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What changed in Seven Hills Realty Trust's 10-K — 2023 vs 2024

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Paragraph-level year-over-year comparison of Seven Hills Realty Trust's 2023 and 2024 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 2024 report.

+299 added−278 removedSource: 10-K (2025-02-18) vs 10-K (2024-02-20)

Top changes in Seven Hills Realty Trust's 2024 10-K

299 paragraphs added · 278 removed · 237 edited across 5 sections

Item 1. Business

Business — how the company describes what it does

82 edited+15 added−13 removed282 unchanged
Biggest changeThe restrictions on transfer enumerated in the regulation as not affecting that finding include: • any restriction on or prohibition against any transfer or assignment that would result in a termination or reclassification for federal or state tax purposes, or would otherwise violate any state or federal law or court order; • any requirement that advance notice of a transfer or assignment be given to the issuer and any requirement that either the transferor or transferee, or both, execute documentation setting forth representations as to compliance with any restrictions on transfer that are among those enumerated in the regulation as not affecting free transferability, including those described in the preceding clause of this sentence; • any administrative procedure that establishes an effective date, or an event prior to which a transfer or assignment will not be effective; and • any limitation or restriction on transfer or assignment that is not imposed by the issuer or a person acting on behalf of the issuer.
Biggest changeThe restrictions on transfer enumerated in the regulation as not affecting that finding include any restriction on or prohibition against any transfer or assignment that would result in a termination or reclassification for federal or state tax purposes, or would otherwise violate any state or federal law or court order.
To this end, the loans that we target for origination and investment generally have the following characteristics: • first mortgage loans with principal balances ranging from $15.0 million to $75.0 million; • stabilized loan to value ratios, or LTVs, of 75% or less; • terms of five years or less; • floating interest rates based on the Secured Overnight Financing Rate, or SOFR, plus a margin that is competitive in the market; • non-recourse to sponsors (subject to customary non-recourse carve-out guarantees); and • secured by middle market and transitional CRE across the United States that are equity owned by well capitalized sponsors with experience investing in the relevant property type.
To this end, the loans that we target for origination and investment generally have the following characteristics: • first mortgage loans with principal balances ranging from $15.0 million to $75.0 million; • stabilized loan to value ratios, or LTVs, of 75% or less; • terms of five years or less; • floating interest rates based on the Secured Overnight Financing Rate, or SOFR, plus a margin that is competitive in the market; • non-recourse to sponsors (subject to customary non-recourse carve-out guarantees); and • secured by middle market transitional CRE across the United States that are equity owned by well capitalized sponsors with experience investing in the relevant property type.
Taxation of Non-U.S. Shareholders The rules governing the U.S. federal income taxation of non-U.S. shareholders are complex, and the following discussion is intended only as a summary of material considerations of an investment in our shares relevant to such investors.
Shareholders The rules governing the U.S. federal income taxation of non-U.S. shareholders are complex, and the following discussion is intended only as a summary of material considerations of an investment in our shares relevant to such investors.
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.
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; 10 Table of Contents • 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.
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.
Assuming that each class of our shares will be “widely held” and that no 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.
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.
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 federal corporate income tax we paid on our retained net capital gain. • 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 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; 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.
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.
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; 11 Table of Contents • 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 regulation further provides that, where a security is part of an offering in which the minimum investment is $10,000 or less, some restrictions on transfer ordinarily will not, alone or in combination, affect a finding that these securities are freely transferable.
The regulation further provides that, where a security is part of an offering in which the minimum investment is $10,000 or less, some restrictions on transfer ordinarily will not, alone or in combination, affect a finding that the securities are freely transferable.
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.
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. 13 Table of Contents • 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.
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.
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 • 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.
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.
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, 2024: 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.
Rents received by us qualify as “rents from real property” in satisfying the gross income requirements described above only if several conditions are met.
Rents from Real Property . Rents received by us qualify as “rents from real property” in satisfying the gross income requirements described above only if several conditions are met.
A U.S. shareholder may be subject to backup withholding when it receives distributions on our shares or proceeds upon the sale, exchange, redemption, retirement or other disposition of our shares, unless the U.S. shareholder properly executes, or has previously properly executed, under penalties of perjury an IRS Form W-9 or substantially similar form that: • provides the U.S. shareholder’s correct taxpayer identification number; • certifies that the U.S. shareholder is exempt from backup withholding because (a) it comes within an enumerated exempt category, (b) it has not been notified by the IRS that it is subject to backup withholding, or (c) it has been notified by the IRS that it is no longer subject to backup withholding; and • certifies that it is a U.S. citizen or other U.S. person.
A U.S. shareholder may be subject to backup withholding when it receives distributions on our shares or proceeds upon the sale, exchange, redemption, retirement or other disposition of our shares, unless the U.S. shareholder properly executes, or has previously properly executed, under penalties of perjury an IRS Form W-9 or substantially similar form that: • provides the U.S. shareholder’s correct taxpayer identification number; 29 Table of Contents • certifies that the U.S. shareholder is exempt from backup withholding because (a) it comes within an enumerated exempt category, (b) it has not been notified by the IRS that it is subject to backup withholding, or (c) it has been notified by the IRS that it is no longer subject to backup withholding; and • certifies that it is a U.S. citizen or other U.S. person.
However, even if we continue to qualify for taxation as a REIT, we may still be subject to federal tax in the following circumstances, as described below: • We will be taxed at regular corporate income tax rates on any undistributed “real estate investment trust taxable income,” determined by including our undistributed ordinary income and net capital gains, if any.
However, even if we continue to qualify for taxation as a REIT, we may still be subject to federal tax in the following circumstances, as described below: • We will be taxed at regular corporate income tax rates on any undistributed “real estate investment trust taxable income,” including our undistributed ordinary income and net capital gains, if any.
Item 1. Business Our Company. Seven Hills Realty Trust is a Maryland REIT that focuses primarily on originating and investing in floating rate first mortgage loans in the $15.0 million to $75.0 million range, secured by middle market and transitional CRE properties that have values of up to $100.0 million.
Item 1. Business Our Company. Seven Hills Realty Trust is a Maryland REIT that focuses primarily on originating and investing in floating rate first mortgage loans that range from $15.0 million to $75.0 million, secured by middle market transitional CRE properties that have values of up to $100.0 million.
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.
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 2024 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.
Because the determination as to whether a shareholder will satisfy any of the tests of Section 302(b) of the IRC depends upon the facts and circumstances at the time that our shares are redeemed, we urge you to consult your own tax advisor to determine the particular tax treatment of any redemption. Taxation of Taxable U.S.
Because the determination as to whether a shareholder will satisfy any of the tests of Section 302(b) of the IRC depends upon the facts and circumstances at the time that our shares are redeemed, we urge you to consult your own tax advisor to determine the particular tax treatment of any redemption. 25 Table of Contents Taxation of Taxable U.S.
Fiduciaries of an ERISA Plan must consider whether: • their investment in our shares or other securities satisfies the diversification requirements of ERISA; 31 Table of Contents • the investment is prudent in light of possible limitations on the marketability of our shares; • they have authority to acquire our shares or other securities under the applicable governing instrument and Title I of ERISA; and • the investment is otherwise consistent with their fiduciary responsibilities.
Fiduciaries of an ERISA Plan must consider whether: • their investment in our shares or other securities satisfies the diversification requirements of ERISA; • the investment is prudent in light of possible limitations on the marketability of our shares; • they have authority to acquire our shares or other securities under the applicable governing instrument and Title I of ERISA; and • the investment is otherwise consistent with their fiduciary responsibilities.
Also, the opinions of our tax counsel are not binding on either the IRS or a court, and either could take a position different from that expressed by our tax counsel. Our continued qualification and taxation as a REIT will depend upon our compliance with various qualification tests imposed under the IRC and summarized below.
Also, the opinions of our tax counsel are not binding on either the IRS or a court, and either could take a position different from that expressed by our tax counsel. 12 Table of Contents Our continued qualification and taxation as a REIT will depend upon our compliance with various qualification tests imposed under the IRC and summarized below.
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.
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.
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.
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. 9 Table of Contents We are committed to responsibly managing risk and preserving capital.
We expect that shareholders that are tax-exempt pension plans, individual retirement accounts or other qualifying tax-exempt entities, and that receive (a) distributions from us, or (b) proceeds from the sale of our shares, will not have such amounts treated as UBTI, provided in each case (x) that the shareholder has not financed its acquisition of our shares with “acquisition indebtedness” within the meaning of the IRC, (y) that the shares are not otherwise used in an unrelated trade or business of the tax-exempt entity, and (z) that, consistent with our present intent, we do not hold a residual interest in a real estate mortgage investment conduit or otherwise hold mortgage assets or conduct mortgage securitization activities that generate “excess inclusion” income.
We expect that shareholders that are tax-exempt pension plans, individual retirement accounts or other qualifying tax-exempt entities, and that receive (a) distributions from us, or (b) proceeds from the sale of our shares, will not have such amounts treated as UBTI, provided in each case (x) that the shareholder has not financed its acquisition of our shares with “acquisition indebtedness” within the meaning of the IRC, (y) that the shares are not otherwise used in an unrelated trade or business of the tax-exempt entity, and (z) that, consistent with our present intent, we do not hold a residual interest in a real estate mortgage investment conduit or otherwise hold mortgage assets or conduct mortgage securitization activities that generate “excess inclusion” income. 27 Table of Contents Taxation of Non-U.S.
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 .
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 .
Each class of our shares has been listed on a U.S. national securities exchange; however, we cannot be sure that our shares will continue to be so listed in future taxable years or that any class of our shares that we may issue in the future will be so listed. 28 Table of Contents Distributions.
Each class of our shares has been listed on a U.S. national securities exchange; however, we cannot be sure that our shares will continue to be so listed in future taxable years or that any class of our shares that we may issue in the future will be so listed. Distributions.
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 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. Income Tests.
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.
All services that would otherwise be provided to us by employees are provided or arranged by Tremont. As of December 31, 2024, RMR had over 1,000 employees, including Tremont’s employees, located at its headquarters and more than 35 offices throughout the United States. Corporate Citizenship.
Fiduciaries considering an investment in our securities should consult their own legal advisors as to whether the ownership of our securities involves a non-exempt prohibited transaction. “Plan Assets” Considerations The U.S.
