rmrm-20210331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-34383

RMR Mortgage Trust

(Exact Name of Registrant as Specified in Its Charter)


Maryland			20-4649929
(State of Organization)			(IRS Employer Identification No.)

Two Newton Place, 255 Washington Street, Suite 300, Newton, MA 02458-1634

(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code 617-332-9530

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol

Name of each exchange on which registered

Common Shares of Beneficial Interest

RMRM

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided in Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Number of registrant's common shares of beneficial interest, $0.001 par value per share, outstanding as of April 30, 2021: 10,202,009

Table of Contents

RMR MORTGAGE TRUST

FORM 10-Q

March 31, 2021

INDEX


		Page
PART I	Financial Information
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheet — March 31, 2021	1
	Consolidated Statement of Assets and Liabilities — December 31, 2020	2
	Condensed Consolidated Statement of Operations — Three Months Ended March 31, 2021	3
	Consolidated Statement of Statement of Operations — Three Months Ended March 31, 2020	4
	Condensed Consolidated Statement of Shareholders’ Equity — Three Months Ended March 31, 2021	5
	Consolidated Statement of Changes in Net Assets — Three Months Ended March 31, 2020	6
	Condensed Consolidated Statement of Cash Flows — Three Months Ended March 31, 2021	7
	Consolidated Statement of Cash Flows — Three Months Ended March 31, 2020	8
	Consolidated Portfolio of Investments — December 31, 2020	9
	Notes to Unaudited Condensed Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
	Warning Concerning Forward-Looking Statements	31
PART II	Other Information	35
Item 1A.	Risk Factors	35


Item 6.	Exhibits	40
	Signatures	41

References in this Quarterly Report on Form 10-Q to the Company, the Trust, RMRM, we, us or our include RMR Mortgage Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.

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PART I. Financial Information

Item 1. Financial Statements

RMR MORTGAGE TRUST

CONDENSED CONSOLIDATED BALANCE SHEET

(dollars in thousands, except per share data)

(unaudited)


	March 31,
	2021
ASSETS
Cash and cash equivalents	$	46,839
Restricted cash	220
Loans held for investment, net	147,247
Accrued interest receivable	456

Prepaid expenses and other assets	305
Total assets	$	195,067

LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, accrued liabilities and deposits	$	1,121


Due to related persons	702
Total liabilities	1,823

Commitments and contingencies

Shareholders' equity:
Common shares of beneficial interest, $0.001 par value per share; unlimited number of shares authorized; 10,202,009 shares issued and outstanding	10
Additional paid in capital	192,884
Cumulative net income	350

Total shareholders' equity	193,244
Total liabilities and shareholders' equity	$	195,067

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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RMR MORTGAGE TRUST

CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES (Predecessor Basis)

(dollars in thousands, except per share data)

(unaudited)


	December 31, 2020
ASSETS
Cash and cash equivalents	$	103,314
Loans held for investment (cost $91,879)	91,879
Restricted cash	250
Dividends and interest receivable	139
Prepaid expenses	345
Other assets	128
Total assets	196,055
LIABILITIES
Accrued income taxes	2,386
Accrued expenses and other liabilities	491
Advisory fee payable	141
Deferred revenue	82
Compliance and internal audit costs payable	31
Administrative fee payable	30
Total liabilities	3,161
Net assets attributable to common shares	$	192,894
Composition of net assets attributable to common shares
Common shares, $0.001 par value per share; unlimited number of shares authorized	$	10
Additional paid in capital	192,884
Net assets attributable to common shares	$	192,894
Common shares outstanding	10,202
Net asset value per share attributable to common shares	$	18.91

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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RMR MORTGAGE TRUST

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(amounts in thousands, except per share data)

(unaudited)


	Three Months Ended March 31, 2021
INCOME FROM INVESTMENTS:
Interest income from investments	$	2,001



