Tremont Mortgage Trust
Q1 2021 Earnings Call Transcript
Published:
- Operator:
- Good morning. Welcome to Tremont Mortgage Trust First Quarter 2021 Financial Results Conference Call. All participants will be in listen-only mode. Please note that this event is being recorded. I would now like to turn the conference over to Kevin Barry, Manager of Investor Relations. Please go ahead.
- Kevin Barry:
- Thank you, and good morning, everyone. Thanks for joining us today. With me on the call are President, Tom Lorenzini; and Chief Financial Officer and Treasurer, Doug Lanois. In just a moment, they will provide details about our business and our performance for the first quarter of 2021, as well as details about our proposed merger with RMR Mortgage Trust. We will then open the call up to a question-and-answer session with sell side analysts.
- Tom Lorenzini:
- Thank you, Kevin. Good morning, everyone, and thank you for joining us. On Monday, April 26th, TRMT issued a press release announcing that we have entered into a definitive agreement to merge with RMR Mortgage Trust and yesterday, TRMT issued a press release reporting its results for the first quarter of 2021. I’ll begin today’s call with some commentary about the proposed merger and then provide a brief update on TRMT’s first quarter performance. Doug will then run through the details of our recent investment activity and financial results and then we will open up the call for Q&A. On Monday, we posted a presentation to our website which is also filed with the SEC. Certain pages of which I will refer to during my remarks today. Before we get started, I encourage you to look over the warning regarding forward-looking statements, other disclaimers that can be found on Slides 2 and 3 of the presentation. Let’s start with the transaction summary on Slide 4. With the unanimous approval of our Special Committee and our Board and entire board of trustees, we are thrilled to be bringing together two highly complementary businesses in Tremont Mortgage Trust and RMR Mortgage Trust. The transaction will be at stock for stock exchange whereby TRMT shareholders will receive 0.52 shares of RMRM for each common share of TRMT. Based on Friday’s closing price for RMRM, the implied offer price per share of approximately $6.55 represents a 6.3% premium to the closing price of TRMT’s common stock on April 23rd, and a 9% premium to the volume weighted average price for the 30 trading days ended April 23rd. RMRM and TRMT shareholder will own approximately 70% and 30% of the combined companies respectively. In terms of the financial impact, the transaction is expected to be accretive to distributable earnings in 2022 as we eliminate certain duplicative public company costs. We expect little to no integration risk as both companies are under the common management of Tremont Realty Advisors and our existing senior management team will continue to lead its company. We intend to close the transaction as soon as possible and expect that to be sometime during the third quarter. Turning to Slide 5, I would like to highlight the merits of this transaction. First, we believe the combination of TRMT and RMRM represent a unique opportunity to quickly achieve scale and create a larger, more diversified commercial mortgage REIT. By coming together the transaction is expected to immediately position the company to approach $1 billion in assets when fully invested.
- Doug Lanois:
- Thank you, Tom, and good morning, everyone. I’ll begin with a brief update on our recent loan activity and then run through our first quarter financial results. In February, we amended our loan related to a retail property in Coppell, Texas extend the maturity date by six months to August of 2021. As part of the amendment, TRMT collected an extension fee and its sponsor funded an interest reserve of $500,000 and repaid $250,000 of the outstanding principal balance. The total loan commitment decreased to $19.9 million. We also received the early repayment of our multi-family loan in Rochester, New York with proceeds totaling $24.8 million. We use these proceeds to pay down our Citi repurchase facility by $22.4 million and retained approximately $2.4 million for liquidity purposes. Additionally, a borrower under our Barrington, New Jersey loan has entered into an agreement to sell the underlying industrial property and accordingly that loan of $36.2 million may prepay during the second quarter.
- Operator:
- Our first question is from Jason Stewart from Jones Trading. Go ahead.
- Jason Stewart:
- Hi, good morning. Thanks for taking the question. And thanks for the update on the pipeline. I was hoping you could give us a little bit more information in terms of structure of those loans that are in term sheets spreads, do you expect it to be accretive to the spread in your LIBOR floors where those big. Any kind of information on that would be helpful. Thanks.
- Tom Lorenzini:
- Sure, Jason. This is Tom. Regarding LIBOR floors, and for our pipeline now for transactions that we either have quoted our term sheets outstanding and even applications for that matter. Spreads – floors range anywhere from 25 basis points to 50 basis points across those transactions. Spreads are generally in the 385 to 400 range. We do have one transaction, a little bit higher than average which is another transaction that we are looking at right now. But as a general rule, we are – we are kind of in the 4 to 4.25 range on housing transactions.
- Jason Stewart:
- Okay. Great. Thanks. And then, the Louisiana office, assuming you reunderwrote that. There was different criteria in moving that risk rating. You told okay, making the extension, any color you could give us in terms of additional color on that loan would be – would also be helpful.
- Doug Lanois:
- Sure, Jason. This is Doug Lanois. That’s actually one of the loans that we upgraded in our loan ratings. So we felt very confident about that. They are looking to lower their cost of capital and are interested in refying to another lender. So, that’s how that’s working out. They’ll – they’ve got several term sheets that are working towards a refi and that’s a pretty good collateral for this.
- Jason Stewart:
- Got it. Okay. That’s super helpful. And then one question on the merger, thank you for all the strategic rationale for it. How did book value for TRMT play into your thoughts in this transaction in terms of priced to multiple to book? And maybe if you could weigh that against your thoughts in terms of doing just the capital – equity capital raise at TRMT that perhaps would have been dilutive or comparably dilutive to book value. Just if you could give us some thoughts on those two, that would be helpful. Thanks.