Fiduciaries considering an investment in our securities should consult their own legal advisors as to whether the ownership of our securities involves a non-exempt prohibited transaction. 31 Table of Contents “Plan Assets” Considerations The U.S.
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.
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.
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.
As of December 31, 2024, 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, 2024, our debt to equity ratio was 1.6:1.
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.
Our investment and leverage strategies may be changed, amended, supplemented or waived at any time by our Board of Trustees without shareholder approval. Our Financing Policies.
Unless the U.S. shareholder has established on a properly executed IRS Form W-9 or substantially similar form that it comes within an enumerated exempt category, distributions or proceeds on our shares paid to it during the calendar year, and the amount of tax withheld, if any, will be reported to it and to the IRS. 30 Table of Contents Distributions on our shares to a non-U.S. shareholder during each calendar year and the amount of tax withheld, if any, will generally be reported to the non-U.S. shareholder and to the IRS.
Unless the U.S. shareholder has established on a properly executed IRS Form W-9 or substantially similar form that it comes within an enumerated exempt category, distributions or proceeds on our shares paid to it during the calendar year, and the amount of tax withheld, if any, will be reported to it and to the IRS.
In addition, specified foreign currency gains will be excluded from gross income for purposes of one or both of the gross income tests. Interest Income .
In addition, specified foreign currency gains will be excluded from gross income for purposes of one or both of the gross income tests. 17 Table of Contents Interest Income .
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.
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.
ERISA PLANS, KEOGH PLANS AND INDIVIDUAL RETIREMENT ACCOUNTS General Fiduciary Obligations The Employee Retirement Income Security Act of 1974, as amended, or ERISA, the IRC and similar provisions to those described below under applicable foreign or state law, individually and collectively, impose certain duties on persons who are fiduciaries of any employee benefit plan subject to Title I of ERISA, or an ERISA Plan, or an individual retirement account or annuity, or an IRA, a Roth IRA, a tax-favored account (such as an Archer MSA, Coverdell education savings account or health savings account), a Keogh plan or other qualified retirement plan not subject to Title I of ERISA, each a Non-ERISA Plan.
These tax consequences may not be comparable to the U.S. federal income tax consequences discussed above. 30 Table of Contents ERISA PLANS, KEOGH PLANS AND INDIVIDUAL RETIREMENT ACCOUNTS General Fiduciary Obligations The Employee Retirement Income Security Act of 1974, as amended, or ERISA, the IRC and similar provisions to those described below under applicable foreign or state law, individually and collectively, impose certain duties on persons who are fiduciaries of any employee benefit plan subject to Title I of ERISA, or an ERISA Plan, or an individual retirement account or annuity, or an IRA, a Roth IRA, a tax-favored account (such as an Archer MSA, Coverdell education savings account or health savings account), a Keogh plan or other qualified retirement plan not subject to Title I of ERISA, each a Non-ERISA Plan.
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.
As of December 31, 2024, our Board was comprised of seven Trustees, of which five were independent and two, or approximately 29%, were 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.
In addition, if we so elect by making a timely designation to our shareholders: (1) each of our U.S. shareholders will be taxed on its designated proportionate share of our retained net capital gains as though that amount were distributed and designated as a capital gain dividend; (2) each of our U.S. shareholders will receive a credit or refund for its designated proportionate share of the tax that we pay; (3) each of our U.S. shareholders will increase its adjusted basis in our shares by the excess of the amount of its proportionate share of these retained net capital gains over the U.S. shareholder’s proportionate share of the tax that we pay; and (4) both we and our corporate shareholders will make commensurate adjustments in our respective earnings and profits for federal income tax purposes.
In addition, if we so elect by making a timely designation to our shareholders: (1) each of our U.S. shareholders will be taxed on its designated proportionate share of our retained net capital gains as though that amount were distributed and designated as a capital gain dividend; (2) each of our U.S. shareholders will receive a credit or refund for its designated proportionate share of the tax that we pay; (3) each of our U.S. shareholders will increase its adjusted basis in our shares by the excess of the amount of its proportionate share of these retained net capital gains over the U.S. shareholder’s proportionate share of the tax that we pay; and (4) both we and our corporate shareholders will make commensurate adjustments in our respective earnings and profits for federal income tax purposes. 26 Table of Contents Distributions in excess of our current or accumulated earnings and profits will not be taxable to a U.S. shareholder to the extent that they do not exceed the shareholder’s adjusted tax basis in our shares, but will reduce the shareholder’s basis in such shares.
Foreclosure property is generally any real property, including interests in real property, and any personal property incident to such real property: • that is acquired by a REIT as a result of the REIT having bid on such property at foreclosure, or having otherwise reduced such property to ownership or possession by agreement or process of law, after there was a default or when default was imminent on a lease of such property or on indebtedness that such property secured; • for which any related loan acquired by the REIT was acquired at a time when the default was not imminent or anticipated; and • for which the REIT makes a proper election to treat the property as foreclosure property.
Foreclosure property is generally any real property, including interests in real property, and any personal property incident to such real property: • that is acquired by a REIT as a result of the REIT having bid on such property at foreclosure, or having otherwise reduced such property to ownership or possession by agreement or process of law, after there was a default or when default was imminent on a lease of such property or on indebtedness that such property secured; • for which any related loan acquired by the REIT was acquired at a time when the default was not imminent or anticipated; and • for which the REIT makes a proper election to treat the property as foreclosure property. 19 Table of Contents For purposes of the 75% and 95% gross income tests, all income from the property will be qualifying income as long as the property qualifies as foreclosure property.
We also believe that RMR’s broad platform provides us with access to its extensive network of real estate owners, operators, intermediaries, sponsors, financial institutions and other real estate related professionals and businesses with which RMR has historical relationships.
We also believe that RMR’s broad platform provides us with access to its extensive network of real estate owners, operators, intermediaries, sponsors, financial institutions and other real estate related professionals and businesses with which RMR has historical relationships. We also believe that Tremont provides us with significant experience and expertise in investing in middle market and transitional CRE.
These relief provisions may apply to a failure of the applicable asset tests even if the failure first occurred in a year prior to the taxable year in which the failure was discovered. 23 Table of Contents The IRC also provides an excepted securities safe harbor to the 10% value test that includes among other items (a) “straight debt” securities, (b) specified rental agreements in which payment is to be made in subsequent years, (c) any obligation to pay “rents from real property,” (d) securities issued by governmental entities that are not dependent in whole or in part on the profits of or payments from a nongovernmental entity, and (e) any security issued by another REIT.
The IRC also provides an excepted securities safe harbor to the 10% value test that includes among other items (a) “straight debt” securities, (b) specified rental agreements in which payment is to be made in subsequent years, (c) any obligation to pay “rents from real property,” (d) securities issued by governmental entities that are not dependent in whole or in part on the profits of or payments from a nongovernmental entity, and (e) any security issued by another REIT.
For additional information about competition and other risks associated with our business, see Item 1A, “Risk Factors—We operate in a highly competitive market for investment opportunities and competition may limit our ability to originate or acquire our target investments on attractive terms or at all and could also affect the pricing of any investment opportunities” in this Annual Report on Form 10-K.
For additional information about competition and other risks associated with our business, see Item 1A, “Risk Factors—We operate in a highly competitive market for investment opportunities and competition may limit our ability to originate or acquire our target investments on attractive terms or at all” in this Annual Report on Form 10-K. Our Manager, Tremont Realty Capital LLC.
U.S. shareholders are urged to consult their tax advisors regarding the application of the 3.8% Medicare tax. 27 Table of Contents If a U.S. shareholder recognizes a loss upon a disposition of our shares in an amount that exceeds a prescribed threshold, it is possible that the provisions of Treasury regulations involving “reportable transactions” could apply, with a resulting requirement to separately disclose the loss-generating transaction to the IRS.
If a U.S. shareholder recognizes a loss upon a disposition of our shares in an amount that exceeds a prescribed threshold, it is possible that the provisions of Treasury regulations involving “reportable transactions” could apply, with a resulting requirement to separately disclose the loss-generating transaction to the IRS.
If as expected our shares are not USRPIs, then a non-U.S. shareholder’s gain on the sale of these shares generally will not be subject to U.S. federal income taxation or withholding. 29 Table of Contents Our shares will not constitute USRPIs if we are not, at relevant testing dates in the preceding five years, a “United States real property holding corporation.” Whether we are a United States real property holding corporation depends upon whether the fair market value of USRPIs owned by us equals or exceeds 50% of the sum of the fair market value of these interests, any interests in real estate outside of the United States, and our other trade and business assets.
Our shares will not constitute USRPIs if we are not, at relevant testing dates in the preceding five years, a “United States real property holding corporation.” Whether we are a United States real property holding corporation depends upon whether the fair market value of USRPIs owned by us equals or exceeds 50% of the sum of the fair market value of these interests, any interests in real estate outside of the United States, and our other trade and business assets.
In addition, if we fail the 5% asset test, the 10% vote test or the 10% value test at the close of any quarter and we do not cure such failure within 30 days after the close of that quarter, that failure will nevertheless be excused if (a) the failure is de minimis and (b) within six months after the last day of the quarter in which we identify the failure, we either dispose of the assets causing the failure or otherwise satisfy the 5% asset test, the 10% vote test and the 10% value test.
When a failure to satisfy the above asset tests results from an acquisition of securities or other property during a quarter, the failure can be cured by disposition of sufficient nonqualifying assets within 30 days after the close of that quarter. 22 Table of Contents In addition, if we fail the 5% asset test, the 10% vote test or the 10% value test at the close of any quarter and we do not cure such failure within 30 days after the close of that quarter, that failure will nevertheless be excused if (a) the failure is de minimis and (b) within six months after the last day of the quarter in which we identify the failure, we either dispose of the assets causing the failure or otherwise satisfy the 5% asset test, the 10% vote test and the 10% value test.
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.
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. 14 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.
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.
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.
The financial services industry and CRE markets are highly competitive. We compete with a variety of banks, insurance companies, other financial institutions, specialty finance companies and public and private funds, including mortgage REITs, that Tremont, RMR or their subsidiaries currently, or may in the future, sponsor, advise or manage.
We compete with a variety of banks, insurance companies, other financial institutions, specialty finance companies and public and private funds, including mortgage REITs, that Tremont, RMR or their subsidiaries currently, or may in the future, sponsor, advise or manage. Some of our competitors may have a lower cost of funds and greater financial and other resources than we have.