OTHER EXPENSES:
Base management fees	715
General and administrative expenses	592
Reimbursement of shared services expenses	326
Total expenses	1,633

Income before income tax expense	368
Income tax expense	(18)
Net income	$	350

Weighted average common shares outstanding	10,202


Net income per common share	$	0.03

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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RMR MORTGAGE TRUST

CONSOLIDATED STATEMENT OF OPERATIONS (Predecessor Basis)

(amounts in thousands)

(unaudited)


	Three Months Ended March 31, 2020
INVESTMENT INCOME:
Dividend income	$	4,129
Interest income	21
Other income	15
Total investment income	4,165
EXPENSES:
Advisory	705
Legal	37
Compliance and internal audit	34
Shareholder reporting	18
Custodian	24
Administrative	24
Preferred share remarketing and auction fees	18
Audit	12
Trustees' fees and expenses	15
Other	53
Total expenses before interest expense	940
Interest expense	554
Total expenses	1,494
Net investment income	2,671
Realized and change in unrealized gain (loss) on investments
Net realized gain on investments	915
Net change in unrealized losses on investments	(123,346)
Net realized and change in unrealized losses on investments	(122,431)
Net decrease in net assets before preferred distributions resulting from operations	(119,760)
Distributions to preferred shareholders from net investment income	(126)
Net decrease in net assets attributable to common shares resulting from operations	$	(119,886)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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RMR MORTGAGE TRUST

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(amounts in thousands)

(unaudited)


	Number of			Additional
	Common	Common		Paid In		Cumulative
	Shares	Shares		Capital		Net Income		Total
Net assets at December 31, 2020	10,202	$	10	$	192,884	$	—	$	192,894


Net income	—	—		—		350		350

Shareholders' equity at March 31, 2021	10,202	$	10	$	192,884	$	350	$	193,244

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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RMR MORTGAGE TRUST

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS (Predecessor Basis)

(amounts in thousands)

(unaudited)


	Three Months Ended March 31, 2020
Decrease in net assets resulting from operations
Net investment income	$	2,671
Net realized gain on investments	915
Net change in unrealized losses on investments	(123,346)
Distributions to preferred shareholders	(126)
Net decrease in net assets attributable to common shares resulting from operations	(119,886)
Distributions to common shareholders from:
Distributable earnings	(3,367)

Total distributions to common shareholders	(3,367)


Total decrease in net assets attributable to common shares	(123,253)
Net assets attributable to common shares
Beginning of period	255,326
End of period	$	132,073
Common shares issued and repurchased
Shares outstanding, beginning of period	10,202

Shares outstanding, end of period	10,202

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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RMR MORTGAGE TRUST

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(dollars in thousands)

(unaudited)


	Three Months Ended March 31, 2021

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	350
Adjustments to reconcile net income to net cash used in operating activities:


Amortization of loan origination and exit fees	(254)
Changes in operating assets and liabilities:
Accrued interest receivable and interest advances	(436)
Prepaid expenses and other assets	217
Accounts payable, accrued liabilities and deposits	(1,815)
Due to related persons	553
Net cash used in operating activities	(1,385)

CASH FLOWS FROM INVESTING ACTIVITIES:
Origination of loans held for investment	(54,840)
Additional funding of loans held for investment	(204)

Net cash used in investing activities	(55,044)

CASH FLOWS FROM FINANCING ACTIVITIES:






Payments of deferred financing costs	(76)



Net cash used in financing activities	(76)

Decrease in cash, cash equivalents and restricted cash	(56,505)
Cash, cash equivalents and restricted cash at beginning of period	103,564
Cash, cash equivalents and restricted cash at end of period	$	47,059

SUPPLEMENTAL DISCLOSURES:
Income taxes paid	$	1,830

SUPPLEMENTAL DISCLOSURE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH:

The table below provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheet to the amounts shown in the condensed consolidated statement of cash flows:


	As of March 31, 2021

Cash and cash equivalents	$	46,839
Restricted cash	220
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statement of cash flows	$	47,059