- Tom Lorenzini:
- Yes, Jason, the equity markets where TRMT that haven’t really not – not an option for us given where we are trading relative to book value. In regards to the merger both entities are trading at quite a – fairly substantial discount to book value. And that’s really one of the primary benefits we believe is that by putting these together, we should be able to narrow that gap over time to reward the shareholders.
- Jason Stewart:
- Great. Okay. Thanks for taking the questions.
- Operator:
- Our next question is from Chris Muller from JMP Securities. Go ahead.
- Chris Muller:
- Hey guys. Thanks for taking the questions. I am on for Steve today. So, it looks like roughly half the loans are set mature in the – mostly the back half of those 2021. I was wondering if you guys could talk about why if they have to schedule what the impacts would be as those LIBOR floors roll off with you guys being at 2.1% that’s I think probably one of the highest in the group. And then a follow-up on that, I see the several notes on loan modifications and extensions, are there other conversations ongoing with borrowers on any further extensions, what could offset them is my first question? Thanks.
- Doug Lanois:
- Chris, this is Doug Lanois. You are focusing on the floors that quite strong floors that TRMT has the 210 basis points. Our expectation is as those loans roll and don’t renew, they will – that floor will gravitate then towards current market which is in the 25 to 50 basis points. That will impact the earnings and as long as we stay at this low interest LIBOR level. And regarding extensions, all of our loans current, well, most of our loans currently have extension options and depending on whether the borrower qualifies for the conditions of those extensions, they’ll either extend or we may enter into discussions to extend them and amend the loan agreement to accommodate that. The Houston office building, we’ve had a discussion with them. They are looking at refinancing options, as well as possibly extending. But it’s just kind of preliminary discussions at this point.
- Chris Muller:
- Thank you. It’s very helpful. And then, just on the flip side of that, what kind of loan do you guys seeing in the pipeline? Is there – are you guys focused on multi-family, office, I guess, what do you like out there right now?
- Tom Lorenzini:
- Yes, multi-family certainly, industrial, office, those are really kind of the three top product types worth at the moment, certainly life science, as well. We don’t want to diswave anybody from us from looking at other retail or hospitality but those opportunities are – would be much more unique for us right now. We think that as a general rule, we’d rather be backing sponsors with some more traditional office, industrial, and multi-family at this stage and that’s where we are seeing most of our deal flow and that’s where we are having most of our execution, as well.
- Chris Muller:
- Thank you very much. Very helpful and congrats on the great next year.
- Tom Lorenzini:
- Thank you.
- Operator:
- Our next question is from Brock Vandervliet from UBS. Go ahead.
- Brock Vandervliet:
- Thanks for taking the question. You could have just noted the conservative setting of the Tremont dividend going forward in the new template, the new structure, do you anticipate also having a dividend that’s well below the distributable income as you’ve done here or is it – do you think you can run it much closer to the distributable level?
- Doug Lanois:
- Hey Brock, this is Doug Lanois. RMRM has declared $0.15 distribution. We expect annual savings from public company costs in the new combined entity of $0.10 to $0.11 per share. So, we expect that to impact distributable earnings and – as well as – as RMRM completes the investment of its capital, its Board will certainly review the distribution level. And the other thing obviously to – we have to comply with is that we need to distribute all of our – or at least 90% of our taxable income as we did in TRMT in January and we did the catch-up distribution. So, all of those playing into this and our expectation is, we have not only the – what we expect the savings to impact distributable earnings and potential new distributions, we expect other synergies to come to play where we connect this capital in the new combined entity and drive earnings.
- Brock Vandervliet:
- Got it. And just stepping back a little bit, you talked about some of the spreads available now, and can you back up and just now versus a year ago, say, on new opportunities, what’s the spread profile better, worst, same? And number two, in the wake of COVID, has that created new discussions that you are observing in the marketplace as owners look to reposition buildings or really not so much, what’s then the COVID going to impact? Thanks.
- Tom Lorenzini:
- Brock it’s Tom. From a year ago, or let’s even say, nine months ago, really a year ago, everybody was pretty much positive in the industry, but the COVID premium, what I’ll call it was kind of a short lived window, really probably for about six months. So the spreads that we are seeing today are lower than transactions that we were able to run against up to RMRM during, call it, last summer through the end of the year. Those spreads have probably gone 50 to 75 basis points from that point in time. And as far as the real estate as it relates to COVID, we are seeing borrowers now asking for more flexible capital rather than where potentially they could qualify for permanent capital, because they are having gone through maybe some difficulties during COVID with servicers and what have you that they are looking to a balance sheet execution which I think puts is in a good place. We are also hearing and seeing really more suburban type office than we are CBD office, people at the major cities they would not come back fully – they are talking about along greater capacity. So things have changed a little bit from that perspective. Multi-family was the surprising winner throughout the pandemic. I think people expected that whole off, but they really didn’t see that. In fact, we saw it become more competitive. So, the industrial as well as and there is really just proven the beauty of the shining star throughout the entire COVID pandemic.
- Doug Lanois:
- And Brock, missing the last deals as well, and closed a few that are attractive to us.
- Tom Lorenzini:
- Yes. Like
- Brock Vandervliet:
- Thanks for the color.
- Doug Lanois:
- Thank you.
- Operator:
- At this time, we have no more questions. So this concludes the Question-And-Answer Session. I would like to turn the conference back over to Thomas Lorenzini, President of Tremont Mortgage Trust for closing remarks.
- Tom Lorenzini:
- Thank you, Kate, and thanks, everyone for joining us today. This concludes our call.
- Operator:
- This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.