Some of our competitors may have a lower cost of funds and greater financial and other resources than we have. Many of our competitors are not subject to the operating constraints associated with maintaining REIT status, SEC reporting compliance or maintaining an exemption from registration as an investment company under the 1940 Act.
Many of our competitors are not subject to the operating constraints associated with maintaining REIT status, SEC reporting compliance or maintaining an exemption from registration as an investment company under the 1940 Act.
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 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.
In addition, any corporation (other than a REIT and other than a QRS) in which a TRS directly or indirectly owns more than 35% of the voting power or value of the outstanding securities is automatically a TRS (excluding, for this purpose, certain “straight debt” securities).
Our ownership of stock and other securities in our TRSs is exempt from the 5% asset test, the 10% vote test and the 10% value test discussed below. 16 Table of Contents In addition, any corporation (other than a REIT and other than a QRS) in which a TRS directly or indirectly owns more than 35% of the voting power or value of the outstanding securities is automatically a TRS (excluding, for this purpose, certain “straight debt” securities).
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.
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. 15 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.
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 .
We have had and may in the future 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.
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.
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.
In addition, we do not expect or intend to impose in the future, or to permit any person to impose on our behalf, any limitations or restrictions on transfer that would not be among the enumerated permissible limitations or restrictions.
We believe that the restrictions imposed under our declaration of trust on the transfer of shares do not result in the failure of our shares to be “freely transferable.” In addition, we do not expect or intend to impose in the future, or to permit any person to impose on our behalf, any limitations or restrictions on transfer that would not be among the enumerated permissible limitations or restrictions in the regulation.
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.
As of December 31, 2024, we had a portfolio of 21 floating rate first mortgage loans with aggregate loan commitments of $641.2 million with a weighted average maximum maturity of 2.6 years, a weighted average coupon rate of 8.24% and a weighted average all in yield of 8.62%.
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.
As of December 31, 2024, we had a portfolio of 21 loans held for investment with a total commitment of $641.2 million, of which $30.4 million remained unfunded.
Because our ability to raise capital depends, in large part, upon market conditions, we cannot be sure that we will be able to raise sufficient capital to fund our growth strategies. We expect to repay our debts through repayments from our borrowers on loans held for investment.
Because our ability to raise capital depends, in large part, upon market conditions, we cannot be sure that we will be able to raise sufficient capital to fund our growth strategies.
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.
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.
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.
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.
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).
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).
If a dividend is declared in October, November or December to shareholders of record during one of those months and is paid during the following January, then for federal income tax purposes such dividend will be treated as having been both paid and received on December 31 of the prior taxable year to the extent of any undistributed earnings and profits.
If a dividend is declared in October, November or December to shareholders of record during one of those months and is paid during the following January, then for federal income tax purposes such dividend will be treated as having been both paid and received on December 31 of the prior taxable year to the extent of any undistributed earnings and profits. 23 Table of Contents The 90% distribution requirements may be waived by the IRS if a REIT establishes that it failed to meet them by reason of distributions previously made to meet the requirements of the 4% excise tax discussed below.
We and our shareholders may also be subject to taxation by state, local or other jurisdictions, including those in which we or our shareholders transact business or reside. These tax consequences may not be comparable to the U.S. federal income tax consequences discussed above.
We and our shareholders may also be subject to taxation by state, local or other jurisdictions, including those in which we or our shareholders transact business or reside.
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 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.
Finally, with the exception of specified rental arrangements with our TRSs (including in respect of lodging facilities or health care facilities), rental income will qualify as “rents from real property” only to the extent that we do not directly or constructively hold a 10% or greater interest, as measured by vote or value, in the lessee’s equity.
Finally, with the exception of specified rental arrangements with our TRSs (including in respect of lodging facilities or health care facilities), rental income will qualify as “rents from real property” only to the extent that we do not directly or constructively hold a 10% or greater interest, as measured by vote or value, in the lessee’s equity. 20 Table of Contents 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.
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.
Portnoy and Jordan are our Managing Trustees. Our President and Chief Investment Officer, Thomas J. Lorenzini, our Chief Financial Officer and Treasurer, Fernando Diaz, and our Vice President, Jared R. Lewis are officers and employees of Tremont and/or RMR.
Tremont is an investment adviser registered with the SEC, that is owned by RMR, the majority owned operating subsidiary of The RMR Group Inc., or RMR Inc., a holding company listed on The Nasdaq Stock Market LLC, or Nasdaq. RMR is an alternative asset management company that is focused on CRE and related businesses.
Tremont manages our day to day operations, subject to the oversight and direction of our Board of Trustees. Tremont is an investment adviser registered with the SEC, that is owned by RMR, the majority owned operating subsidiary of The RMR Group Inc., or RMR Inc., a holding company listed on The Nasdaq Stock Market LLC, or Nasdaq.
There is limited case law or administrative guidance addressing the treatment of mezzanine loans and preferred equity investments as debt or equity for federal income tax purposes. We expect that our mezzanine loans generally will be treated as debt for federal income tax purposes, and our preferred equity investments generally will be treated as equity for federal income tax purposes.
We expect that our mezzanine loans generally will be treated as debt for federal income tax purposes, and our preferred equity investments generally will be treated as equity for federal income tax purposes.
We may make some mezzanine loans that do not qualify for that safe harbor and that do not qualify as “straight debt” securities or for one of the other exclusions from the definition of “securities” for purposes of the 5% asset test and 10% asset tests; nevertheless, we expect that these investments will not impact our ability to satisfy the applicable REIT asset tests. 22 Table of Contents As discussed above under “—Interest Income,” where a loan is secured by real property and other property and the highest principal amount of the loan outstanding during a taxable year exceeds the fair market value of the real property securing the loan as of (a) the date we agreed to acquire or originate the loan or (b) in the event of a significant modification, the date we modified the loan, then a portion of the interest income from such a loan will not be qualifying income for purposes of the 75% gross income test but will be qualifying income for purposes of the 95% gross income test.
As discussed above under “—Interest Income,” where a loan is secured by real property and other property and the highest principal amount of the loan outstanding during a taxable year exceeds the fair market value of the real property securing the loan as of (a) the date we agreed to acquire or originate the loan or (b) in the event of a significant modification, the date we modified the loan, then a portion of the interest income from such a loan will not be qualifying income for purposes of the 75% gross income test but will be qualifying income for purposes of the 95% gross income test.
We will be treated as having sufficient earnings and profits to treat as a dividend any distribution by us up to the amount required to be distributed in order to avoid imposition of the 4% excise tax. 24 Table of Contents Due to timing differences between the actual receipt of cash and the inclusion of items of income by us for U.S. federal income tax purposes, it is possible that, from time to time, we may not have enough cash or other liquid assets to meet our distribution requirements.
Due to timing differences between the actual receipt of cash and the inclusion of items of income by us for U.S. federal income tax purposes, it is possible that, from time to time, we may not have enough cash or other liquid assets to meet our distribution requirements.
Our tax counsel, Sullivan & Worcester LLP, is of the opinion that, although the matter is not free from doubt, our investments in the equity or debt of a TRS of ours, to the extent that and during the period in which they qualify as temporary investments of new capital, will be treated as real estate assets, and not as securities, for purposes of the above REIT asset tests.
Our stock and other securities in a TRS are exempted from these 5% and 10% asset tests. • Not more than 20% of the value of our total assets may be represented by stock or other securities of our TRSs. • Not more than 25% of the value of our total assets may be represented by “nonqualified publicly offered REIT debt instruments” as defined in Section 856(c)(5)(L)(ii) of the IRC. 21 Table of Contents Our tax counsel, Sullivan & Worcester LLP, is of the opinion that, although the matter is not free from doubt, our investments in the equity or debt of a TRS of ours, to the extent that and during the period in which they qualify as temporary investments of new capital, will be treated as real estate assets, and not as securities, for purposes of the above REIT asset tests.
To summarize, the preferential federal income tax rates for long-term capital gains and for qualified dividends generally apply to: (1) long-term capital gains, if any, recognized on the disposition of our shares; (2) our distributions designated as long-term capital gain dividends; (3) our dividends attributable to dividend income, if any, received by us from C corporations such as TRSs; (4) our dividends attributable to earnings and profits that we inherit from C corporations; and (5) our dividends to the extent attributable to income upon which we have paid federal corporate income tax (such as taxes on foreclosure property income), net of the corporate income taxes thereon. 26 Table of Contents As long as we qualify for taxation as a REIT, a distribution to our U.S. shareholders that we do not designate as a capital gain dividend generally will be treated as an ordinary income dividend to the extent of our available current or accumulated earnings and profits (subject to the lower effective tax rates applicable to qualified REIT dividends via the deduction-without-outlay mechanism of Section 199A of the IRC, which is generally available to our noncorporate U.S. shareholders that meet specified holding period requirements for taxable years before 2026).
As long as we qualify for taxation as a REIT, a distribution to our U.S. shareholders that we do not designate as a capital gain dividend generally will be treated as an ordinary income dividend to the extent of our available current or accumulated earnings and profits (subject to the lower effective tax rates applicable to qualified REIT dividends via the deduction-without-outlay mechanism of Section 199A of the IRC, which is generally available to our noncorporate U.S. shareholders that meet specified holding period requirements for taxable years before 2026).
If, contrary to our expectation, a class of our shares was not listed on a U.S. national securities exchange and we made a distribution on those shares that was attributable to gain from the sale or exchange of a USRPI, then a non-U.S. shareholder holding those shares would be taxed as if the distribution was gain effectively connected with a trade or business in the United States conducted by the non-U.S. shareholder.
Treasury regulations also provide special rules to determine whether, for purposes of determining the applicability of a tax treaty, our distributions to a non-U.S. shareholder that is an entity should be treated as paid to the entity or to those owning an interest in that entity, and whether the entity or its owners are entitled to benefits under the tax treaty. 28 Table of Contents If, contrary to our expectation, a class of our shares was not listed on a U.S. national securities exchange and we made a distribution on those shares that was attributable to gain from the sale or exchange of a USRPI, then a non-U.S. shareholder holding those shares would be taxed as if the distribution was gain effectively connected with a trade or business in the United States conducted by the non-U.S. shareholder.