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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RMR MORTGAGE TRUST

CONSOLIDATED STATEMENT OF CASH FLOWS (Predecessor Basis)

(dollars in thousands)

(unaudited)


	Three Months Ended March 31, 2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets before preferred distributions resulting from operations	$	(119,760)
Adjustments to reconcile net decrease in net assets before preferred distributions
resulting from operations to cash provided by operating activities:
Purchases of long term investments	(5,757)
Proceeds from sales of long term investments	4,900
Net sales of short term investments	3,099
Changes in assets and liabilities:
Dividends and interest receivable and other assets	524
Receivable for securities sold	(1,849)
Prepaid expenses	28
Interest payable	(55)
Payable for securities purchased	(10)
Advisory fee payable	(63)
Compliance and internal audit costs payable	34
Administrative fee payable	(20)
Accrued expenses and other liabilities	38
Net unrealized losses on investments	123,346
Net realized gain on investments and foreign currency transactions	(915)
Cash provided by operating activities	3,540

CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to preferred shareholders	(130)
Distributions paid to common shareholders	(3,367)
Cash used in financing activities	(3,497)

Increase in cash and cash equivalents	43
Cash and cash equivalents at beginning of period	7
Cash and cash equivalents at end of period	$	50

SUPPLEMENTAL DISCLOSURES:
Cash paid for interest and fees on borrowings	$	609

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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RMR MORTGAGE TRUST

CONSOLIDATED PORTFOLIO OF INVESTMENTS - DECEMBER 31, 2020 (Predecessor Basis)

(dollars in thousands)

(unaudited)

Location

Property Type

Committed Principal Amount

Coupon Rate

Origination Date

Maturity Date

Cost

Value

MORTGAGE LOANS HELD FOR INVESTMENT 47.6% (1)

Downers Grove, IL

Office

$30,000

L + 4.25%

09/25/2020

11/25/2023

29,232

Durham, NC

Lab

$21,500

L + 4.35%

12/17/2020

12/17/2023

13,281

Los Angeles, CA

Retail

$24,600

L + 4.25%

12/17/2020

12/17/2022

17,029

Aurora, IL

Office

$16,500

L + 4.35%

12/18/2020

12/18/2023

14,540

Berkeley, CA

Lab

$19,120

L + 4.35%

12/30/2020

12/30/2023

17,797

Total Mortgage Loans - 47.6%

91,879

Other assets less liabilities - 52.4% (2)

101,015

Net Assets attributable to common shareholders – 100.0%

192,894

(1)The mortgage loans we invest in are not registered under the securities laws. These mortgage loans are valued using Level III inputs as defined in the fair value hierarchy under U.S. generally accepted accounting principles, or GAAP.

(2)Please refer to our Consolidated Statement of Assets and Liabilities for further information on these amounts.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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RMR MORTGAGE TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Note 1. Organization

RMR Mortgage Trust (formerly known as RMR Real Estate Income Fund), or we, us, our, or the Trust, is a Maryland statutory trust. We were previously registered under the Investment Company Act of 1940, as amended, or the 1940 Act, as a closed-end management investment company. Our investment objective while we operated as a registered investment company was investing in equity securities of real estate companies.

On January 5, 2021, the Securities and Exchange Commission, or the SEC, issued an order granting our request to deregister as an investment company under the 1940 Act. As a result, the Trust changed its SEC registration to a reporting company under the Securities Exchange Act of 1934, as amended, or the Exchange Act. The issuance of the deregistration order enabled us to proceed with full implementation of our new business mandate to operate as a real estate investment trust, or REIT, that focuses primarily on originating and investing in first mortgage whole loans secured by middle market and transitional commercial real estate, or CRE, or the Business Change.

