Seven Hills Realty Trust Price & Performance (SEVN)

Investors are cautioned not to place undue reliance upon any forward looking statements. In addition, 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 Seven. With that, I will now turn the call over to Tom. Thanks, Matt, and good morning, everyone. On our call today, I will start with an update on our fourth quarter activities and performance. Followed by an overview of our loan portfolio, Before turning it over to Jared, to discuss the macro perspective, the opportunities that we are seeing in this competitive environment as it relates to our pipeline, Fernando will then review our financial results before opening the call to questions from cell site analysts. Before jumping into our quarterly results, I would like to highlight that for the full year, Seven Hills soundly outperformed our benchmark index and 20%. This is the second consecutive year that we have outperformed this index allowing us to deliver meaningful shareholder returns. We is a testament to the quality of our borrowers as well as our underwriting and portfolio asset management.

Turning to our fourth quarter results. Last evening, we reported distributable earnings per share of $0.33 which met the high end of our guidance range.

We further strengthened and diversified our portfolio by increasing our total loan commitments during the quarter to $641,000,000 from $594,000,000 at the end of Q3. Our average loan commitment also increased quarter over quarter from $30,000,000 to $31,000,000 Our loan portfolio continues to perform well and currently has a weighted average risk rating of 3.1.

We have no five rated loans no loans in default and no non accrual loans. We ended the quarter $70,000,000 in cash and ample borrowing capacity after receiving eight loan repayments totaling $165,000,000,000 during the year. Positioning us to further grow our portfolio strategically taking advantage of opportunities in our pipeline to generate attractive risk adjusted returns.

Prior to our recycling in capital generated through future loan repayments, we would expect to grow our $100,000,000 in 2025. Turning to a few additional highlights from the fourth quarter. We were active during the quarter closing two loans totaling $87,000,000 The first loan was a fully funded $42,000,000 refinance of a student housing property serving the University of Mississippi. The second loan was a $45,000,000,000 commitment to finance the acquisition of 178 room hotel located here in Boston Also during the quarter, we received one loan repayment, our Star Mississippi loan, which totaled 37,000,000 Then in early January, we closed on a $31,000,000 bridge loan finance the acquisition of another student housing property, this one located at Texas State Looking forward, we are not anticipating any first quarter repayments, but do expect six to seven loans totaling [indiscernible] which should position us well as the markets continue to improve. Turning to our loan book as of December 31, Seven Health portfolio remained 100% invested in floating rate loans, which consisted of twenty one first mortgages, an average loan size of $31,000,000 and total commitments of $641,000,000 an increase of approximately 8% or $47,000,000 from last quarter. Future fundings decreased modestly to 5% of total commitments and our investments have a weighted average coupon of 8.2% and an all in yield of 8.6%.

In aggregate, the portfolio has a weighted average max including extension options and a stable overall credit profile with an average risk rating of 3.1 and a weighted average loan to value at close of 67% Seven. We continue to thoughtfully diversify our loan book. As of today, our office exposure has been reduced to 26% of our total outstanding loan dollars down from 30% at the end of Q3. But more importantly, all of our office loans are secured by well leased properties remain current at debt service and continue to be actively supported by our borrowers. In addition, 52% of today's portfolio consists of multifamily and industrial loans, followed by select service hospitality and grocery anchored retail loans. Geographically, we continue to be well diversified across the country. A capital perspective, our lending partners remain incredibly supportive of our business. We amended our UBS master repurchase agreement by extending the maturity date to February of twenty twenty six, while also increasing the maximum facility size by $45,000,000 to $250,000,000 Seven, we extended the maturity date of our $125,000,000 Wells Fargo mat repurchase facility from February 2025 Before I turn the call to Jared, I would like to mention that in December, Seven Hills elected Ann Danner to our Board as an independent trustee and brings more than forty years of real estate industry experience and her strong background residential and multifamily development investment and operations will be a significant asset to Seven Hills going forward.

With that, I will now turn the call over to Jared.

Thanks, Tom. Will provide a quick macro perspective update. Optimism in the market as the Federal Reserve began reducing interest rates. As a result, over the fourth quarter, we saw a significant increase in loan request activity and averaged over $1,200,000,000 of monthly loan registrations during the quarter.