Although we cannot be sure, we believe our common shares have been and will remain widely held, and we expect the same to be true of any future class of equity that we may issue. 32 Table of Contents The regulation provides that whether a security is “freely transferable” is a factual question to be determined on the basis of all relevant facts and circumstances.
Although we cannot be sure, we believe our common shares have been and will remain widely held, and we expect the same to be true of any future class of equity that we may issue.
To the extent that any of our mezzanine loans do not meet all of the requirements for reliance on the IRS safe harbor, however, we cannot be sure that the IRS will not challenge the tax treatment of these loans.
To the extent that any of our mezzanine loans do not meet all of the requirements for reliance on the IRS safe harbor, however, we cannot be sure that the IRS will not challenge the tax treatment of these loans. 18 Table of Contents There is limited case law or administrative guidance addressing the treatment of mezzanine loans and preferred equity investments as debt or equity for federal income tax purposes.
For further information regarding our financing sources and activities, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in this Annual Report on Form 10-K. Our Board of Trustees may change our financing policies at any time without a vote of, or notice to, our shareholders. Competition.
For further information regarding our debt agreements and our financing sources and activities, see Note 5 to our Consolidated Financial Statements included in Part IV, Item 15 and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” of this Annual Report on Form 10-K.
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.
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.
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.
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, 2024, 96.1% of our loan portfolio by principal outstanding had interest rate floors in place with a weighted average floor of 2.12%.
This opinion is conditioned upon certain assumptions and representations, as discussed above under the heading “Material United States Federal Income Tax Considerations—Taxation as a REIT.”
This opinion is conditioned upon certain assumptions and representations, as discussed above under the heading “Material United States Federal Income Tax Considerations—Taxation as a REIT.” Also, the opinion of our tax counsel is not binding on either the Department of Labor or a court, and either could take a position different from that expressed by our tax counsel.
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.
As of December 31, 2024, RMR Inc. had over $40 billion of real estate assets under management and the combined RMR managed companies had more than $5 billion of annual revenues, approximately 2,000 properties and over 18,000 employees.
As 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.
As of December 31, 2024, SOFR was 4.33%, and as a result, one of our loan investments had an active interest rate floor. 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.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeAs 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.
Biggest changeAs 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.
Risks Relating to Taxation Our failure to remain qualified for taxation as a REIT under the IRC could have significant adverse consequences. As a REIT, we generally do not pay federal or most state income taxes as long as we distribute all of our REIT taxable income and meet other qualifications set forth in the IRC.
Risks Relating to Our Taxation Our failure to remain qualified for taxation as a REIT under the IRC could have significant adverse consequences. As a REIT, we generally do not pay federal or most state income taxes as long as we distribute all of our REIT taxable income and meet other qualifications set forth in the IRC.
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.
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; 37 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; • 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, 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.
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.
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; 51 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.
We intend to continue to make regular quarterly distributions to our shareholders, but we may not be able to increase or maintain such a distribution rate for various reasons, including: • our ability to sustain or increase the rate of distributions may be adversely affected if any of the risks described in our Annual Report on Form 10-K occur; • we may not have enough cash to pay such distributions as a result of changes in our cash requirements, cash flow or financial position; • our payment of distributions is subject to restrictions contained in the agreements governing our debt and may be subject to restrictions in future debt obligations we may incur; during the continuance of any event of default under the agreements governing our debt, we may be limited or in some cases prohibited from paying distributions to our shareholders; and • the timing, amount and form of any distributions will be determined at the discretion of our Board of Trustees and will depend on various factors that our Board of Trustees deems relevant, including, but not limited to our historical and projected income, our Distributable Earnings, Distributable Earnings per common share, Adjusted Distributable Earnings and Adjusted Distributable Earnings per common share, our expectations of future capital requirements and operating performance and our expected needs for cash to pay our obligations and fund our investments, requirements to maintain our qualification for taxation as a REIT and limitations in our Secured Financing Facilities.
We intend to continue to make regular quarterly distributions to our shareholders, but we may not be able to increase or maintain such a distribution rate for various reasons, including: • our ability to sustain or increase the rate of distributions may be adversely affected if any of the risks described in our Annual Report on Form 10-K occur; 58 Table of Contents • we may not have enough cash to pay such distributions as a result of changes in our cash requirements, cash flow or financial position; • our payment of distributions is subject to restrictions contained in the agreements governing our debt and may be subject to restrictions in future debt obligations we may incur; during the continuance of any event of default under the agreements governing our debt, we may be limited or in some cases prohibited from paying distributions to our shareholders; and • the timing, amount and form of any distributions will be determined at the discretion of our Board of Trustees and will depend on various factors that our Board of Trustees deems relevant, including, but not limited to our historical and projected income, our Distributable Earnings, Distributable Earnings per common share, Adjusted Distributable Earnings and Adjusted Distributable Earnings per common share, our expectations of future capital requirements and operating performance and our expected needs for cash to pay our obligations and fund our investments, requirements to maintain our qualification for taxation as a REIT and limitations in our Secured Financing Facilities.
The current situation related to SVB, Signature and other regional banks could in the future lead to further rules and regulations for public companies, banks, financial institutions and other participants in the U.S. and global capital markets, and complying with the requirements of any such rules or regulations may be burdensome.
The situation related to SVB, Signature and other regional banks could in the future lead to further rules and regulations for public companies, banks, financial institutions and other participants in the U.S. and global capital markets, and complying with the requirements of any such rules or regulations may be burdensome.
If we or our subsidiaries fail to maintain an exception or exemption from the 1940 Act, we could, among other things, be required either to: (1) change the manner in which we conduct our operations to avoid being required to register as an investment company under the 1940 Act; (2) sell our assets in a manner that, or at a time when, we would not otherwise choose to do so; or (3) register as an investment company, any of which could negatively affect the sustainability of our business and our ability to pay distributions, which could have an adverse effect on our business and the market value for our common shares.
If we or our subsidiaries fail to maintain an exception or exemption from the 1940 Act, we could, among other things, be required either to: (1) change the manner in which we conduct our operations to avoid being required to register as an investment company under the 1940 Act; (2) sell our assets in a manner that, or at a time when, we would not otherwise choose to do so; or (3) register as an investment company, any of which could negatively affect the sustainability of our business and our ability to pay distributions, which could have an adverse effect on our business and the market price for our common shares.
If 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.
If 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. 34 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.
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.
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 41 Table of Contents • requirements that loan forms be submitted for review.
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 market conditions could adversely affect the market value of our securities. As with other publicly traded equity securities and REIT securities, the market price of our common shares and other securities depends on various market conditions that are subject to change from time to time.
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.
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, 1.3% of Industrial Logistics Properties Trust’s outstanding common shares, 1.2% of Service Properties Trust’s outstanding common shares and 1.1% of Office Properties Income 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. 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.
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. 36 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 do not have other funds available in these situations, among other things, we may borrow funds on unfavorable terms, sell investments at disadvantageous prices or distribute amounts that would otherwise be invested in future acquisitions in order to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year.
If we do not have other funds available in these situations, among other things, we may borrow funds on unfavorable terms, sell investments at disadvantageous prices or distribute amounts that would otherwise be invested in future acquisitions in order to pay distributions sufficient to enable us to distribute enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year.
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.
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; 32 Table of Contents • 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 current economic conditions, including inflation, uncertainty surrounding interest rates and 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.
Government securities and cash items) on an unconsolidated basis, or if one or more of our subsidiaries fails to maintain an exception or exemption from the 1940 Act, we could, among other things, be required to either: (1) substantially change the manner in which we conduct our operations to avoid being required to register as an investment company under the 1940 Act; or (2) register as an investment company under the 1940 Act, either of which could have an adverse effect on us and the market value of our common shares.
Government securities and cash items) on an unconsolidated basis, or if one or more of our subsidiaries fails to maintain an exception or exemption from the 1940 Act, we could, among other things, be required to either: (1) substantially change the manner in which we conduct our operations to avoid being required to register as an investment company under the 1940 Act; or (2) register as an investment company under the 1940 Act, either of which could have an adverse effect on us and the market price of our common shares.
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.
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. 33 Table of Contents Our business is subject to a number of risks and uncertainties.
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.
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; 38 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, 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.
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.
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. 42 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.
Policy changes could adversely affect the market value of our common shares and our ability to pay distributions to our shareholders. Further, our organizational documents do not limit the amount or percentage of indebtedness, funded or otherwise, that we may incur. Our Board of Trustees may alter or eliminate our current policy on borrowing at any time without shareholder approval.
Policy changes could adversely affect the market price of our common shares and our ability to pay distributions to our shareholders. Further, our organizational documents do not limit the amount or percentage of indebtedness, funded or otherwise, that we may incur. Our Board of Trustees may alter or eliminate our current policy on borrowing at any time without shareholder approval.
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.
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. 35 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.
In addition, in certain circumstances we may be liable for the actions of our partners or co-venturers. 44 Table of Contents RMR and Tremont rely on information technology and systems in their respective operations, and any material failure, inadequacy, interruption or security breach of that technology or those systems could materially and adversely affect us.
In addition, in certain circumstances we may be liable for the actions of our partners or co-venturers. 43 Table of Contents RMR and Tremont rely on information technology and systems in their respective operations, and any material failure, inadequacy, interruption or security breach of that technology or those systems could materially and adversely affect us.
Furthermore, the management and resolution of CRE increases our costs and requires significant commitments of time from our management and directors, which can be detrimental to the performance of their other responsibilities. 40 Table of Contents REIT distribution requirements may adversely impact our ability to carry out our business plan.
Furthermore, the management and resolution of CRE increases our costs and requires significant commitments of time from our management and directors, which can be detrimental to the performance of their other responsibilities. 39 Table of Contents REIT distribution requirements may adversely impact our ability to carry out our business plan.
Real property we may own in the future but do not use in the ordinary course of our operations subjects us to risks particular to CRE property. We have in the past owned, and may own in the future, certain properties as a result of foreclosure of loans secured by such properties.
Real property we own or may own in the future, but do not use in the ordinary course of our operations subjects us to risks particular to CRE property. We currently own, have in the past owned, and may own in the future, certain properties as a result of foreclosure of loans secured by such properties.
If a shareholder sells our common shares that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market value of our common shares at the time of the sale.
If a shareholder sells our common shares that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common shares at the time of the sale.
If the market value of our common shares does not increase or declines, our cost of equity capital will remain high or further increase, and we may not be able to practically or otherwise raise equity capital by issuing additional equity securities.