On April 26, 2021, we and Tremont Mortgage Trust, or TRMT, entered into an Agreement and Plan of Merger, or the Merger Agreement, pursuant to which, on the terms and subject to the satisfaction or waiver of the conditions thereof, TRMT has agreed to merge with and into us, with us continuing as the surviving entity in the merger, or the Merger. Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger, or the Effective Time, each common share of beneficial interest, $0.01 par value per share, of TRMT, or TRMT Common Shares, issued and outstanding immediately prior to the Effective Time will be converted into the right to receive 0.52, or the Exchange Ratio, of one newly issued common share of beneficial interest, $0.001 par value per share, of us, or the RMRM Common Shares, subject to adjustment as described in the Merger Agreement, with cash paid in lieu of fractional shares. Under the Merger Agreement, the Exchange Ratio is fixed and will not be adjusted to reflect changes in the market price of the RMRM Common Shares or the TRMT Common Shares prior to the Effective Time. Pursuant to the Merger Agreement, at the Effective Time, any unvested TRMT Common Share awards outstanding under TRMT's equity compensation plan generally will be converted into an unvested RMRM Common Share award under our equity compensation plan, subject to substantially similar vesting requirements and other terms and conditions, determined by multiplying the number of unvested TRMT Common Shares subject to such award by the Exchange Ratio (rounded down to the nearest whole number). The Merger and the other transactions contemplated by the Merger Agreement are collectively referred to herein as the Transactions.

Following the consummation of the Merger, the combined company will continue to be managed by our and TRMT’s current manager, Tremont Realty Advisors LLC, or TRA or our Manager, pursuant to the terms of our existing management agreement with TRA. Contemporaneously with the execution of the Merger Agreement, we, TRMT and TRA entered into a letter agreement, or the TRA Letter Agreement, pursuant to which, on the terms and subject to conditions contained therein, we, TRMT and TRA have acknowledged and agreed that, effective upon consummation of the Merger, TRMT shall have terminated its management agreement with TRA, and TRA shall have waived its right to receive payment of the termination fee pursuant to such agreement. In consideration of this waiver, we have agreed that, effective upon consummation of the Merger and the termination of TRMT's management agreement with TRA, certain of the expenses TRA had paid on behalf of TRMT pursuant to such management agreement will be included in the “Termination Fee” under and as defined in our existing management agreement with TRA. The TRA Letter Agreement further provides that such termination by TRMT and waiver by TRA shall apply only in respect of the Merger and will not apply in respect of any competing proposal or superior proposal (as those terms are defined in the Merger Agreement) or to any other transaction or arrangement.

Contemporaneously with the execution of the Merger Agreement, we entered into a voting agreement with TRA, or the Voting Agreement, pursuant to which TRA has agreed to vote all of the TRMT Common Shares which it is entitled to vote in favor of approval of the Merger and the other Transactions to which TRMT is a party at the special meeting of TRMT's shareholders held for that purpose and against any competing acquisition proposal.

Also contemporaneously with the execution of the Merger Agreement, TRMT entered into a voting agreement with Diane Portnoy, pursuant to which Ms. Portnoy has agreed to vote all of our common shares which she is entitled to vote in favor of approval of the Merger Share Issuance at the special meeting of our shareholders held for that purpose and against any competing acquisition proposal.

RMR MORTGAGE TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Note 2. Basis of Presentation.

Prior to the Business Change, the Trust was accounted for as an investment company in accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 946, Financial Services - Investment Companies, or the Predecessor Basis. Upon the Business Change, we discontinued the application of guidance in ASC Topic 946 and prospectively applied the guidance required under GAAP, applicable to companies that are not investment companies, or the Successor Basis. As a result of these changes, our condensed consolidated financial statements as of and for the three months ended March 31, 2021 are presented separately from our financial statements on the Predecessor Basis, as of and for the periods prior to the Business Change. The results of operations from January 1, 2021 through January 4, 2021 were not material to the Trust's condensed consolidated financial statements and have not been presented separately, but they are included in our statement of operations for the three months ended March 31, 2021.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim periods have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the accompanying condensed consolidated financial statements include the fair value of financial instruments.

