Seven Hills Realty Trust

Good morning and welcome to the Seven Hills Realty Trust third quarter 2025 financial results conference call. All participants will be in the listen only mode. Should you need assistance during the conference call, please signal and 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 press star then one on your touchtone phone. To withdraw your question, please press star and then two. Please note that this conference is being recorded. I would now like to turn the call over to Mr. Matt Murphy, Manager of Investor Relations. Please go ahead.

Good morning. Joining me on today's call are Tom Lorenzini, President and Chief Investment Officer, Matt Brown, Chief Financial Officer and Treasurer, and Jared Lewis, Vice President. Today's call includes a presentation by management, followed by a question and answer session with analysts. Please note that the recording, retransmission, and transcription of today's conference call is prohibited without the prior written consent of the company. 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, October 28, 2025, 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 financial 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, which can be found on our website at 7REIT.com. With that, I will now turn the call over to Tom.

Thank you, Matt, and good morning, everyone. On today's call, I will provide an overview of our third quarter performance and recent developments. And I will then turn the call over to Jared for an update on our pipeline and market trends, followed by Matt, who will review our financial results before opening the line for questions. We delivered solid third quarter results supported by a fully performing loan portfolio and disciplined capital deployment. Distributable earnings for the third quarter were $4.2 million, or 29 cents per share, which came in at the high end of our guidance range. And earlier this month, our board declared a regular quarterly dividend of 28 cents per share, which equates to an annualized yield of 11% on yesterday's closing price. Recent transaction activity during the quarter included the closing of a $34.5 million first mortgage loan secured by 100% leased mixed-use retail and medical office property in Manhattan's Upper West Side. In addition, we also executed a loan application for $37.3 million secured by a student housing property at the University of Maryland, which we expect to close in the next few days. Student housing assets at major universities continue to perform well, while allowing for enhanced spreads when compared to traditional multifamily. As of quarter end, our portfolio consisted of $642 million in floating rate first mortgage commitments across 22 loans, with a weighted average all-in yield of 8.2% and a weighted average loan to value of 67% at close. Our weighted average risk rating at the quarter end was 2.9, with all loans current on debt service, no five-rated loans, and no non-accrual balances. During the quarter, we received the full repayment of two loans, totaling $53.8 million, and we may see one additional loan repaid before year-end with an outstanding balance of $15.3 million, but the majority of near-term repayments are expected to occur in 2026. Full-year portfolio growth is estimated to be approximately $100 million net from year end 2024. We continue to see a more active lending environment as short-term rates move lower and investors anticipate further rate cuts before year end. This has led to greater borrower engagement and transaction volume across our pipeline, which we expect will continue to grow over the coming quarters. As SOFR continues to decline, we will see our SOFR floors begin to become active, providing a benefit to earnings and helping to partially offset the impact from declining rates. While competition remains elevated, we continue to find compelling opportunities that meet our return thresholds and align with our underwriting standards. Overall, we believe our disciplined approach, strong sponsor relationships, and underwriting and asset management expertise will allow us to continue generating attractive risk-adjusted returns. With borrower demand and transaction activity improving, we remain focused on deploying capital into opportunities that we believe offer the best relative value in the current environment. Our platform is well positioned to deliver consistent execution and drive sustainable value creation as market conditions evolve, and we look forward to sharing our continued progress in the quarters ahead. With that, I will now turn the call over to Jared for an overview of current market conditions as well as our pipeline.

Thanks, Tom. During the third quarter, we saw a notable improvement in market sentiment following the Fed's rate cut in September, which helped to drive new financing activity. The initial rate cut prompted many borrowers to move forward with financing decisions that had previously been placed on hold, and with expectations of two additional rate cuts before year end, buyer and seller expectations are beginning to come into closer alignment, which has led to an increase in overall transaction volumes. Demand for floating rate bridge financing remains strong, driven primarily by 2021 and 2022 vintage floating rate multifamily loan maturities, which will continue well into 2026. In most cases, borrowers are choosing to refinance debt, but continue to require flexible fund rate debt solutions to allow time for business plans to play out and property operations to stabilize. We are also beginning to see more instances of new buyers acquiring properties at a reset basis that better reflects current rent growth and operational expectations, helping drive additional transaction volume. While multifamily continues to account for the majority of current opportunities, it also remains most competitive. CRE CLO issuance has accelerated meaningfully over the year, and debt funds, mortgage REITs, and insurance companies are all pursuing similar loan opportunities. Furthermore, the material tightening of corporate bond spreads has made real estate credit an attractive relative value investment, which has resulted in an influx of capital to the CRE debt sector, providing liquidity and causing competition among lenders. Despite these competitive dynamics, we remain selective and disciplined in our approach to new originations. We continue to find opportunities in industrial, necessity-based retail, hospitality, and student housing. we are seeing more attractive spreads on loans with strong credit characteristics. Furthermore, with transaction volumes expected to increase in the first half of 2026, we expect to see significant opportunities for lenders with flexible capital to invest. Our pipeline is robust and well diversified, and we are currently evaluating over $1 billion of loan opportunities. Importantly, the composition of our pipeline has shifted toward a higher proportion of acquisition financing compared to refinancing activity, a trend that we view as a key indicator of renewed market confidence and a constructive environment for new lending. Our disciplined investment process, supported by the broad RMR platform, will allow us to identify attractive opportunities and maintain strong credit performance as market dynamics continue to unfold. I will now turn the call over to Matt for an overview of our financial results.