If the market price of our common shares does not increase or declines, our cost of equity capital will remain high or further increase, and we may not be able to practically or otherwise raise equity capital by issuing additional equity securities.
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.
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, 2024, Mr.
Conflicts of interest or the perception of conflicts of interest could have a material adverse impact on our reputation, business and the market value of our common shares and other securities and we may be subject to increased risk of litigation as a result.
Conflicts of interest or the perception of conflicts of interest could have a material adverse impact on our reputation, business and the market price of our common shares and other securities and we may be subject to increased risk of litigation as a result.
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.
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. 50 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.
It is possible, however, that the IRS may assert that we did not own the assets during the term of the applicable sale and repurchase agreement, in which case our qualification for taxation as a REIT may be jeopardized. 57 Table of Contents Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
It is possible, however, that the IRS may assert that we did not own the assets during the term of the applicable sale and repurchase agreement, in which case our qualification for taxation as a REIT may be jeopardized. Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
If we collect less on the debt instrument than our purchase price plus the market discount we had previously reported as income, we may not be able to benefit from any offsetting loss deductions. Moreover, some of the CMBS that we might acquire may have been issued with original issue discount.
If we collect less on the debt instrument than our purchase price plus the market discount we had previously reported as income, we may not be able to benefit from any offsetting loss deductions. 57 Table of Contents Moreover, some of the CMBS that we might acquire may have been issued with original issue discount.
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 of December 31, 2024, 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.
We cannot predict the ultimate content, timing or effect of legislative and/or regulatory action under the Biden Administration nor the impact of such changes on our business and operations. Further, loans that we originate or acquire may be subject to U.S. federal, state or local laws.
We cannot predict the ultimate content, timing or effect of legislative and/or regulatory action under the second Trump Administration nor the impact of such changes on our business and operations. Further, loans that we originate or acquire may be subject to U.S. federal, state or local laws.
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.
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. 49 Table of Contents Tremont does not guaranty our performance; moreover, we could experience poor performance or losses for which Tremont would not be liable.
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.
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. 53 Table of Contents We cannot be sure that the SEC staff will concur with our classification of our assets.
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.
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. 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.
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.
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.
Certain of our Independent Trustees also serve as independent directors or independent trustees of other public companies to which RMR or its subsidiaries provide management services. 47 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 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. As of December 31, 2023, our portfolio consisted of 24 first mortgage loans.
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. As of December 31, 2024, our portfolio consisted of 21 first mortgage loans.
In addition, the Biden Administration is taking a more active approach to economic and financial regulation than the Trump Administration, particularly to promote policy goals involving climate change, racial equity, ESG matters, cybersecurity, consumer financial protection and infrastructure.
In addition, the Biden Administration took a more active approach to economic and financial regulation than the first Trump Administration, particularly to promote policy goals involving climate change, racial equity, ESG matters, cybersecurity, consumer financial protection and infrastructure.
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.
Sales of our common shares may cause a decline in the market price of our common shares. 40 Table of Contents Third party expectations relating to ESG factors may impose additional costs and expose us to new risks.
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.
As of December 31, 2024, we had $370.1 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.
We operate in a highly competitive market for investment opportunities. We compete with a variety of institutional investors, including other mortgage REITs, specialty finance companies, public and private funds (including mortgage REITs, funds or investors that Tremont, RMR or their subsidiaries currently, or may in the future, sponsor, advise or manage), banks, and insurance companies and other financial institutions.
We compete with a variety of institutional investors, including other mortgage REITs, specialty finance companies, public and private funds (including mortgage REITs, funds or investors that Tremont, RMR or their subsidiaries currently, or may in the future, sponsor, advise or manage), banks, and insurance companies and other financial institutions.
We generally must distribute annually at least 90% of our REIT taxable income, subject to specified adjustments and excluding any net capital gain, in order to maintain our qualification for taxation as a REIT under the IRC.
REIT distribution requirements could adversely affect us and our shareholders. We generally must distribute annually at least 90% of our REIT taxable income, subject to specified adjustments and excluding any net capital gain, in order to maintain our qualification for taxation as a REIT under the IRC.
In addition, the IRS might argue that a particular property did not qualify for a foreclosure property election or that its status as foreclosure property terminated prematurely, possibly causing us to fail one or both REIT gross income tests or causing any gain from sale of such property to be subject to the prohibited transaction tax. 55 Table of Contents REIT distribution requirements could adversely affect us and our shareholders.
In addition, the IRS might argue that a particular property did not qualify for a foreclosure property election or that its status as foreclosure property terminated prematurely, possibly causing us to fail one or both REIT gross income tests or causing any gain from sale of such property to be subject to the prohibited transaction tax.
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 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.
A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions at a gain of property, other than foreclosure property but including mortgage loans, held primarily for sale to customers in the ordinary course of business.
In general, prohibited transactions are sales or other dispositions at a gain of property, other than foreclosure property but including mortgage loans, held primarily for sale to customers in the ordinary course of business.
Unfavorable market, economic and CRE industry conditions may be due to, among other things, rising or sustained high interest rates and inflation, labor market challenges, supply chain disruptions, volatility in the capital markets, pandemics (such as the COVID-19 pandemic) or other public health safety concerns, geopolitical instability (such as the war in Ukraine), and other conditions beyond our control.
Unfavorable market, economic and CRE industry conditions may be due to, among other things, uncertainty surrounding interest rates or sustained high interest rates and inflation, labor market challenges, supply chain disruptions, volatility in the capital markets, pandemics or other public health safety concerns, geopolitical instability (such as the war in Ukraine and conflicts in the Middle East), the new presidential administration, and other conditions beyond our control.
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.
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.
There is an increasing focus from investors, borrowers, tenants, and their customers, employees, other stakeholders and regulators concerning corporate sustainability, specifically related to ESG factors.
There remains a continued focus from investors, borrowers, tenants, and their customers, employees, other stakeholders and regulators concerning corporate sustainability, specifically related to ESG factors.
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 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. 48 Table of Contents Our management agreement’s fee and expense structure may not create proper incentives for Tremont.
Our bylaws currently provide that, unless the dispute has been referred to binding arbitration, the Circuit Court for Baltimore City, Maryland will be the sole and exclusive forum for: (1) any derivative action or proceeding brought on our behalf; (2) any action asserting a claim for breach of a fiduciary duty owed by any of our Trustees, officers, manager or other agents to us or our shareholders; (3) any action asserting a claim against us or any of our Trustees, officers, manager or other agents arising pursuant to Maryland law, our declaration of trust or bylaws brought by or on behalf of a shareholder, either on his, her or its own behalf, on our behalf or on behalf of any series or class of our shareholders or shareholders against us or any of our Trustees, officers, manager or other agents, including any claims relating to the meaning, interpretation, effect, validity, performance or enforcement of our declaration of trust or bylaws; or (4) any action asserting a claim against us or any of our Trustees, officers, manager or other agents that is governed by the internal affairs doctrine of the State of Maryland.
Our bylaws currently provide that, other than any action arising under the Securities Act of 1933, as amended, or the Securities Act, the Circuit Court for Baltimore City, Maryland will be the sole and exclusive forum for: (1) any Internal Corporate Claim, as such term is defined under the Maryland General Corporation Law; (2) any derivative action or proceeding brought on our behalf; (3) any action asserting a claim for breach of a fiduciary duty owed by any of our Trustees, officers, manager or other agents to us or our shareholders; (4) any action asserting a claim against us or any of our Trustees, officers, manager or other agents arising pursuant to Maryland law, our declaration of trust or bylaws, including any disputes, claims or controversies brought by or on behalf of a shareholder, either on his, her or its own behalf, on our behalf or on behalf of any series or class of our shareholders or shareholders against us or any of our Trustees, officers, manager or other agents, including any claims relating to the meaning, interpretation, effect, validity, performance or enforcement of our declaration of trust or bylaws; or (5) any action asserting a claim against us or any of our Trustees, officers, manager or other agents that is governed by the internal affairs doctrine of the State of Maryland.
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 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.
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 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.
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.
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.
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.
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. 46 Table of Contents Risks Relating to Our Relationships with Tremont and RMR We are dependent upon Tremont and its personnel.
In the event we own a mezzanine loan that does not meet the safe harbor requirements and the IRS successfully challenges the loan’s treatment as a real estate asset for purposes of the REIT asset and income tests, then we could fail to remain qualified for taxation as a REIT under the IRC.
In the event we own a mezzanine loan that does not meet the safe harbor requirements and the IRS successfully challenges the loan’s treatment as a real estate asset for purposes of the REIT asset and income tests, then we could fail to remain qualified for taxation as a REIT under the IRC. 56 Table of Contents We may fail to remain qualified for taxation as a REIT under the IRC if the IRS successfully challenges the treatment of our mezzanine loans as debt for federal income tax purposes or successfully challenges the treatment of our preferred equity investments as equity for federal income tax purposes.
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.
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. 44 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.
Other risks of which we are not yet aware, or that we currently believe are not material, may also materially and adversely impact our business operations or financial results.
The risks described below may not be the only risks we face but are risks we believe may be material at this time. Other risks of which we are not yet aware, or that we currently believe are not material, may also materially and adversely impact our business operations or financial results.
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.
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.
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.
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. 45 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.
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.
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.
Termination of our management agreement without a cause event will be difficult and costly.
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.
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.
In order to meet these requirements, it may be necessary for us to sell or forgo attractive investments. 54 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 price of our common shares could decline.
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.
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.
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.
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.
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.
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.
More favorable rates will nevertheless continue to apply to regular corporate “qualified” dividends, which may cause some investors to perceive that an investment in a REIT is less attractive than an investment in a non-REIT entity that pays dividends, thereby reducing the demand and market value of our common shares. 56 Table of Contents Even if we remain qualified for taxation as a REIT under the IRC, we may face other tax liabilities that reduce our cash flow.
More favorable rates will nevertheless continue to apply to regular corporate “qualified” dividends, which may cause some investors to perceive that an investment in a REIT is less attractive than an investment in a non-REIT entity that pays dividends, thereby reducing the demand and market price of our common shares.
Taxable shareholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, shareholders may be required to pay income taxes with respect to these dividends in excess of the cash dividends received.
We may in the future distribute taxable dividends that are payable in part in shares. Taxable shareholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes.
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.
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. 52 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.
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.
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.