Note 3. Summary of Significant Accounting Policies

Consolidation. These consolidated financial statements include the accounts of us and our subsidiaries, all of which are 100% owned directly by us. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated.

For each investment we make, we evaluate whether consolidation of the borrower's financial statements is required under GAAP. GAAP addresses the application of consolidation principles to an investor with a controlling financial interest.

Cash, Cash Equivalents and Restricted Cash. We consider highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents.

Restricted cash primarily consists of deposit proceeds from potential borrowers when originating loans, which may be returned to the applicable borrower upon the closing of the loan, after deducting any transaction costs paid by us for the benefit of such borrower.

Loans Held for Investment. Generally, our loans are classified as held for investment based upon our intent and ability to hold them until maturity, if earlier, repayment. Loans that are held for investment are carried at cost, net of unamortized loan origination and accreted exit fees that are required to be recognized in the carrying value of the loans in accordance with GAAP, unless the loans are deemed to be impaired. Loans that we have a plan to sell or liquidate are held at the lower of cost or fair value less cost to sell.

We evaluate each of our loans for impairment at least quarterly by assessing a variety of risk factors in relation to each loan and assigning a risk rating to each loan based on those factors. Factors considered in these evaluations include, but are not limited to, property type, geographic and local market dynamics, physical condition, leasing and tenant profile, projected cash flow, risk of loss, current loan to value ratio, or LTV, debt yield, collateral performance, structure, exit plan and sponsorship. Loans are rated “1” (lower risk) through “5” (impaired/loss likely) 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.

"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.

RMR MORTGAGE TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

"3" acceptable risk—Criteria reflects a sponsor having a history of repaying loans at maturity and meeting its credit obligations and our evaluation of management's experience; collateral performance expected to meet performance metrics included in the business plan or credit underwriting; and the property having a moderate LTV. New loans and loans with a limited history will typically be assigned this rating and will be adjusted to other levels from time to time as appropriate.

"4" higher risk—Criteria reflects a sponsor having a history of unresolved missed or late payments, maturity extensions and difficulty timely fulfilling its credit obligations and our evaluation of management's experience; collateral performance failing to meet the business plan or credit underwriting; the existence of a risk of default possibly leading to a loss and/or potential weaknesses that deserve management’s attention; and/or the property having a high LTV.

"5" impaired/loss likely—Criteria reflects a very high risk of realizing a principal loss or having incurred a principal loss; a sponsor having a history of default payments, trouble fulfilling its credit obligations, deeds in lieu of foreclosures, and/or bankruptcies; collateral performance is significantly worse than performance metrics included in the business plan; loan covenants or performance milestones having been breached or not attained; timely exit via sale or refinancing being uncertain; and/or the property having a very high LTV.

See Note 5 for further information regarding our current loan portfolio’s assessment under our internal risk rating policy.

Impairment occurs when it is deemed probable that we will not be able to collect all amounts due under a loan according to its contractual terms. Impairment will then be measured based on the present value of the expected future cash flows discounted at the loan's contractual effective rate and the fair value of any available collateral, net of any costs we expect to incur to realize that value. The determination of this estimated fair value involves judgments and assumptions based on objective and subjective factors. Consideration will be given to various factors, such as business plans, property occupancies, tenant profiles, rental rates, operating expenses and borrowers’ repayment plans, among others, and will require significant judgments regarding certain circumstances, such as guarantees, if any. Upon measurement of an impairment, we will record an allowance to reduce the carrying value of the loan accordingly, and record a corresponding charge to net income in our condensed consolidated statements of operations.

As of March 31, 2021, we have not recorded any allowances for losses as we believe it is probable that we will collect all amounts due pursuant to the contractual terms of our loan agreements with borrowers.