Thank you, Jared, and good morning, everyone. Yesterday, we reported third quarter distributable earnings of $4.2 million for $0.29 per share, coming in at the high end of our guidance and in line with consensus estimates for the quarter. As it relates to third quarter distributable earnings, loan repayments since April 1st impacted distributable earnings by $0.06 per share, whereas loan originations over the same period contributed $0.03 per share. The $53.8 million of loan repayments in July contributed one cent of distributable earnings to third quarter results. We expect the loan originated in September and the loan origination under application to contribute three cents of distributable earnings per share in the fourth quarter. Overall, we expect fourth quarter distributable earnings to be the range of 29 to 31 cents per share, taking into account this loan activity and current SOPR expectations based on the curve. As Tom mentioned, all but one of our loans contain interest rate floors ranging from 0.25% to 4% with a weighted average floor of 2.59%. With continued decreases in SOFR, certain of our loans will be subject to the floor, providing seven with earnings protection, whereas none of our secured financing facilities contain floors. At quarter end, none of our loans had active interest rate floors. However, with SOFR now hovering just below 4%, Certain of our floors have become active. Please refer to page 17 of our earnings presentation for further details. We ended the quarter with $77 million of cash on hand and $310 million of capacity on our secured financing facilities. Our portfolio has an all-in yield of SOFR plus 397 basis points and a weighted average borrowing rate of SOFR plus 215 basis points. Our CECL reserve remains modest at 150 basis points of our total loan commitments. unchanged from last quarter, and is supported by a conservative portfolio risk rating of 2.9, which is also unchanged from last quarter. Our portfolio remains well diversified by property type and geography, and all loans are current on debt service. We do not have any collateral dependent loans or loans with specific reserves. This highlights the strength in our underwriting and asset management functions to provide long-term value for shareholders. That concludes our prepared remarks. Operator, please open the line for questions.

Thank you. We will now begin the question and answer session. To ask a question, you will press star and 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you wish to withdraw your question, please press star and two. At this time, we will pause momentarily to assemble our roster. We have the first question from the line of Matthew Edna from Jones Trading. Please go ahead.

Hey, good morning, guys. Thanks for taking the question. Could you rehash through the repayments that you were expecting for the remainder of the year? I picked up the 15.3 million, but was there another loan that I was missing in there?

No, Matt, that's the only one that we expect to come back potentially before year end. Everything else really will be 2026 with the bulk of our scheduled repayments in Q3 and Q4 of 26.

Okay, got it. Yeah, that makes sense. And then Based off of the College Park loan closing, I've got the portfolio around 680 million. You know, seeing that last year, you know, at the end of the year was about 640. So, you know, that leads me to believe that, you know, you guys are expecting a couple more loans to close throughout the year. You know, could you talk a little bit about, you know, how you guys are sourcing those, you know, and just speak a little more on the competition of, you know, what's causing you guys to win loans over... certain people and just the characteristics that you guys are bringing to the table?

Thanks. Sure. So I'll start with how we're sourcing those loans. The majority of the transactions are coming in through the traditional channels, such as the mortgage banking community, the JLLs, the CBs, New Marks of the World, et cetera. A certain percentage of our transactions also come in direct from sponsorship. It's probably 80% from the brokerage, 20% direct, something along those lines. And as far as how we're winning those transactions, it really, you know, I think that a couple things. I think we have a solid reputation in the marketplace that we deliver as advertised, which is critical to sponsors today, and especially to the brokerage community. They certainly want to align themselves with lenders that will close as, you know, as advertised. and also i think we're also been we've been very judicious about trying to uncover loans with a little bit higher yielding um you know we can fall upon the expertise here at the broader platform you know learn something about the asset the market and really lean in and take a deal you know from away from a competitor because maybe we have a better understanding of it so All that translates really across product types for everything that we're looking at currently. As you saw, we're under app on the student deal. We like that business. We continue to chase multifamily, grocery-anchored retail, select hospitality opportunities certainly exist out there as well. So, you know, for the foreseeable future, through the end of the year, I think we're looking at probably another three to four loans, you know, that we're comfortable with that we're going to close up on.