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.
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.
Investors and prospective investors should consider the risks described below and the information contained under the caption “Warning Concerning Forward-Looking Statements” and elsewhere in this Annual Report on Form 10-K before deciding whether to invest in our securities. 34 Table of Contents Risks Relating to our Business We operate in a highly competitive market for investment opportunities and competition may limit our ability to originate or acquire target investments on attractive terms or at all.
Investors and prospective investors should consider the risks described below and the information contained under the caption “Warning Concerning Forward-Looking Statements” and elsewhere in this Annual Report on Form 10-K before deciding whether to invest in our securities.
Government securities and cash items) on an unconsolidated basis. This requirement limits the types of businesses in which we may engage through subsidiaries.
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.
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.
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.
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.
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. Item 1B. Unresolved Staff Comments None.
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.
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 in the future choose to pay dividends in our common shares, in which case shareholders may be required to pay income taxes in excess of the cash dividends that they receive. We may in the future distribute taxable dividends that are payable in part in shares.
Thus, compliance with the REIT distribution requirements may hinder our ability to grow, which could cause the market price of our common shares to decline. 55 Table of Contents We may in the future choose to pay dividends in our common shares, in which case shareholders may be required to pay income taxes in excess of the cash dividends that they receive.
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.
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.
Furthermore, in such an event, our common shares could become ineligible for inclusion in those market indexes that exclude UBTI-generating stock, which could adversely affect demand for our common shares and the market value of our common shares. 58 Table of Contents The tax on prohibited transactions limits our ability to engage in transactions, including some methods of securitizing mortgage loans that would be treated as sales for U.S. federal income tax purposes.
Furthermore, in such an event, our common shares could become ineligible for inclusion in those market indexes that exclude UBTI-generating stock, which could adversely affect demand for our common shares and the market price of our common shares.
In addition, the U.S. and global economies have continued to experience high inflation, constrained labor availability, supply chain challenges, global instability and economic downturn.
The FOMC cut interest rates three times between September 2024 and December 2024, and it may seek to further reduce interest rates, increase interest rates or maintain current interest rates. In addition, the U.S. and global economies have continued to experience inflation above historic levels, constrained labor availability, supply chain challenges, global instability and economic downturn.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeItem 2. Properties Our principal executive and administrative offices are located in leased space at Two Newton Place, 255 Washington Street, Newton, MA 02458-1634. In June 2023, we assumed legal title to an office property located in Yardley, PA through a deed in lieu of foreclosure.
Biggest changeItem 2. Properties Our principal executive and administrative offices are located in leased space at Two Newton Place, 255 Washington Street, Newton, MA 02458-1634. In June 2023, we assumed legal title to an office property located in Yardley, PA through a deed in lieu of foreclosure. 59 Table of Contents

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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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.
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 2024 3,602 $ 13.61 — $ — December 2024 78 13.35 — — Total/weighted average 3,680 $ 13.60 — — (1) These common share withholdings and purchases were made to satisfy tax withholding and payment obligations of certain of our officers and certain 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, 2023.
The table below provides information about our purchases of our equity securities during the quarter ended December 31, 2024.
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 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 13, 2025, there were 84 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

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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.
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, 2024: # 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 $ 52,050 S + 4.00% S + 4.30% 01/28/2026 63 % 3 2 Passaic, NJ Industrial 09/08/2022 47,000 43,808 S + 3.85% S + 4.22% 09/08/2027 69 % 3 3 Dallas, TX Office 08/25/2021 46,811 43,511 S + 3.25% S + 3.27% 08/25/2026 72 % 4 4 Boston, MA Hotel 12/16/2024 45,000 39,800 S + 3.95% S + 4.39% 12/16/2029 49 % 3 5 Brandywine, MD Retail 03/29/2022 42,500 42,200 S + 3.85% S + 4.27% 03/29/2027 62 % 3 6 Oxford, MS Multifamily 11/26/2024 42,000 42,000 S + 2.95% S + 3.35% 11/26/2029 75 % 2 7 Farmington Hills, MI Multifamily 05/24/2022 30,520 29,443 S + 3.15% S + 3.52% 05/24/2027 75 % 3 8 Downers Grove, IL Office 09/25/2020 30,000 29,500 S + 5.00% S + 5.91% 02/24/2025 67 % 4 9 Anaheim, CA Hotel 11/29/2023 29,000 29,000 S + 4.00% S + 4.56% 11/29/2028 55 % 2 10 Fountain Inn, SC Industrial 07/13/2023 27,500 24,300 S + 4.25% S + 4.85% 07/13/2026 76 % 2 11 Plano, TX Office 07/01/2021 27,385 26,569 S + 3.75% S + 3.76% 07/01/2026 78 % 4 12 Las Vegas, NV Multifamily 06/10/2022 25,992 25,448 S + 3.30% S + 4.07% 06/10/2027 60 % 3 13 Fayetteville, GA Industrial 10/06/2023 25,250 25,250 S + 3.35% S + 3.73% 10/06/2028 55 % 3 14 Carlsbad, CA Office 10/27/2021 24,750 24,417 S + 3.25% S + 3.26% 10/27/2026 78 % 4 15 Fontana, CA Industrial 11/18/2022 24,355 22,000 S + 3.75% S + 4.09% 11/18/2026 72 % 3 16 Los Angeles, CA Industrial 06/28/2024 23,800 21,940 S + 3.40% S + 3.83% 06/28/2029 58 % 3 17 Downers Grove, IL Office 12/09/2021 23,530 23,530 S + 4.25% S + 4.54% 12/09/2026 72 % 3 18 Bellevue, WA Office 11/05/2021 21,000 20,000 S + 3.85% S + 4.01% 11/05/2026 68 % 4 19 Newport News, VA Multifamily 04/25/2024 17,757 14,759 S + 3.15% S + 3.87% 04/25/2029 71 % 3 20 Sandy Springs, GA Retail 09/23/2021 16,488 15,286 S + 3.75% S + 4.05% 09/23/2026 72 % 2 21 Lake Mary, FL Hotel 09/06/2024 16,000 16,000 S + 4.00% S + 4.41% 09/06/2029 68 % 3 Total/weighted average $ 641,213 $ 610,811 S + 3.72% S + 4.10% 67 % 3.1 (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.
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 and Adjusted Book Value per common share, which are considered “non-GAAP financial measures” within the meaning of the applicable SEC rules.
These non-GAAP financial measures do not represent net income, net income per common share or cash generated from operating activities and should not be considered as alternatives to net income or net income per common share determined in accordance with U.S. generally accepted accounting principles, or GAAP, or as an indication of our cash flows from operations determined in accordance with GAAP, a measure of our liquidity or operating performance or an indication of funds available for our cash needs.
These non-GAAP financial measures do not represent net income, net income per common share or cash generated from operating activities and should not be considered as alternatives to net income or net income per common share determined in accordance with GAAP or as an indication of our cash flows from operations determined in accordance with U.S. generally accepted accounting principles, or GAAP, a measure of our liquidity or operating performance or an indication of funds available for our cash needs.
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.
Upon the repurchase of a purchased asset, we are required to pay Citibank, UBS or Wells Fargo, as applicable, the outstanding purchase price of the purchased asset, accrued interest and all accrued and unpaid expenses of Citibank, UBS or Wells Fargo, as applicable, relating to such purchased asset.
UBS and Citibank each has the discretion to make advancements at margins higher than 75% and Wells Fargo has discretion to make advancements higher than 80%.
Citibank has the discretion to make advancements at margins higher than 75%, and UBS and Wells Fargo each has the discretion to make advancements at margins higher than 80%.
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.
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.
Our business strategy is focused on originating and investing in floating rate first mortgage loans in the $15,000 to $75,000 range, secured by middle market and transitional CRE properties that have values up to $100,000. We define transitional CRE as commercial properties subject to redevelopment or repositioning activities that are expected to increase the value of the properties.
Our business strategy is focused on originating and investing in floating rate first mortgage loans that range from $15,000 to $75,000, secured by middle market transitional CRE properties that have values up to $100,000. We define transitional CRE as commercial properties subject to redevelopment or repositioning activities that are expected to increase the value of the properties.
In addition, our methodologies for calculating these non-GAAP financial measures may differ from the methodologies employed by other companies to calculate the same or similar supplemental performance measures; therefore, our reported Distributable Earnings, Distributable Earnings per common share, Adjusted Distributable Earnings and Adjusted Distributable Earnings per common share may not be comparable to distributable earnings, distributable earnings per common share, adjusted distributable earnings and adjusted distributable earnings per common share as reported by other companies.
In addition, our methodologies for calculating these non-GAAP financial measures may differ from the methodologies employed by other companies to calculate the same or similar supplemental performance measures; therefore, our reported Distributable Earnings and Distributable Earnings per common share may not be comparable to distributable earnings and distributable earnings per common share as reported by other companies.
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.
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 2025 Annual Meeting of Shareholders, or our 2025 Proxy Statement, to be filed with the SEC within 120 days after the fiscal year ended December 31, 2024.
Over time, Distributable Earnings, Distributable Earnings per common share, Adjusted Distributable Earnings and Adjusted Distributable Earnings per common share may be useful indicators of distributions to our shareholders and are measures that are considered by our Board of Trustees when determining the amount of distributions.
Over time, Distributable Earnings and Distributable Earnings per common share may be useful indicators of distributions to our shareholders and are measures that are considered by our Board of Trustees when determining the amount of distributions.
We believe that Distributable Earnings, Distributable Earnings per common share, Adjusted Distributable Earnings and Adjusted Distributable Earnings per common share provide meaningful information to consider in addition to net income, net income per common share and cash flows from operating activities determined in accordance with GAAP.
We believe that Distributable Earnings and Distributable Earnings per common share provide meaningful information to consider in addition to net income, net income per common share and cash flows from operating activities determined in accordance with GAAP.
Significant inputs to the model include certain loan specific data, such as loan to value, or LTV, property type, geographic location, occupancy, vintage year, remaining loan term, net operating income, expected timing and amounts of future loan fundings, and macroeconomic forecast assumptions, including the performance of CRE assets, unemployment rates, interest rates and other factors.
Significant inputs to the model include certain loan specific data, such as LTV, property type, geographic location, occupancy, vintage year, remaining loan term, net operating income, expected timing and amounts of future loan fundings, and macroeconomic forecast assumptions, including the performance of CRE assets, unemployment rates, interest rates and other factors.