Fair Value of Financial Instruments. FASB ASC Topic 820-10, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands the required disclosure regarding fair value measurements. ASC Topic 820-10 defines fair value as the price that would be received for a financial instrument in a current sale, which assumes an orderly transaction between market participants on the measurement date. We determine the estimated fair value of financial assets and liabilities using the three-tier fair value hierarchy established by GAAP, which prioritizes the inputs used in measuring fair value. GAAP establishes market based or observable inputs as the preferred source of values followed by valuation models using management assumptions in the absence of market inputs. The three levels of inputs that may be used to measure fair value are as follows:

Level I—Inputs include quoted prices in active markets for identical assets or liabilities that we have the ability to access.

Level II—Inputs include quoted prices in markets that are less active or inactive or for which all significant inputs are observable, either directly or indirectly.

Level III—Inputs include unobservable prices and are supported by little or no market activity and are significant to the overall fair value measurement.

Loan Deferred Fees. Loan origination and exit fees are reflected in loans held for investment, net, in our condensed consolidated balance sheet and include fees charged to borrowers. These fees are amortized and accreted, respectively, into interest income over the life of the related loans held for investment.

Deferred Financing Costs. Costs incurred in connection with financings are capitalized and recorded as an offset to the related liability and amortized over the respective financing terms and are recorded in our condensed consolidated statement of

RMR MORTGAGE TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

operations as a component of interest and related expenses. At March 31, 2021, we had approximately $76 of capitalized financing costs.

Net Income Per Common Share. We calculate net income per common share, or EPS, by dividing net income by the weighted average number of common shares outstanding during the period. At March 31, 2021 and December 31, 2020, no warrants, options or other types or classes of securities existed that could be potentially dilutive to our common shares outstanding.

Revenue Recognition. Interest income related to our first mortgage whole loans secured by CRE will generally be accrued based on the coupon rates applied to the outstanding principal balance of such loans. Fees, premiums and discounts, if any, will be amortized or accreted into interest income over the remaining lives of the loans using the effective interest method, as adjusted for any prepayments.

If a loan's interest or principal payments are not paid when due and there is uncertainty that such payments will be collected, the loan may be categorized as non-accrual and no interest will be recorded unless it is collected. When all overdue payments are collected and, in our judgment, a loan is likely to remain current, it may be re-categorized as accrual.

For loans purchased at a discount, GAAP limits the yield that may be accreted (accretable yield) to the excess of the investor’s estimate of undiscounted expected principal, interest and other cash flows (cash flows expected at acquisition to be collected) over the investor’s initial investment in the loan. 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. Decreases in cash flows expected to be collected will be recorded as an impairment.

Securities Transactions and Investment Income. Under the Predecessor Basis, we recorded securities transactions on a trade date basis, dividend income on the ex-dividend date and any non-cash dividends at the fair market value of the securities received. We use the accrual method for recording interest income, including accretion of original issue discount, where applicable, and accretion of discount on short term investments and identified cost basis for realized gains and losses from securities transactions. The difference between cost and fair value for investments we continue to hold is reflected as unrealized gain (loss), and any change in that amount from a prior period is reflected in the accompanying consolidated statement of operations.

Note 4. Recent Accounting Pronouncements

In June 2016, the FASB issued Accounting Standards Update, or ASU, No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires that entities use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. As a smaller reporting company, we expect to adopt ASU No. 2016-13 on January 1, 2023. We are currently assessing the potential impact the adoption of ASU No. 2016-13 will have on our condensed consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions on contract modifications meeting certain criteria to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to the alternative reference rates. For a contract that meets the criteria, this ASU generally allows an entity to account for and present modifications as an event that does not require remeasurement at the modification date or reassessment of a previous accounting determination. This ASU was effective upon issuance and can be applied through December 31, 2022. The adoption of ASU No. 2020-04 did not have a material impact on our condensed consolidated financial statements.

Note 5. Loans Held for Investment

We originate first mortgage whole loans secured by middle market and transitional CRE, which are generally to be held as long term investments. We funded our existing loan portfolio using cash on hand.

