and paid distributions totaling $14,636, or $1.00 per common share, using cash on hand. On January 12, 2023, we declared a regular quarterly distribution of $0.35 per common share, or $5,148, to shareholders of record on January 23, 2023.
Distributions During the year ended December 31, 2023, we declared and paid distributions totaling $20,639, or $1.40 per common share, using cash on hand.
We seek to mitigate this risk by utilizing a comprehensive underwriting, diligence and investment selection process and by ongoing monitoring of our investments. Nevertheless, unanticipated credit losses could occur that may adversely impact our operating results. 68 Table of Contents Changes in Fair Value of our Assets.
We are subject to the credit risk of our borrowers in connection with our investments. We seek to mitigate this risk by utilizing a comprehensive underwriting, diligence and investment selection process and by ongoing monitoring of our investments.
As of December 31, 2022, we had a $111,105 aggregate outstanding principal balance under the BMO Facility.
As of December 31, 2023, we had a $368,047 aggregate outstanding principal balance under our Master Repurchase Facilities.
The amended and restated Citibank Master Repurchase Agreement increased the maximum amount of available advancements under our Citibank Master Repurchase Facility to $215,000, extended the stated maturity date of the Citibank Master Repurchase Facility to March 15, 2025, and made certain other changes to the agreement and related fee letter, including replacing LIBOR with SOFR for interest rate calculations on advancements under the Citibank Master Repurchase Facility and modifying certain pricing terms.
The amended and restated UBS Master Repurchase Agreement made certain changes to the agreement and related fee letter, including extending the stated maturity date to February 18, 2025. In August 2023, we amended the related fee letter to increase the maximum amount of available advancements under the UBS Master Repurchase Facility to $205,000.
Our ability to further grow our loan portfolio over time will depend, to a significant degree, upon our ability to obtain additional capital. However, our access to additional capital depends on many factors including the price at which our common shares trade relative to their book value and market lending conditions. See "—Market Conditions" below. Market Conditions.
However, our access to additional capital depends on many factors including the price at which our common shares trade relative to their book value and market lending conditions. See "—Market Conditions" below. Market Conditions. During 2023, the CRE industry continued to experience extreme volatility. In response to inflationary pressures, the Federal Open Market Committee of the U.S.
These mortgage loans are classified as loans held for investment in our consolidated balance sheets. Loans held for investment are reported at cost, net of any unamortized loan fees, origination costs, premiums, discounts or reserves for loan losses, as applicable. Tremont is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended.
Our mortgage loans are classified as loans held for investment in our consolidated balance sheets. Tremont is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended. We believe that Tremont provides us with significant experience and expertise in investing in middle market and transitional CRE.
The increase in interest and related expenses was primarily the result of an increase in advances made to us under our Secured Financing Facilities since January 1, 2021 and higher benchmark interest rates in 2022. The weighted average benchmark rate was 4.33% as of December 31, 2022 as compared to 0.10% as of December 31, 2021. Base management fees.
The increase in interest and related expenses was primarily the result of higher benchmark interest rates during the year ended December 31, 2023. The weighted average benchmark rate was 5.36% as of December 31, 2023 as compared to 4.33% as of December 31, 2022. Revenue from real estate owned.
In January 2023, we received $16,429 of early repayment proceeds on a loan secured by an office/industrial property in Aurora, IL. All of the loans in our portfolio are structured with risk mitigation mechanisms, such as cash flow sweeps or interest reserves, to help protect us against investment losses.
All of the loans in our portfolio are structured with risk mitigation mechanisms, such as cash flow sweeps or interest reserves, to help protect us against investment losses. In addition, we actively engage with our borrowers regarding their execution of the business plans for the underlying collateral, among other things.