(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.
(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, 2024 were the outstanding balances under our Secured Financing Facilities.
Revenue from real estate owned represents revenue from the operations of an office property located in Yardley, PA that was transferred to real estate owned through a deed in lieu of foreclosure in June 2023. Incentive fees. We recognize management incentive fees payable to Tremont in accordance with our management agreement.
Revenue from real estate owned represents revenue from the operations of an office property located in Yardley, PA that was transferred to real estate owned through a deed in lieu of foreclosure in June 2023. Base management and incentive fees. We recognize base management and incentive fees payable to Tremont in accordance with our management agreement.
(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.
(3) Projected interest payments are attributable only to our debt service obligations at existing rates as of December 31, 2024 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.
The allowance for credit losses related to unfunded loan commitments is included in accounts payable, accrued liabilities and other liabilities in our consolidated balance sheets. Given the lack of historical loss data related to our loan portfolio, we estimate our expected losses using an analytical model that considers the likelihood of default and loss given default for each individual loan.
The allowance for credit losses related to unfunded loan commitments is included in accounts payable, accrued liabilities and other liabilities in our consolidated balance sheets. 73 Table of Contents Given the lack of historical loss data related to our loan portfolio, we estimate our expected losses using an analytical model that considers the likelihood of default and loss given default for each individual loan.
The initial purchase price paid by UBS or Citibank of each purchased asset is up to 75% of the lesser of the market value of the purchased asset or the unpaid principal balance of such purchased asset, subject to UBS’s or Citibank's approval.
The initial purchase price paid by Citibank of each purchased asset is up to 75% of the lesser of the market value of the purchased asset or the unpaid principal balance of such purchased asset, subject to Citibank's approval.
We utilize the model to estimate credit losses over a reasonable and supportable economic forecast period, followed by a straight-line reversion period to average historical losses. Average historical losses are established using a population of third party historical loss data that approximates our portfolio as of the measurement date.
We utilize the model to estimate credit losses over a reasonable and supportable economic forecast period of 12 months, followed by a straight-line reversion period of six months to average historical losses. Average historical losses are established using a population of third party historical loss data that approximates our portfolio as of the measurement date.
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 may elect to apply a practical expedient to determine the loan's allowance for credit losses by comparing the collateral's fair value, less costs to sell, if applicable, to the amortized cost basis of the loan.
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 may elect to apply a practical expedient to determine the loan's allowance for credit losses by comparing the collateral's fair value to the amortized cost basis of the loan.
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
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.
“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.
“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. 74 Table of Contents Real Estate Owned.
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.
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.
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.
Adjusted Book Value per Common Share The table below calculates our book value per common share: As of December 31, 2024 2023 Shareholders' equity $ 269,278 $ 271,248 Total outstanding common shares 14,903 14,811 Book value per common share 18.07 18.31 Unaccreted purchase discount per common share (1) — 0.16 Allowance for credit losses per common share (2) 0.60 0.40 Adjusted Book Value per common share $ 18.67 $ 18.87 (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.
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.
The purchase discount of $36,443 was allocated to each acquired loan and was accreted into income over the remaining term of the respective loan. As of December 31, 2024, the purchase discount was fully accreted. As of December 31, 2023, the unaccreted purchase discount was $2,347. (2) Excludes the impact of our allowance for credit losses.
Loans are rated “1” (less risk) through “5” (greater risk) as defined below: “1” lower risk—Criteria reflects a sponsor having a strong financial condition and low credit risk and our evaluation of management's experience; collateral performance exceeding performance metrics included in the business plan or credit underwriting; and the property demonstrating stabilized occupancy and/or market rates, resulting in strong current cash flow and net operating income and/or having a very low LTV. 73 Table of Contents “2” average risk—Criteria reflects a sponsor having a stable financial condition and our evaluation of management's experience; collateral performance meeting or exceeding substantially all performance metrics included in the business plan or credit underwriting; and the property demonstrating improved occupancy at market rents, resulting in sufficient current cash flow and/or having a low LTV.
Loans are rated “1” (less risk) through “5” (greater risk) as defined below: “1” lower risk—Criteria reflects a sponsor having a strong financial condition and low credit risk and our evaluation of management's experience; collateral performance exceeding performance metrics included in the business plan or credit underwriting; and the property demonstrating stabilized occupancy and/or market rates, resulting in strong current cash flow and net operating income and/or having a very low LTV.
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.
Financing Activities Our secured financing agreements at December 31, 2024 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 September 2024, we amended our Citibank Master Repurchase Agreement.
(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.
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.
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.
The interest income on our loans and interest expense on our borrowings float with benchmark rates, such as 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.
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”.
As of December 31, 2024, we had $641,213 in aggregate loan commitments, consisting of a diverse portfolio, geographically and by property type, of 21 first mortgage loans. As of December 31, 2024, we had five loans representing approximately 24% of the amortized cost of our loan portfolio with a loan risk rating of “4” or “higher risk”.
Expenses from real estate owned. Expenses from real estate owned represent expenses from the operations of an office property located in Yardley, PA that was transferred to real estate owned through a deed in lieu of foreclosure in June 2023. Other transaction related costs.
Expenses from real estate owned represent expenses from the operations of an office property located in Yardley, PA that was transferred to real estate owned through a deed in lieu of foreclosure in June 2023. Income tax (expense) benefit.
The increase in management incentive fees was due to higher "core earnings," as defined in our management agreement, during the year ended December 31, 2023. General and administrative expenses .
The increase in base management and incentive fees was due to higher “core earnings”, as defined in our management agreement, during the year ended December 31, 2024. General and administrative expenses .
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.
For further information on our adoption of our allowance for credit losses, 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, 2024 and 2023: As of December 31, 2024 2023 Number of loans 21 24 Total loan commitments $ 641,213 $ 670,293 Unfunded loan commitments (1) $ 30,402 $ 40,401 Principal balance $ 610,811 $ 629,892 Carrying value $ 601,842 $ 622,086 Weighted average coupon rate 8.24 % 9.19 % Weighted average all in yield (2) 8.62 % 9.64 % Weighted average floor 2.12 % 1.36 % Weighted average maximum maturity (years) (3) 2.6 3.0 Weighted average risk rating 3.1 3.0 Weighted average LTV (4) 67 % 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.
As of December 31, 2023, we had a $368,047 aggregate outstanding principal balance under our Master Repurchase Facilities.
As of December 31, 2024, we had a $315,767 aggregate outstanding principal balance under our Master Repurchase Facilities.
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.
Reconciliation of Net Income to Distributable Earnings The table below demonstrates how we calculate Distributable Earnings and 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, 2024 2023 Net income $ 17,820 $ 25,965 Non-cash equity compensation expense 1,359 1,121 Non-cash accretion of purchase discount (2,347) (4,128) Provision for (reversal of) credit losses 3,080 (799) Depreciation and amortization of real estate owned 1,248 594 Exit fees collected on loans acquired in Merger (1) 124 148 Distributable Earnings $ 21,284 $ 22,901 Weighted average common shares outstanding - basic and diluted 14,712 14,625 Net income per common share - basic and diluted $ 1.20 $ 1.76 Distributable Earnings per common share - basic and diluted $ 1.45 $ 1.57 (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.
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 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.
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.
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.
We allocate the purchase price to land, building and improvements and intangibles based on determinations of the relative fair values of these assets assuming the properties are vacant.
Upon acquisition, real estate owned is recognized at the fair value of the property at the time of acquisition. We allocate the purchase price to land, building and improvements and intangibles based on determinations of the relative fair values of these assets assuming the properties are vacant.
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.
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.
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 general and administrative expenses was primarily due to a decrease in professional fees during the year ended December 31, 2024. 69 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.
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.
As of December 31, 2024, 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, our allowance for credit losses for our loan portfolio and unfunded loan commitments was $5,828. As of December 31, 2022, we did not have an allowance for credit losses.
As of December 31, 2024 and 2023, our allowance for credit losses for our loan portfolio and unfunded loan commitments was $8,908 and $5,828, respectively.
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.
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. 70 Table of Contents Pursuant to the terms of our Citibank Master Repurchase Facility, our UBS Master Repurchase Facility and our Wells Fargo Master Repurchase Facility, we may sell to, and later repurchase from, Citibank, UBS and Wells Fargo, the purchased assets related to the applicable facility.
This analytical model incorporates data from a third party database with historical loan loss information for commercial mortgage-backed securities, or CMBS, and commercial real estate, or CRE, loans since 1998. We estimate the allowance for credit losses for our loan portfolio, including unfunded loan commitments, at the individual loan level.
This analytical model incorporates data from a third party database with historical loan loss information for commercial mortgage-backed securities, or CMBS, and CRE loans since 1998.
These measures help us to evaluate our performance excluding the effects of certain transactions, the variability of any management incentive fees that may be paid or payable and GAAP adjustments that we believe are not necessarily indicative of our current loan portfolio and operations.
These measures help us to evaluate our performance excluding the effects of certain transactions and GAAP adjustments that we believe are not necessarily indicative of our current loan portfolio and operations. 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.
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.
As of December 31, 2024 and February 13, 2025, we had a $419,622 and $442,026, respectively, aggregate outstanding principal balance under our Secured Financing Facilities.
We evaluate the estimated allowance for each of our loans individually and we consider our internal loan risk rating as the primary credit quality indicator underlying our assessment.
We evaluate the estimated allowance for each of our loans individually and we consider our internal loan risk rating as the primary credit quality indicator underlying our assessment. We have elected to exclude accrued interest receivable from amortized cost and not to measure an allowance for credit losses on accrued interest receivable.
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.
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 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.
We did not have any outstanding past due loans or nonaccrual loans as of December 31, 2024. However, our borrowers' businesses, operations and liquidity may be materially adversely impacted by current inflationary pressures, interest rate fluctuations, supply chain issues or a prolonged economic slowdown or recession could amplify those negative impacts.
Generally, our loans are classified as held for investment based upon our intent and ability to hold them until maturity.
Decreases in cash flows expected to be collected will be recorded through our provision for credit losses. Loans Held For Investment. Generally, our loans are classified as held for investment based upon our intent and ability to hold them until maturity.
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.
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 realized loss amount reflected in Distributable Earnings will equal the difference between the cash received or expected to be received and the carrying value of the asset. 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.