RMR MORTGAGE TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

The table below provides overall statistics for our loan portfolio as of March 31, 2021 and December 31, 2020:


	As of March 31, 2021 (Successor Basis)			As of December 31, 2020 (Predecessor Basis)
Number of loans	7			5
Total loan commitments	$	177,195		$	111,720
Unfunded loan commitments (1)(2)	$	28,613		$	18,857
Principal balance (2)	$	148,652		$	92,863
Unamortized net deferred origination fees	$	(1,405)		$	(984)
Carrying value	$	147,247		$	91,879
Weighted average coupon rate	4.99		%	5.08		%
Weighted average all in yield (3)	5.65		%	5.71		%
Weighted average maximum maturity (years) (4)	4.3			4.2
Weighted average risk rating	3.0			3.0
Weighted average LTV (5)	67		%	68		%

(1) Unfunded loan commitments are primarily used to finance property and building improvements and leasing capital and are generally funded over the term of the loan.

(2) The principal balance at March 31, 2021 includes $69 of capitalized interest that does not reduce the amount of unfunded loan commitments.

(3) All in yield represents the yield on a loan, excluding any repurchase debt funding applicable to the loan and including amortization of deferred fees over the initial term of the loan.

(4) Maximum maturity assumes all borrower loan extension options have been exercised, which options are subject to the borrower meeting certain conditions.

(5) LTV represents the initial loan amount divided by the underwritten in-place value of the underlying collateral at closing.

The table below represents our loan activities during the three months ended March 31, 2021:


	Principal Balance		Deferred Fees		Carrying Value
Balance at December 31, 2020 (Predecessor Basis)	$	92,863	$	(984)	$	91,879
Additional funding	274		—		274
Originations	55,515		(675)		54,840

Net amortization of deferred fees	—		254		254
Balance at March 31, 2021 (Successor Basis)	$	148,652	$	(1,405)	$	147,247

In April 2021, we originated a first mortgage whole loan of $34,275 to refinance an office/industrial property with 288,275 square feet located in Colorado Springs, Colorado. This loan requires the borrower to pay interest at the floating rate of LIBOR plus a premium of 450 basis points per annum. This floating rate loan includes an initial funding of $28,970 and a future funding allowance of $5,305 for tenant improvements, leasing commissions and capital expenditures and has a three year initial term with one one-year extension option, subject to the borrower meeting certain conditions.

Also in April 2021, we originated a first mortgage whole loan of $39,240 to finance the acquisition of two cold storage industrial buildings located in Londonderry, New Hampshire. This loan requires the borrower to pay interest at the floating rate of LIBOR plus a premium of 400 basis points per annum. This floating rate loan includes an initial funding of $34,200 and a future funding allowance of $5,040 for tenant improvements, leasing commissions and capital expenditures and has a three year initial term with two one-year extension options, subject to the borrower meeting certain conditions.

RMR MORTGAGE TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

The tables below detail the property type and geographic location of the properties securing the loans in our portfolio as of March 31, 2021 and December 31, 2020:


	March 31, 2021 (Successor Basis)					December 31, 2020 (Predecessor Basis)
Property Type	Number of Loans	Carrying Value		Percentage of Value		Number of Loans	Carrying Value		Percentage of Value
Office (1)	3	$	48,979	33	%	2	$	38,106	41	%
Multifamily	1	44,119		30	%	—	—		—	%
Lab	2	31,139		21	%	2	31,078		34	%
Retail	1	17,344		12	%	1	17,029		19	%
Industrial (1)	—	5,666		4	%	—	5,666		6	%
	7	$	147,247	100	%	5	$	91,879	100	%

(1) Our loan investment secured by a mixed use property consisting of office space and an industrial warehouse in Aurora, IL is classified as office for the purpose of counting the number of loans in our portfolio. The carrying value of this loan investment is reflected in office and industrial based on the fair value of the buildings at the time of origination relative to the total fair value of the property.