For further information regarding our Secured Financing Facilities, see Note 6 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. 65 Table of Contents The table below is an overview of our Secured Financing Facilities as of December 31, 2022: Facility Maturity Date Principal Balance Unused Capacity Maximum Facility Size Collateral Principal Balance Citibank Master Repurchase Facility 03/15/2025 $ 150,647 $ 64,353 $ 215,000 $ 205,234 UBS Master Repurchase Facility 02/18/2024 144,437 47,563 192,000 198,254 BMO Facility Various 111,105 38,895 150,000 148,476 Wells Fargo Master Repurchase Facility 03/11/2025 67,426 57,574 125,000 89,008 Total $ 473,615 $ 208,385 $ 682,000 $ 640,972 The table below details our Secured Financing Facilities activities during the year ended December 31, 2022: Carrying Value Balance at December 31, 2021 $ 339,627 Borrowings 284,867 Repayments (152,121) Deferred fees (1,885) Amortization of deferred fees 1,033 Balance at December 31, 2022 $ 471,521 As of December 31, 2022, outstanding advancements under our Secured Financing Facilities had a weighted average interest rate of 6.34% per annum, excluding associated fees and expenses.
The table below is an overview of our Secured Financing Facilities as of December 31, 2023: Facility Maturity Date Principal Balance Unused Capacity Maximum Facility Size Collateral Principal Balance Citibank Master Repurchase Facility 03/15/2025 $ 91,115 $ 123,885 $ 215,000 $ 142,465 UBS Master Repurchase Facility 02/18/2025 181,381 23,619 205,000 241,887 BMO Facility Various 87,767 62,233 150,000 118,471 Wells Fargo Master Repurchase Facility 03/11/2025 95,551 29,449 125,000 127,069 Total $ 455,814 $ 239,186 $ 695,000 $ 629,892 The table below details our Secured Financing Facilities activities during the year ended December 31, 2023: Carrying Value Balance at December 31, 2022 $ 471,521 Borrowings 123,208 Repayments (141,009) Deferred fees (703) Amortization of deferred fees 1,405 Balance at December 31, 2023 $ 454,422 As of December 31, 2023, outstanding advancements under our Secured Financing Facilities had a weighted average interest rate of 7.53% per annum, excluding associated fees and expenses.
We did not have any impaired loans or non-accrual loans as of December 31, 2022; thus, we did not record a reserve for loan loss as of that date. However, our borrowers' businesses, operations and liquidity may be materially adversely impacted by inflationary pressures, rising interest rates, supply chain issues and any recession or economic downturn.
However, our borrowers' businesses, operations and liquidity may be materially adversely impacted by current inflationary pressures, rising or sustained high interest rates, supply chain issues or a prolonged economic slowdown or recession could amplify those negative impacts.
For further information regarding the Merger, see Part I, Item 1, "Business" in our Annual Report on Form 10-K for the year ended December 31, 2021 and Note 4 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. 61 Table of Contents Non-GAAP Financial Measures We present Distributable Earnings, Distributable Earnings per common share, Adjusted Distributable Earnings, Adjusted Distributable Earnings per common share and Adjusted Book Value per common share, which are considered “non-GAAP financial measures” within the meaning of the applicable SEC rules.
Non-GAAP Financial Measures We present Distributable Earnings, Distributable Earnings per common share, Adjusted Distributable Earnings, Adjusted Distributable Earnings per common share and Adjusted Book Value per common share, which are considered “non-GAAP financial measures” within the meaning of the applicable SEC rules.
The increase in general and administrative expenses was primarily due to increases in share based compensation, professional fees, internal audit services, fees paid to our Trustees for their services and insurance expense for the year ended December 31, 2022 as compared to the year ended December 31, 2021. Reimbursement of shared services expenses.
The increase in general and administrative expenses was primarily due to an increase in share based compensation during the year ended December 31, 2023. 68 Table of Contents Reimbursement of shared services expenses. Reimbursement of shared services expenses represents reimbursement of the costs for the services that Tremont arranges on our behalf from RMR. Reversal of credit losses.
The decrease in cash used in investing activities is primarily due to lower loan originations and higher loan repayments in 2022, as well as payment of transaction costs related to the Merger in 2021, partially offset by cash assumed in the Merger.
The increase in cash provided by investing activities is primarily due to lower origination activity and higher loan repayments in 2023.
Debt Covenants Our principal debt obligations as of December 31, 2022 were the outstanding balances under our Secured Financing Facilities.