More notably, however, we saw an increase in credit quality and in particular transactions that fit our stringent underwriting criteria evidenced by a substantial increase in term sheets issued when compared to the same period last year. [indiscernible] Beginning at the end of the last year and so far in early twenty twenty five, we have seen a great deal of liquidity return to the market. The CMBS and CRE CLO markets are active. And competition among lenders for new loans continues to drive spreads downward. Particularly in the multifamily sector. The confluence of recent interest rate reductions, increased liquidity and the bottoming of real estate values gives property owners and borrowers more conviction to make buy sell or refinance decisions. With significant upcoming loan maturities, this combination should help fuel increased transaction activity as we progress into 2025. Furthermore, a significant amount of these upcoming loan maturities are floating rate bridge loan originated in 2021 and 2022 and do not readily qualify for permanent financing today. Many of these properties are likely to require additional investment in new floating rate debt to facilitate the completion of their business plans and to allow for additional time for property analyze to stabilize.

As I mentioned earlier, our pipeline of financing opportunities remains robust And while borrowers are evaluating both fixed and floating rate options, we are seeing that many are more open to signing floating rate loans for the near term flexibility they offer. Like many lenders, continue to see an increase in opportunities to finance multifamily properties, However, we continue to be thoughtful about how we deploy our capital. And have found success targeting sectors of the multifamily market where there's less competition like student housing. We also continue to see interesting opportunities in the industrial, hospitality and retail sectors where we can leverage the expertise of the broader RMR platform help us better evaluate transactions that generate stronger, Generally speaking, this is a good environment for floating rate lenders like us. The relative stability of short term rates compared to the recent volatility and a ten year treasury rate make floating rate loans useful for a wide array of circumstances. This allows us to be very selective during our credit analysis process while still being able to strategically expand our loan portfolio.

To that end, we currently have two outstanding term sheets on industrial and hospitality properties totaling $65,000,000 In addition, we have one $19,000,000 loan in diligence with a repeat borrower for the refinance of the student housing properties serving Baylor University. This loan is a three year initial term with two one year extension options. Subject to property meeting certain requirements, Barring any issues and diligence, this loan should close within the next thirty days. Now, I would like to turn the call over to Fernando.

Thank you, Jared, and good morning. Yesterday, we reported fourth quarter twenty twenty four distributable earnings of $4,900,000 or $0.33 per share. For the full year, we reported distributable earnings of $21,300,000 or $1.45 per share, compared to our dividend of $1.4 per share. In January, we declared a regular quarterly dividend to shareholders of $0.35 per share to be paid tomorrow, February 20. On an annualized basis, the dividend yield on our stock is approximately 10.6% Our CECL reserve remains modest at 140 basis points of our total loan commitments as of December 31, compared to 160 basis points as of September 30, Our CECL provision decreased $450,000 for the third quarter primarily due to an improvement in the macro forecast used in our CECL model improved performance at certain of our loans during the fourth quarter. As a reminder, to help protect us against investment losses, we structure all of our loans with risk mitigation mechanisms such as cash flow sweeps, interest reserves and rebalancing requirements.

And we do not have any collateral dependent loans or loans with specific reserves. As of year end, Seven Hills Seven its conservative leverage metrics and continues to have ample liquidity. Ended the quarter with $70,000,000 of cash on hand ample borrowing capacity and a weighted average borrowing rate of sulfur plus two twenty three basis points. Total debt to equity increased 1.6 times from 1.4 times at the end of the previous quarter primarily due to the two loan originations in the quarter Tom discussed earlier. We believe that our conservative leverage and available borrowing capacity provide a strong opportunity originate accretive loans will benefit the company.

Turning to our outlook and guidance.

We expect first quarter distributable earnings to be in the range of $30.0.32 dollars per share as a result of the fourth quarter payoff and the timing of the closing of new originations currently in our pipeline. As Tom and Jared discussed, we have a robust pipeline with several loans in advanced stages of negotiation.

However, these loans will not close until later this quarter in the second quarter. That concludes our prepared remarks. And with that, operator, Thank you. We will now begin the question and answer session.

And the first question will come from Matthew Ertner with Jones Trading. Please go ahead. Hey, good morning guys. Thanks for the question. And Fernando, thanks for that clarification on the interest income and kind of the timing there, because that was actually the first question that I had. But I guess turning to the four portfolio, targeting $100,000,000 in net originations and I believe you said $200,000,000 in payoffs.