The realized loss amount reflected in Distributable Earnings will equal the difference between the cash received or expected to be received and the carrying value of the loan.
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 .
As of December 31, 2024, we were in compliance with all covenants and other terms under our Secured Financing Facilities. 68 Table of Contents RESULTS OF OPERATIONS (amounts in thousands, except per share data) Year Ended December 31, 2024 Compared to Year Ended December 31, 2023: Year Ended December 31, 2024 2023 Change % Change INCOME FROM INVESTMENTS: Interest and related income $ 62,415 $ 66,337 $ (3,922) (5.9) % Purchase discount accretion 2,347 4,128 (1,781) (43.1) % Less: interest and related expenses (31,769) (33,518) 1,749 (5.2) % Income from loan investments, net 32,993 36,947 (3,954) (10.7) % Revenue from real estate owned 2,281 1,288 993 77.1 % Total revenue 35,274 38,235 (2,961) (7.7) % OTHER EXPENSES: Base management fees 4,329 4,303 26 0.6 % Incentive fees 974 968 6 0.6 % General and administrative expenses 3,902 3,947 (45) (1.1 %) Reimbursement of shared services expenses 2,647 2,596 51 2.0 % Provision for (reversal of) credit losses 3,080 (799) 3,879 485.5 % Expenses from real estate owned 2,489 1,293 1,196 92.5 % Total other expenses 17,421 12,308 5,113 41.5 % Income before income taxes 17,853 25,927 (8,074) (31.1 %) Income tax (expense) benefit (33) 38 (71) (186.8 %) Net income 17,820 25,965 (8,145) (31.4 %) Weighted average common shares outstanding - basic and diluted 14,712 14,625 87 0.6 % Net income per common share - basic and diluted $ 1.20 $ 1.76 $ (0.56) (31.8 %) Interest and related income .
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.
Income tax expense for the year ended December 31, 2024 is a result of income taxes paid or payable by us in certain jurisdictions where we are subject to state income taxes. Net income. The decrease in net income was due to the changes noted above.
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 following is a summary of our sources and uses of cash flows for the period presented: Year Ended December 31, 2024 2023 Cash and cash equivalents at beginning of period $ 87,855 $ 71,067 Net cash provided by (used in): Operating activities 20,110 20,270 Investing activities 21,261 35,844 Financing activities (58,476) (39,326) Cash and cash equivalents at end of period $ 70,750 $ 87,855 The decrease in cash provided by operating activities for 2024 compared to 2023 was primarily the result of lower net interest income earned on loan investments due to lower amounts invested, partially offset by favorable changes in working capital, higher interest income earned on cash balances invested and increased cash earned from our real estate owned.
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.
Distributions During the year ended December 31, 2024, we declared and paid distributions totaling $20,772, or $1.40 per common share, using cash on hand. On January 16, 2025, we declared a regular quarterly distribution of $0.35 per common share, or $5,216, to shareholders of record on January 27, 2025.
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.
The decrease in purchase discount accretion was due to the purchase discount recorded as part of the Merger becoming fully accreted during the year ended December 31, 2024. Interest and related expenses. The decrease in interest and related expenses was primarily the result of lower outstanding principal balances under our Secured Financing Facilities during the year ended December 31, 2024.
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.
In December 2024, we amended the fee letter to our UBS Master Repurchase Agreement to extend the stated maturity date to February 18, 2026 and increase the maximum facility size to $250,000.
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.
The table below is an overview of our Secured Financing Facilities as of December 31, 2024: Facility Maturity Date Principal Balance Unused Capacity Maximum Facility Size Collateral Principal Balance UBS Master Repurchase Facility 02/18/2026 $ 181,989 $ 68,011 $ 250,000 $ 267,084 Citibank Master Repurchase Facility 09/27/2026 93,314 121,686 215,000 145,520 BMO Facility Various 103,855 46,145 150,000 145,234 Wells Fargo Master Repurchase Facility 03/11/2026 40,464 84,536 125,000 52,973 Total $ 419,622 $ 320,378 $ 740,000 $ 610,811 The table below details our Secured Financing Facilities activities during the year ended December 31, 2024: Carrying Value Balance at December 31, 2023 $ 454,422 Borrowings 101,335 Repayments (137,529) Deferred fees (1,855) Amortization of deferred fees 1,423 Balance at December 31, 2024 $ 417,796 67 Table of Contents As of December 31, 2024, outstanding advancements under our Secured Financing Facilities had a weighted average interest rate of 6.62% per annum, excluding associated fees and expenses.
The allowance for credit losses required under ASU No. 2016-13 is a valuation account that is deducted from the related loans’ amortized cost basis in our consolidated balance sheets. Our loans typically include commitments to fund incremental proceeds to borrowers over the life of the loan; these future funding commitments are also subject to the CECL model.
Our loans typically include commitments to fund incremental proceeds to borrowers over the life of the loan; these future funding commitments are also subject to the CECL model.
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.
In addition, we actively engage with our borrowers regarding their execution of the business plans for the underlying collateral, among other things. As of December 31, 2024 and February 13, 2025, all of our borrowers with outstanding loans had paid their debt service obligations owed and due to us.
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.
As of December 31, 2024, this loan had an amortized cost of $19,997 and a risk rating of 4. 66 Table of Contents 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.
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.
The decrease in interest and related income was primarily the result of lower outstanding principal balances under our loan investment portfolio during the year ended December 31, 2024. The weighted average principal balance was approximately $603,000 for the year ended December 31, 2024 compared to approximately $646,000 for the year ended December 31, 2023. Purchase discount accretion.
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 of December 31, 2024, SOFR was 4.33%, and as a result, one of our loan investments had an active interest rate floor. Size of Portfolio .
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.
The decrease in cash provided by investing activities was primarily due to increased fundings for our existing loan portfolio as borrowers carry out their business plans and decreased loan repayments in 2024 compared to 2023. The increase in cash used in financing activities was primarily due to lower proceeds from our Secured Financing Facilities in 2024 compared to 2023.
The measurement of current expected credit losses, or CECL, is based upon historical experience, current conditions, and reasonable and supportable forecasts incorporating forward-looking information that affect the collectability of the reported amount. ASU No. 2016-13 is applicable to financial assets measured at amortized cost and off-balance sheet credit exposures, such as unfunded loan commitments.
We measure our allowance for credit losses using the CECL model, which is based upon historical experience, current conditions, and reasonable and supportable forecasts incorporating forward-looking information that affect the collectability of the reported amount. The allowance for credit losses is a valuation account that is deducted from the related loans’ amortized cost basis in our consolidated balance sheets.
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.
For further information regarding distributions, see Note 7 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, 2024 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) $ 30,402 $ 15,896 $ 14,506 $ — $ — Principal payments on Secured Financing Facilities (2) 419,622 255,765 163,857 — — Interest payments on Secured Financing Facilities (3) 25,324 19,191 6,133 — — Lease related costs (4) 138 138 — — — $ 475,486 $ 290,990 $ 184,496 $ — $ — (1) The allocation of our unfunded loan commitments is based on the current loan maturity date to which the individual commitments relate.
The decrease in the allowance for credit losses during the year ended December 31, 2023 was primarily attributable to a recovery in our previously recorded allowance for credit losses for our loan secured by an office property in Yardley, PA that was transferred to real estate owned through a deed in lieu of foreclosure in June 2023, partially offset by unfavorable changes in the current macroeconomic outlook, most notably in CRE pricing forecasts.
The increase in the allowance for credit losses during the year ended December 31, 2024 was primarily attributable to declining values for CRE and unfavorable CRE pricing forecasts used in our current expected credit loss, or CECL, model and increased provisions for certain of our office loans. Expenses from real estate owned.
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.
The weighted average principal balance was approximately $411,000 for the year ended December 31, 2024 compared to approximately $447,000 for the year ended December 31, 2023. Revenue from real estate owned.
Removed
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.
Added
Early in 2024, CRE investors seemed cautiously optimistic that inflation had peaked, the U.S. economy was likely headed for a “soft-landing” and the FOMC was poised to reduce the federal funds rate by 125 to 150 basis points by year end.
Removed
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.
Added
With the anticipation of lower interest rates in the future, investors delayed sale or refinancing decisions, which resulted in tepid CRE investment and transaction volume during the first half of 2024.
Removed
Although concerns about capital adequacy and liquidity in the banking sector have waned following the failure of certain banks in March 2023, regional banks have generally not opted to increase CRE exposure. Banks that are actively lending are generally doing so to existing well capitalized clients. Securitized lenders were the most affected during last year’s interest rate volatility.
Added
In September 2024, citing progress toward its 2% inflation target, the FOMC lowered the targeted federal funds rate by 50 basis points, providing CRE owners initial relief from high borrowing costs and reduced uncertainty regarding the timing and magnitude of future rate cuts. The FOMC then followed with two additional 25 basis point reductions by year end.
Removed
Floating rate and fixed rate CMBS lenders continue to be negatively impacted by a volatile interest rate environment. Lower CRE CLO, and CMBS issuance in 2023 has created pent up demand for newly originated CRE loans in the secondary market heading into 2024.
Added
Although the 100-basis point reduction fell short of expectations, the reduction in overall borrowing costs helped spur CRE refinancing activity through the fourth quarter of 2024, and we believe there is a renewed appetite amongst most lenders to increase CRE loan origination volume in 2025.
Removed
In December 2023, the FOMC chose to maintain the federal funds target rate in the 5.25% to 5.50% range, citing a slowdown in economic activity and easing inflation. Treasuries also rallied in the fourth quarter and the yield on the 10-Year U.S. Treasury dropped by over 100bps.
Added
The CMBS financing market was a key provider of debt liquidity to the CRE industry in 2024. Increasing demand from bond investors has translated into tighter credit spreads, particularly for 5-year loans which have become more popular among borrowers anticipating further interest rate reductions at the longer end of the yield curve.
Removed
CRE investors seem cautiously optimistic that inflation has peaked, and that lower interest rate volatility will lead to more transaction volume in 2024. Despite the optimism, challenges persist for the CRE industry. Although the FOMC has paused rate increases, CRE investors and lenders may now need to adapt to a sustained higher interest rate environment.
Added
Life insurance companies continue to expand their product offerings, providing low leverage, fixed rate term debt for stabilized assets as well as floating rate capital for more transitional properties, which were once reserved for banks and alternative lenders, like us.

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