Seven Hills Realty Trust

Good morning and welcome to the Seven Hills Realty Trust's third 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 conference over to Kevin Barry, Senior 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 and Chief Investment Officer Tom Lorenzini and Chief Financial Officer and Treasurer Fernando Diaz. In just a moment, they will provide details about our business and our performance for the third 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, Wednesday, November 1st, 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 forwarding statements. In addition, we will be discussing non-GAAP numbers during this call, including adjusted distributable earnings and adjusted 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. I will now turn the call over to Tom.

Thanks, Kevin. Good morning, everyone, and thank you for joining Seven Hills today. I'd like to start by welcoming Fernando Diaz. Fernando joined Seven Hills as our Chief Financial Officer and Treasurer on October 1st and brings more than 20 years of public company experience as a securities analyst and portfolio manager, and served as the President and Senior Portfolio Manager of our trust prior to its deregistration as an investment company in 2021. He also oversees credit risk and business analytics within the RMR Group. Turning now to our third quarter performance. Last night, we reported strong results, further demonstrating the quality of our loan portfolio and the strength of our business, despite the macroeconomic pressures facing the commercial real estate industry. Let me begin with the highlights. We generated adjusted distributable earnings of $0.36 per share, more than fully covering our dividend. We accelerated loan production, closing two loans during the quarter and another just after quarter end for total commitments of $70 million. Shortly after quarter end, we received repayments totaling approximately $62 million, including two loans secured by office properties. In addition, our capital continues to remain well insulated with substantial sponsorship equity to our position with a portfolio risk rating of 2.9 and no non-accrual loans. Seven Hills continues to benefit from favorable competitive conditions and market dislocation in the aftermath of the regional banking issues earlier this year. Any regional banks and other traditional middle market lenders have taken a conservative approach to CRE lending and have turned their focus in the near term to addressing credit-challenged assets and shoring up the balance sheets. With strong liquidity and deep industry relationships, we remain well-positioned to continue to attract superior investment opportunities supported by well-capitalized sponsors and high-quality assets. We also continue to make progress diversifying our loan book and reducing our office exposure. Since the end of the second quarter, we have closed three loans with aggregate total commitments of $70 million secured by industrial, hospitality, and self-storage properties. The loans carry attractive return profiles with spreads ranging from 335 basis points to 425 basis points with a weighted average loan to value of 64%. Consistent with our overall portfolio, the percentage of initial fundings to total new loan commitments was approximately 95%, allowing us to put more capital to work at the inception of each loan. Additionally, in October, we received more than $62 million of loan repayments, including $44 million on two office loans. This repayment activity is a testament to our disciplined underwriting and asset management capabilities and serves as a positive indicator that our experienced Wealth Capitalized sponsors can be refinanced in this challenging environment. Taking into account a recent production of repayment activity, we have reduced our office exposure to 29% compared to 40% earlier this year. Industrial and multifamily now make up just over half of our commitments, while retail accounts for 17%, and we have one recently closed hospitality loan. Turning to our loan book as of September 30th. Seven Hills Portfolio remained 100% invested in floating rate loans and consisted of 26 first mortgages with an average loan size of approximately $28 million and total commitments of $720 million. Our investments have a weighted average coupon of 9.2% and an all-in yield of 9.7%. In aggregate, the portfolio has a weighted average maximum maturity of just under three years when including extension options And the weighted average risk rating for the portfolio decreased to 2.9 from 3 last quarter, reflecting the overall strength and stability of our sponsors and the underlying collateral assets. It is worth noting that our portfolio had the added benefit of relatively recent underwriting, with 93% of our total commitments underwritten during the past three years. To give you more detail on our office exposure, after the recent repayments, our book includes seven office loans with a weighted average risk rating of 3.1, and all of these loans are performing. We have two four-rated loans, one in Dallas, which has benefited from strong and continued commitment from the sponsor, and a 73% lease, with a weighted average lease term of 4.7 years, and one in Carlsbad, California, secured by a Class A property that is 90% leased with a wealth of 3.6 years. The remaining five office loans consist of two two-rated loans and three three-rated loans. We maintain regular dialogue with all of our sponsors, closely asset managing the portfolio, and monitoring our sponsors' progress executing their business plans. From a capital perspective, our lending partners remain very supportive of our business and continue to provide us with ample, attractively priced capital to originate new loans. In aggregate, our four secured financing facilities provide us with nearly $700 million in borrowing capacity. At the end of the quarter, we had a weighted average borrowing rate on our facilities of so far plus 2.1% with a healthy interest coverage ratio. Turning to our active deal pipeline, we have over $800 million of prospective loan opportunities covering a wide range of property types, including industrial, multifamily, hospitality, student housing, and self-storage. The deals are broadly distributed across the country and reflect an even distribution of refinancing and acquisition transactions. We currently have one loan in diligence with a total commitment of approximately $29 million. In summary, during a period of unsettled commercial real estate conditions, we continue to execute on our objectives. Our results in the third quarter once again highlight the quality of our loan portfolio, the strength of our underwriting and asset management capabilities, and the progress we are making reallocating capital to our favorite property types. With ample liquidity and modest leverage, we look forward to capitalizing on our competitive position, taking advantage of the investment opportunities we are seeing in today's market, and continuing to generate attractive returns for our shareholders. With that, I'll now turn the call over to Fernando.