(4) Lease related costs include capital expenditures used to improve tenants' spaces pursuant to lease agreements or leasing related costs, such as brokerage commissions, related to the Yardley, PA property. Debt Covenants Our principal debt obligations as of December 31, 2023 were the outstanding balances under our Secured Financing Facilities.
As it relates to the CRE debt markets, many CRE debt providers have become less willing, or able, to extend credit to borrowers, and those that are extending credit are doing so at lower leverage levels and with higher credit spreads. Market volatility and the increase in interest rates has not affected all lenders equally.
By the end of 2023, many CRE debt providers were less willing, or able, to extend credit to borrowers. Limited transaction activity due to interest rate volatility made it difficult for lenders to value and underwrite transactions. Companies that did extend credit did so at lower leverage levels, often at higher credit spreads, and with repeat or proven borrowers.
The weighted average benchmark rate was 4.29% as of December 31, 2022 as compared to 0.68% as of December 31, 2021. Purchase discount accretion. The fair value of the loans acquired in the Merger on September 30, 2021 exceeded the purchase price of the loans.
The increase in interest and related income was primarily the result of higher benchmark interest rates during the year ended December 31, 2023. The weighted average benchmark rate was 5.41% as of December 31, 2023 as compared to 4.29% as of December 31, 2022. Purchase discount accretion.
For further information regarding distributions, see Note 8 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. 71 Table of Contents Contractual Obligations and Commitments Our contractual obligations and commitments as of December 31, 2022 were as follows: Payment Due by Period Total Less than 1 Year 1 - 3 Years 3 - 5 Years More than 5 Years Unfunded loan commitments (1) $ 49,007 $ 7,808 $ 41,199 $ — $ — Principal payments on Secured Financing Facilities (2) 473,615 99,112 374,503 — — Interest payments on Secured Financing Facilities (3) 46,590 28,448 18,142 — — $ 569,212 $ 135,368 $ 433,844 $ — $ — (1) The allocation of our unfunded loan commitments is based on the current loan maturity date to which the individual commitments relate.
Contractual Obligations and Commitments Our contractual obligations and commitments as of December 31, 2023 were as follows: Payment Due by Period Total Less than 1 Year 1 - 3 Years 3 - 5 Years More than 5 Years Unfunded loan commitments (1) $ 40,401 $ 22,389 $ 18,012 $ — $ — Principal payments on Secured Financing Facilities (2) 455,814 223,746 232,068 — — Interest payments on Secured Financing Facilities (3) 33,704 28,725 4,979 — — Lease related costs (4) 361 361 — — — $ 530,280 $ 275,221 $ 255,059 $ — $ — (1) The allocation of our unfunded loan commitments is based on the current loan maturity date to which the individual commitments relate.
We generally intend to hold our investments for their contractual terms, unless repaid earlier by the borrowers. We evaluate our investments for impairment at least quarterly. Impairments occur when it is probable that we will not be able to collect all amounts due according to the applicable contractual terms.
Nevertheless, unanticipated credit losses could occur that may adversely impact our operating results. 61 Table of Contents Changes in Fair Value of our Assets. We generally intend to hold our investments for their contractual terms, unless repaid earlier by the borrowers. We evaluate the credit quality of each of our loans at least quarterly.
As of December 31, 2022 and February 9, 2023, our borrowers had paid their debt service obligations owed and due to us and none of the loans included in our investment portfolio were in default, except for the interest rate cap forbearance described above.
As of December 31, 2023 and February 15, 2024, all of our borrowers with outstanding loans had paid their debt service obligations owed and due to us. 66 Table of Contents We did not have any outstanding past due loans or nonaccrual loans as of December 31, 2023.
Income tax expense represents income taxes paid or payable by us in certain jurisdictions where we are subject to state income taxes.
Other transaction related costs for the year ended December 31, 2022 include expenses related to the Merger. Income tax benefit (expense). Income tax benefit for the year ended December 31, 2023 is a result of income taxes refunded or refundable to us in certain jurisdictions where we are subject to state income taxes. Net income.
