Seven Hills Realty Trust

Good morning and welcome to Seven Hills Realty Trust Fourth Quarter 2022 Financial Results Conference Call. All participants will be in 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. Please note that this event is being recorded. I'd like to turn the call over to Kevin Barry, Director of Nevada 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 Tiffany Tsai. In just a moment, they will provide details about our business and our performance for the fourth 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, Tuesday, February 14th, 2023, 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 and distributable earnings per share. For a reconciliation of GAAP to non-GAAP financial measures, please see our quarterly earnings release, which is available on our website, sevnreach.com. I will now turn the call over to Tom.

Thank you, Kevin. Good morning, everyone, and thank you for joining the call today. Last night, we announced strong fourth quarter earning results, capping off a year in which we made excellent progress growing Seven Hills' loan portfolio and generating higher returns for our shareholders. I would like to highlight a few items in particular. In January, we were pleased to announce a 40% increase in our quarterly dividend to $0.35 per share, or $1.40 annually, which was a direct result of our strong operating performance and our confidence in the long-term outlook for our business. During the quarter, we grew distributable earnings per share 37% on a sequential quarter basis. Our loan book remained healthy with all of our loans current on debt service and our weighted average risk rating remaining below three. Looking back on the past year, Seven Hills generated a total return for our shareholders of over 15%, outperforming the NAE REIT Mortgage REIT Index by more than 30% since the beginning of 2022. We originated seven loans for approximately $228 million despite rapidly changing capital markets and slowing commercial real estate transaction volume. We grew and further diversified our borrowing capacity to allow for more than $800 million, and we more than doubled distributable earnings for the year to $1.25 per share. While the economic landscape continues to evolve, we are thrilled with the progress we are making and the opportunity in front of us. As we discussed on our call last quarter, we have been selective in our loan origination activities and focused on building liquidity until there is more clarity on overall market conditions, which we believe are beginning to stabilize. As we saw two weeks ago, the Federal Reserve continued to tighten monetary policy, although they have transitioned from the aggressive interest rate hikes implemented over the past year. It is anticipated that rates will peak this summer and that markets should further stabilize. We expect to continue to generate solid earnings and benefit from the increased income that results from any additional rate increases and continued higher interest rates. Our relationships with our secured financing partners remain strong and we have balance sheet capacity to support additional investments and attractive opportunities that meet our disciplined underwriting criteria and are in line with our targeted returns. Turning now to our recent investment activity and loan book at quarter end. As new lending activity declined across the market during the fourth quarter, we closed one new loan and realized two loan repayments, which led to a moderate decline in our portfolio balance compared to the prior quarter. In November, we closed a $24 million loan with a repeat sponsor of ours, secured by an industrial property in a strong sub-market of the Inland Empire. This loan brought our full-year production to nearly $230 million. the majority of which was originated in the first two quarters of the year. We received a loan repayment and a retail loan in Los Angeles and an early repayment of our office loan in Colorado Springs for a combined outstanding principal balance of approximately $54 million. For the year, repayments totaled more than $130 million, with approximately 30% representing office loan repayments. We believe this repayment activity is a testament to our disciplined underwriting and asset management capabilities and serves as a positive indicator of our experienced, well-capitalized sponsors achieving their business plans in this challenging market environment. As a reminder, all of our loans are structured with risk mitigation provisions such as cash flow sweeps, interest reserves, and rebalancing requirements to help protect us against possible investment losses and our loans typically require borrowers to obtain interest rate caps. As of December 31st, Seven Hills portfolio consisted of 27 first mortgage loans with total commitments of $728 million, representing a 12% increase compared to a year ago. Our average loan commitment is approximately $27 million, and future fundings account for less than 7% of our total commitments. Despite the market volatility during the fourth quarter, Our portfolio continues to perform, and we remain pleased with the quality of our loans and their risk-adjusted returns. Our investments have a weighted average coupon of 8.1% and an all-in yield of 8.6%. In aggregate, the portfolio has a weighted average loan-to-value of 68% and a weighted average maximum maturity of 3.3 years when including extension options. Our portfolio credit quality remains strong with no impairments or non-accrual loans which speaks to the overall strength and stability of our borrowers and collateral assets. The weighted average risk rating for the portfolio is unchanged compared to the prior quarter at 2.9 and none of our loans are rated a 5. We are monitoring our $16.5 million loan on an office property in Narley, Pennsylvania with a risk rating of 4. While the loan remains current and the collateral property has increased occupancy From 35% to approximately 80% over the past year, the sponsor may need additional time to fully execute their business plan. Looking at our portfolio diversification, our geographic exposure has remained relatively consistent across the U.S. From a property type perspective, during 2022, we reduced our office exposure from 48% to 38% of our portfolio. This shift enabled us to increase our percentage of loans on multifamily and industrial assets. At the end of the year, our total loan portfolio consisted of 38% office, 29% multifamily, 17% industrial, and 16% retail. While we experienced some leveling off in our pipeline given the rapid rise in SOFR and widening of credit spreads over the past few quarters, we are beginning to see increased transaction volume in 2023, which will allow us to take advantage of accretive opportunities to deploy capital. Current activity includes eight respective financings where we have outstanding term sheets with an aggregate loan balance in excess of $250 million. In addition, we have approximately 350 million of potential tracks and transactions in various stages of review. As we move into 2023, we believe our company is well positioned to navigate the current market environment, opportunistically reinvest our capital and continue to drive attractive returns for our shareholders. And with that, I will now turn the call over to Tiffany.