Seven Hills Realty Trust

Good morning, and welcome to the Seven Hills Realty Trust second quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw a question, please press star, then two. Please do note that this event is being recorded. I would now like to turn the conference over to Kevin Barry, Director of Investor Relations. Please go ahead.

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 Lenoy. In just a moment, they will provide details about our business and our performance for the second quarter of 2022. We will then open the call to a question and answer session with sell-side analysts. First, I would like to note that the recording and retransmission of today's conference call is strictly prohibited without Seven Hills Realty Trust's prior written consent. Also note that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on Seven Hills' beliefs and expectations as of today, Thursday, July 28th, 2022, and actual results may differ materially from those that we project. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call. Additional information concerning factors that could cause those differences is contained in our filings with the Securities and Exchange Commission, or SEC, which can be accessed from the SEC's website. Investors are cautioned not to place undue reliance upon any forward-looking statements. In addition, we will be discussing non-GAAP numbers during this call, including distributable earnings, Distributable earnings per share, adjusted distributable earnings, adjusted distributable earnings per share, and adjusted book value per share. For a reconciliation of GAAP, non-GAAP financial measures, please see our quarterly earnings release, which is available on our website, sevnreit.com. With that, I will now turn the call over to Tom.

Thank you, Kevin. Good morning, everyone, and welcome to the second quarter earnings call for Seven Hills Realty Trust. Last night, we reported a solid quarter highlighted by strong year-over-year earnings growth and continued execution on our plan to fully invest Seven Hills Capital. We continue to advance our key priorities focused on fully deploying our capital to nearly $1 billion in assets, increasing and diversifying our capital base, and increasing returns to our shareholders. At the same time, we are closely monitoring the ongoing macroeconomic changes related to rising inflation, higher interest rates, and recessionary concerns. These trends have resulted in increased conservatism and underwriting standards in the CRE debt markets. Commercial lenders of all types, including banks and life insurance companies, have reduced advance rates, and credit spreads have widened in the secondary market for CMBS and CLOs. As a result, CRE transaction volume has moderated as buyers and sellers adjust to this new environment of higher rates and lower leverage. Despite the choppy conditions, we believe the industry remains well-positioned to face this volatility and alternative lenders like Seven Hills will continue to see attractive opportunities to deploy debt capital. Turning to the quarter, we closed on $60 million of high-quality loan originations, bringing our production for the first half of the year to more than $150 million and increasing our committed capital to $735 million, which represents a three-fold increase in our loan book compared to a year ago. Distributable earnings per share increased 85% year-over-year to 24 cents per share, reflecting the continued expansion of our loan portfolio. We begin the second half of the year in an excellent position to continue to grow distributable earnings and further enhance returns for our shareholders. We have a strong earnings tailwind in this rising interest rate environment, given that our portfolio is 100% floating rate. To put this into context, One month term SOFR at the end of the second quarter was approximately 170 basis points, and it is projected to be approximately 330 basis points at the end of the year. We estimate that this increase will result in a distributable earnings benefit of approximately 20 cents annually. Turning to our second quarter investment activity, our manager, Tremont Realty Capital, originated two new loans for approximately $60 million of committed capital and funded an additional $5 million of follow-on funding. These investments, secured by suburban multifamily properties in Las Vegas and Detroit, are supported by institutional quality sponsors with significant experience investing in multifamily real estate. The loans carry a weighted average spread of 322 basis points and a weighted average loan value of 68%, indicating our continued focus on underwriting quality assets with attractive yields. We also received $11 million from the early repayment of our office loan in Miami. We ended the second quarter with 28 first mortgage loans with an aggregate commitment of $735 million, representing approximately 7% growth in Seven Hills Loan Book on a sequential quarter basis. Our investments have a weighted average coupon of 5.1% and an all-in yield of 5.6%. In aggregate, the portfolio has a weighted average loan to value of 68% and a weighted average maximum maturity of 3.6 years when including extension options. Credit quality remains a top priority, and we feel very good about the quality of our loans and their risk-adjusted returns. All of our loans are current on debt service with no loans in default, and our portfolio risk rating has improved to 2.7. During the quarter, we upgraded three loans driven by progress on the underlying business plans which has resulted in increased debt yield and debt coverage. We did not have any downgrades, and none of our loans are assigned to five. We remain further focused on diversifying our originations and are mindful of concentration risk in our portfolios. Since the beginning of the year, we've improved our mix of property types, reducing our exposure to office by 800 basis points to 40%, and increasing our mix of multifamily loans by 10 percentage points to 29%. The remainder of our loans are backed by high-quality industrial and retail collateral, and geographically our portfolio remains well diversified across the country. Our favored property types remain multifamily and industrial, while select retail, office, and hospitality opportunities continue to present themselves as well. We have a steady pipeline with compelling transactions with which to grow our asset base, including two loans under application totaling $70 million, which we expect to close during the third quarter, subject to our final diligence. Looking ahead, we're excited about the future of Seven Hills. We believe we are well positioned to navigate the current uncertain economic outlook, and we remain confident that our strategy will generate higher risk-adjusted returns for our shareholders. In addition, our manager recently demonstrated further commitment to our platform, increasing its equity ownership of Seven Hills to approximately 12% during the second quarter. We believe this reflects strong alignment with our shareholders as our business continues to grow and mature. And with that, I will now turn it over to Doug.