How comfortable are you guys at the current dividend or at the current level with the dividend and portfolio size? And just kind of thinking about run rate earnings going forward, once those loans do close later half 1Q, early Q2, you kind of expect that to be fully supportive of that $0.35 dividend? Yes, I can start with that and perhaps Duncan add some color in terms of loan production.

As you know, Matt, the Board evaluates dividend on a quarterly basis based on market conditions, originations and payoffs. And the forward path of interest rates. So So it's something that the Board looks on a quarterly basis and I think We continue to evaluate that along with the Board in terms of the dividend.

And then, Matt, I think certainly important to that question is going to be our pace of production. For the year, we've already closed one transaction earlier this year for $31,000,000 We've got another in the 2019 that we mentioned that's in closing. So we'll have those two close this quarter. And then we've got another another $50,000,000 $60,000,000 that we can put two more deals probably in second quarter at some point and then we start getting the repayments recycling that cash. So as far as supporting the dividend, it's really going to just depend on how quickly we can get the initial dollars out. To continue to support the support the plan.

Got it. That's helpful. And then kind of as a follow-up to that, when looking at payoffs, how much insight can you guys see into that? Because it looks like with the original maturity date, there's about 58% of the portfolio give or take that was scheduled to mature this year. And you mentioned the back half, but how good of a look into that do you guys have Well, look, certainly speak with our sponsors at a minimum monthly as they provide their we're acutely aware of the upcoming maturities and we're working with the sponsorship. So what I can tell you is that when we look through the schedule here, the there's 11 loans that are going to mature in 2025. Several of those we know will extend. Some have the extensions by right, Some there's some early maturities coming up quickly now. We've got one in Maryland on a retail center. They are actively pursuing to pass to either sell or refinance us There may be a short term extension we do there. And then we've got another property outside of Chicago and Downers Grove that is maturing here at the February, we've agreed to extend on a short term basis there as well while they continue to work with their bank on a refinance.

And then the rest of the loans, if you look at the schedule, they're really not scheduled until Q3 and Q4.

Got it. Yes, that's very helpful. Thank you for that. Our next question will come from Chris Mueller with Citizens JMP. Please go ahead. Everyone, thanks for taking the questions and congrats to a nice close to 2024. So I guess how are you guys thinking about leverage in 2025? And just to put that in a little context, the Centimeters REIT typically you to operate in a three zero one type leverage scenario.

But you guys are well below that today, which gives you a lot of flexibility going forward. So just curious on any thoughts you guys have on leverage going forward?

Yes, happy to take that. As you know, we finished the quarter at 1.6 times with with the amount of capital that Tom alluded to earlier, probably [indiscernible] which is probably a little bit under where we want to be, but at this point, maximum leverage will be about 2.5x, but currently probably around two, a little bit north of two we put the money to work. And part of that equation [indiscernible] think four of the six office loans that we have were pretty under levered. So that factors into keeping that number low. Got it. That's helpful.

And then maybe something that would impact that leverage a little more dramatically. Hearing and you guys touched on this in your prepared remarks securitization markets are tightening up and becoming a little more attractive. So is CLO something that could fit into the Seven Hills vehicle? And just how are you guys thinking about the CLO market as we sit today? Hi, Chris. This is Jared.

I can address that. Yes, with respect to our The CMBS and CRELO markets, they're definitely back. They're very active and they're a huge catalyst to driving spreads downward. As a result of that, we gained the benefit of that with our repo facilities as well. So where CLO prints happen kind of translates into our borrowing costs well. So that's a benefit to us. Our ability, however, to access or tap into that CRE CLO market is a little bit challenging today given the size of the portfolio. As you know, the majority of those structures are collateralized with multifamily properties and generally they're anywhere from 3 quarters of a billion dollars to $1,000,000,000 for each of those deals. So for us to really access that market, we'd have to originate all of our loans and that probably multi family world and start from scratch all over again Our portfolio we think is performing well and so we continue to find ways to generate returns elsewhere.

Got it. So CLL would kind of be a next chapter once we get through this current cycle. So appreciate the comments today and look forward to seeing story play out in twenty twenty five.

With no further questions, this concludes our question and answer session. Would like to turn the conference back over to Tom Lorenzini, President and Chief Investment Officer.

For any closing remarks.

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