Got it, that's very helpful, thank you.

Thank you. Again, participants, if you have a question, please press star and one. We have the next question from the line of Christopher Nolan from Lidenberg Thalman, please go ahead.

Hey, for Matt, does the CECL reserve change or does the requirements under CECL for the allowance go down with lower rates, lower SOFRs specifically?

They could. There's a lot of factors that impact the CECL reserve. I think it's important to note that we add back any CECL reserve to our distributable earnings because it's a non-cash item. And we do not have a history of recording any loan losses for 7. So there's macroeconomic factors. There's factors with our existing portfolio based off property level performance. repayment activity, origination activity. So it's a blend of factors that are driving that. Overall, we're 1.5% of total loan commitments, which we think is very conservative for our business.

Because my thinking is if SOFR is going down and your loans are spread over SOFR, from that we can... it's an increased probability that the allowance reserve as a percentage of loans will go down. Does that follow or not?

It does, but like I said, there are a lot of factors that go into it in addition to just SOFR.

Okay. And, Jared, thank you for the overview on the market. For multifamily and your comments on multifamily debt, does that, Does this also imply increased demand for multifamily equity as well, or is that a different market in terms of its dynamics right now?

Well, I would say there's certainly always a demand for equity capital. Given just the sheer volume of loan maturities from 21 and 22 vintage assets, a lot of those deals are going to require either additional equity, so if you're refinancing a property and if it doesn't refinance to current standards, then it may require additional equity capital. So sponsors and borrowers are outsourcing additional equity for those opportunities. But then there's also on the acquisition side, plenty of capital that's been raised over the years that is seeking to be deployed in the multifamily sector because of its attractiveness and liquidity. So that's going to also help drive financing activity. So it's sort of a two-way street. Yes, there's going to be the requirement for new debt going forward in the multifamily sector, but with that comes the requirement of additional equity as well. So I think there is a lot of capital chasing those opportunities because of the underlying fundamentals. And so I expect that to continue into 2026 and 2027. Great.

And final question on that line. In your observation, are you seeing banks become less participant in multifamily debt markets or more? Any characterization there?

Yeah, so the larger banking communities, you know, the money center banks are very active today and they've become competitive and they're another cohort of lenders that are chasing these opportunities, specifically in the multifamily space. Smaller regional banks may not be as active. You know, as you've read in headlines, I mean, there's still concern or questions over bank balance sheets in certain sectors, and so I think some are still taking a more conservative approach, but generally speaking, the larger banks are active. The smaller banks are a little bit more selective.

Interesting. Okay, thank you very much.

Thank you. We have the next question from the line of Chris Mueller from Citizens Capital Markets. Please go ahead.

Hey, guys. Thanks for taking the questions, and congrats on a solid quarter. So cash balance has jumped up a little bit in the quarter. I guess the question is, is that due to timing of repayments coming in? Are you guys holding a little bit of extra liquidity ahead of some of those originations you expect in 4Q?

It's really driven by the sources and uses of the quarter. You know, we had 54 million of repayments come in in July, and we only put out about 34 million of new loans. As we noted, we do have a $37 million loan opportunity that we expect to close in the near future, but that cash balance also allows for the additional origination that Tom noted through the end of the year.

Got it. And I guess I like the slide you guys have with the EPS bridge in the deck. Does that $0.03 include origination fees? And then I guess follow-up question on that is, what does a typical quarter look like for origination fees? Is it kind of that penny, two pennies, three pennies type number? Or can we see that ramp up if you guys can really start deploying capital in 2026?

Yes, the origination fees are baked into the yield.

Got it. And is that just like a penny or two a quarter? Is that the right way to think about that?

Yeah, at best it's probably a penny a quarter is my guess.

Got it. I guess just the last one I have here. So on the NIM compression, the other slide you guys have in your deck, It's been trending lower since the peak of the market when rates were at zero, which makes sense. But do you guys feel that you're either at or near a trough on NIM compression there, or could there be some more pressure in the coming quarters?

Yeah, I think we're at the... I would say that we're probably at the trough there. You know, part of that really just comes down to us identifying the appropriate transactions to invest in, right? So... We're certainly mindful of that, and again, I think we've been very good about sourcing outsized returns when we're able to do so, and that's obviously the goal going forward. So we're expecting that to bottom out, and if not, almost reverse itself.

Got it. Well, I appreciate you guys taking the questions, and congrats again on a solid quarter.

Thank you. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Tom Lorenzini, President and Chief Investment Officer, for any closing remarks.

Thank you, everyone, for joining today's call. Please reach out to Investor Relations if you are interested in scheduling a call with Seven Hills. Operator, that concludes our call.

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.