Removed
We believe that Tremont provides us with significant experience and expertise in investing in middle market and transitional CRE. We operate our business in a manner that is consistent with our qualification for taxation as a REIT under the IRC.
Added
If a loan is determined to be collateral dependent (because the repayment of the loan is expected to be provided substantially through the operation or sale of the underlying collateral property) and the borrower is experiencing financial difficulties, but foreclosure is not probable, we will record an allowance for credit losses by comparing the collateral's fair value to the amortized cost basis of the loan.
Removed
Merger with Tremont Mortgage Trust On September 30, 2021, we completed the Merger with TRMT, at which time TRMT merged with and into us, with us continuing as the surviving entity. The purchase price was $169,150, including the assumption of $128,962 of outstanding debt, closing costs of $6,160 and assumed working capital of $10,146.
Added
For collateral-dependent loans for which foreclosure is probable, the related allowance for credit losses is determined using the fair value of the collateral compared to the loan's amortized cost. Availability of Leverage and Equity. We use leverage to make additional investments that may increase our returns.
Removed
Distributable Earnings are reduced for realized losses on loan investments when amounts are deemed uncollectable.
Added
Federal Reserve, or the FOMC, increased the federal funds rate by 525 basis points over a 16-month period beginning in March 2022. The pace of the interest rate increases in 2022 and 2023 coupled with macroeconomic and geopolitical uncertainty negatively impacted CRE acquisition and financing transaction activity.
Removed
Louis, MO Office 12/19/2018 28,866 28,866 L + 3.25% L + 3.74% 06/20/2023 72 % 3 12 Plano, TX Office 07/01/2021 27,385 26,152 L + 4.75% L + 5.16% 07/01/2026 78 % 3 13 Carlsbad, CA Office 10/27/2021 24,750 23,825 L + 3.25% L + 3.58% 10/27/2026 78 % 3 14 Fontana, CA Industrial 11/18/2022 24,355 22,000 S + 3.75% S + 4.28% 11/18/2026 72 % 3 15 Downers Grove, IL Office 12/09/2021 23,530 23,530 L + 4.25% L + 4.57% 12/09/2026 72 % 3 16 Dublin, OH Office 02/18/2020 22,820 22,507 S + 3.75% S + 4.95% 02/18/2023 33 % 2 17 Bellevue, WA Office 11/05/2021 21,000 20,000 L + 3.85% L + 4.19% 11/05/2026 68 % 3 18 Portland, OR Multifamily 07/09/2021 19,687 19,687 L + 3.57% L + 3.97% 07/09/2026 75 % 3 19 Ames, IA Multifamily 11/15/2021 18,000 17,820 L + 3.80% L + 4.13% 11/15/2026 71 % 2 20 Aurora, IL Office / Industrial 12/18/2020 17,460 16,429 L + 4.35% L + 5.01% 12/18/2024 73 % 2 21 Yardley, PA Office 12/19/2019 16,500 15,583 L + 4.58% L + 5.97% 12/19/2024 75 % 4 22 Sandy Springs, GA Retail 09/23/2021 16,489 15,017 L + 3.75% L + 4.11% 09/23/2026 72 % 3 23 Delray Beach, FL Retail 03/18/2022 16,000 15,149 S + 4.25% S + 4.91% 03/18/2026 56 % 3 24 Westminster, CO Office 05/25/2021 15,750 14,634 L + 3.75% L + 4.25% 05/25/2026 66 % 2 25 Portland, OR Multifamily 07/30/2021 13,400 13,400 L + 3.57% L + 3.98% 07/30/2026 71 % 3 26 Seattle, WA Multifamily 08/16/2021 12,500 12,354 L + 3.55% L + 3.89% 08/16/2026 70 % 3 27 Allentown, PA Industrial 01/24/2020 9,775 9,775 S + 3.50% S + 4.03% 01/24/2025 67 % 1 Total/weighted average $ 727,562 $ 678,555 + 3.78% + 4.28% 68 % 2.9 (1) All in yield represents the yield on a loan, including amortization of deferred fees over the initial term of the loan and excluding any purchase discount accretion.

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