Seven Hills Realty Trust

And welcome to Seven Hills Realty Trust's first quarter 2023 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. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the call 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, Chief Financial Officer and Treasurer Tiffany Tsai. In just a moment they will provide details about our business and our performance for the first quarter of 2023. 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, April 25th, 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 can 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. A reconciliation of GAAP to non-GAAP financial measures can be found in our earnings release presentation that we issued last night, which can be found on our website, SEVNREIT.com. We believe this combined presentation of information will be helpful for analysts and investors to efficiently digest information about our company and our results. 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 first quarter earnings resulting from our resilient business model during a period of increased market volatility and the benefit of rising interest rates on our floating rate portfolio. Even as pressure on commercial real estate intensified, all of our loans continued to perform. Our capital remained well insulated with an overall portfolio loan to value of 67%. The credit profile of our loan book was stable. Distributable earnings increased to 39 cents per share, and we continue to deliver total shareholder returns that have outperformed the industry benchmark by more than 40 percentage points since the beginning of last year. We have maintained a highly selective approach in our loan origination activities and did not close on any new loans during the quarter, although we are in diligence on two opportunities totaling approximately $65 million currently projected to close over the next several weeks. In addition, we have an active pipeline along with ample liquidity to take advantage of today's attractive pricing opportunities. The Federal Reserve continued on its path of tightening monetary policy during the first quarter, and as a result, new lending activity across the market was subdued. In addition to higher interest rates, the continued slowdown in the CLO market has driven many lenders to the sidelines. And the recent failures of Silicon Valley and Signature Bank have raised liquidity concerns and contributed to the slowdown in lending in the banking sector. The overall result is a favorable, competitive backdrop for alternative lenders such as Seven Hills that have liquidity and are not financing themselves in the CLO or securitized market. This allows us to continue to be selective on new investments while capitalizing on those opportunities with high quality sponsors and accretive pricing. We continue to be proactive and are in active dialogue with all our sponsors as they execute on their business plans. We received more than $60 million of loan repayments since the beginning of 2023, further enhancing our liquidity and strengthening our balance sheet. 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. Turning now to our loan book at quarter end. As of March 31, Seven Hills' portfolio consisted of 25 first mortgage loans with total commitments of $674 million. Our average loan commitment is approximately $27 million, and future fundings account for less than 7% of our total commitments. Our investments have a weighted average coupon of 8.6% and an all-in yield of 9.1%. In aggregate, the portfolio has a weighted average loan to value of 67% and a weighted average maximum maturity of 3.1 years when including extension options. Our portfolio credit quality remains strong with no past due or non-recrual loans, which speaks to the overall strength and stability of our borrowers and the underlying collateral assets. The weighted average risk rating for the portfolio is unchanged compared with the prior quarter at 2.9 and none of our loans are rated 5. strategies. Given the well-publicized headwinds facing the office sector, I want to take a moment to give you more color on our office loans and point out that we have included additional details in our earnings presentation this quarter, which we believe may be helpful to investors. Our portfolio includes 10 office loans, making up 40% of Seven Hills principal balance. All these loans are performing, and none are located in urban or CBT markets that are facing the sharpest headwinds from the post-COVID work-from-home trend. We are seeing capital investment plans advance, strong rent collections, and continued financial commitments from our sponsors. We have no five-rated office loans, and our two four-rated loans make up just 9% of the overall portfolio. One of these is our office loan in Dallas, where we are seeing an ongoing commitment from our sponsor with significant additional equity contributions. The other four-rated loan is our Pennsylvania loan secured by a Class A office building. And while not out of the woods yet, the property recently increased occupancy to approximately 80% from 35% a year ago. As we look ahead, we expect commercial real estate will continue to face challenges related to sustained higher interest rates, recessionary concerns, and scarce financing. Considering the ongoing volatility in today's market environment, It is worth noting that the strength of our platform is... We have access to substantial hands-on experience executing business plans and operating properties across sectors. Our collective knowledge and resources across Tremont Realty Capital and the depth of RMR's national commercial real estate platform provides Seven Hills with a unique ability to step into the operations and management of a property, if necessary, to protect shareholder interest.