	March 31, 2021 (Successor Basis)					December 31, 2020 (Predecessor Basis)
Geographic Location	Number of Loans	Carrying Value		Percentage of Value		Number of Loans	Carrying Value		Percentage of Value

Midwest	3	$	87,960	60	%	2	$	43,772	48	%
West	2	35,167		24	%	2	34,826		38	%
South	2	24,120		16	%	1	13,281		14	%
	7	$	147,247	100	%	5	$	91,879	100	%

Loan Risk Ratings

We evaluate each of our loans for impairment at least quarterly by assessing a variety of risk factors in relation to each loan and assigning a risk rating to each loan based on those factors. The following table allocates the carrying value of our loan portfolio at March 31, 2021 and December 31, 2020 based on our internal risk rating policy:


	March 31, 2021 (Successor Basis)			December 31, 2020 (Predecessor Basis)
Risk Rating	Number of Loans	Carrying Value		Number of Loans	Carrying Value
1	—	$	—	—	$	—
2	—	—		—	—
3	7	147,247		5	91,879
4	—	—		—	—
5	—	—		—	—
	7	$	147,247	5	$	91,879

The weighted average risk rating of our loans by carrying value was 3.0 as of March 31, 2021 and December 31, 2020. We did not have any impaired loans or nonaccrual loans as of March 31, 2021 or December 31, 2020. See Note 3 for further information regarding our loan risk ratings.

As of April 30, 2021, all of our borrowers had paid all of their debt service obligations owed and due to us and none of the loans included in our investment portfolio were in default.

Note 6. Debt Agreements

On February 18, 2021, one of our wholly owned subsidiaries entered into a master repurchase agreement, or the Master Repurchase Agreement, with UBS AG, or UBS, for a master repurchase facility, or the Master Repurchase Facility, pursuant to which we may sell to UBS, and later repurchase, commercial mortgage loans, or the Purchased Assets. The expiration date of the Master Repurchase Agreement is February 18, 2024, unless extended or earlier terminated in accordance

RMR MORTGAGE TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

with the terms of the Master Repurchase Agreement. Pursuant to the Master Repurchase Agreement, we will pay UBS a non-refundable upfront fee that is equal to 0.50% of the applicable tranche amount on each Purchase Date (as each term is defined in the Master Repurchase Agreement). While the Master Repurchase Facility has no maximum facility amount, we expect the advancements under the Master Repurchase Facility to not exceed our equity, which is as of March 31, 2021 is $193,244. Our equity will change from time-to-time and may increase or decrease. We expect that the size of our Master Repurchase Facility may similarly change as our equity changes.

Under the Master Repurchase Facility, the initial purchase price paid by UBS for each Purchased Asset is up to 75% of the lesser of the market value of the Purchased Asset and the unpaid principal balance of such Purchased Asset, subject to UBS’s approval. Upon the repurchase of a Purchased Asset, we are required to pay UBS the outstanding purchase price of the Purchased Asset, accrued interest and all accrued and unpaid expenses of UBS relating to such Purchased Assets. The pricing rate (or interest rate) relating to a Purchased Asset is equal to one month LIBOR plus a customary premium within a fixed range, determined by the debt yield and property type of the Purchased Asset’s real estate collateral. UBS has the discretion under our Master Repurchase Agreement to make advancements at margins higher than 75%.

In connection with our Master Repurchase Agreement, we entered into a guaranty, or the Guaranty, which requires us to guarantee 25% of the aggregate repurchase price, and 100% of losses in the event of certain bad acts as well any costs and expenses of UBS related to our Master Repurchase Agreement. The Guaranty also requires us to comply with customary financial covenants, which include the maintenance of a minimum tangible net worth, minimum cash liquidity and a total indebtedness to stockholders equity ratio.

SEC Form 10-Q filed by RMR Mortgage Trust