Seven Hills Realty Trust Common Stock 2026 Q3 Earnings Call

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, 2026, 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 sevnreit.com. With that, I will now turn the call over to Tom.

Thank you, Matt, and good morning, everyone. On our call today, I will begin with an overview of our third quarter activity and portfolio performance. Jared will then discuss market conditions and our investment pipeline before Matt reviews our financial results and outlook. The third quarter was highly productive for Seven Hills as we continued deploying capital into accretive investments while reducing our legacy office exposure. We generated Distributable Earnings of $0.24 per share, excluding a modest loss associated with the repayment of our Dallas office loan. As I will discuss shortly, we believe this loan's resolution was a positive outcome for Seven Hills that will further support ongoing earnings growth within the portfolio. Origination activity accelerated meaningfully during the quarter as we continued to capitalize on attractive lending opportunities across our target sectors.

We originated three loans totaling $122.3 million, representing our highest quarterly loan origination volume since the fourth quarter of 2021. These investments included a $68 million loan secured by a Class A multifamily property in Chattanooga, Tennessee, a $30 million loan secured by a 95% leased retail property in Charlotte, North Carolina, and a $24.3 million loan secured by a high-end retail property in Park City, Utah. Importantly, virtually 100% of the loan proceeds from these three loans were funded at closing, eliminating any earnings drag on unfunded future commitments. We also received $139 million of repayment proceeds during the quarter, improving our portfolio composition and enhancing our ability to pursue new lending opportunities.

Included in this activity was the repayment of our Dallas office loan, which was resolved at approximately 97% of its $44.2 million outstanding balance, reflecting a $1.5 million discount that was significantly below the $6.3 million CECL reserve allocated to the investment. We believe this represents a highly favorable resolution. In addition, the repayment unlocked approximately $46 million of previously trapped capacity due to the underlevered nature of the loan. This allows us to efficiently redeploy this capital into new investments and grow our portfolio. As a result of our origination and repayment activity, office exposure declined from 19% at the end of the second quarter to 13% at the end of the third quarter. Going forward, we expect our office exposure to continue trending lower into the high single digits over the coming quarters as additional office loans are repaid and capital is redeployed.

Turning to portfolio performance, our loan book continues to perform well, reflecting the benefits of our disciplined underwriting approach and active asset management. Our portfolio maintained a weighted average all-in yield of approximately 7.8% at quarter end, and credit performance was steady as all borrowers remain current on debt service. Our weighted average risk rating increased from 2.9 last quarter to 3.2, driven by two one-rated loans being repaid, as well as a single office loan in Carlsbad, California, being downgraded to a risk rating of five as it approached maturity and a negotiated resolution was in progress. Subsequent to quarter end, the Carlsbad property was sold, netting approximately $22.1 million, which represents a recovery of approximately 90% of the loan's $24.7 million outstanding principal balance.

This outcome was consistent with the discounted payoff we agreed to, and reflects a discount of approximately $2.6 million, in line with the CECL reserve allocated to the investment. While this repayment occurred after quarter end and is not reflected in our third quarter results, it further reduced our office exposure to 10% and unlocked an additional investment capacity of approximately $11 million due to the underlevered nature of the loan. Furthermore, I'd like to put the recent realized losses into perspective. Since writing our first loan in the spring of 2018, we have closed 72 loans for $1.93 billion. The combined realized losses incurred total 0.2%, a track record we are extremely proud of, and certainly one of the best amongst our peer group.

We believe the resolution of these office loans represents significant progress in not only reducing our legacy office exposure, but improving the overall composition of the portfolio, enhancing our ability to redeploy capital into new investments that will drive future earnings growth. Our only remaining office maturity in 2026 is a $23.5 million loan backed by a 95% leased asset in suburban Chicago, where we remain actively engaged with the sponsor regarding a path forward, and expect to provide an update in the fourth quarter. Additionally, nearly 80% of our portfolio has been originated since 2024 in a higher interest rate environment. This positions us well for the current operating environment and provides increased visibility into the portfolio's future performance. Looking ahead, we remain focused on actively deploying capital into investments that meet our disciplined underwriting and return objectives.

Our pipeline remains healthy, and we currently have three loans in diligence totaling over $120 million that we expect to close over the next couple of weeks. Based on our current outlook, we now expect to achieve sustainable dividend coverage in the first half of 2027. This timing primarily reflects certain loan closings occurring later than anticipated rather than any change in our origination assumptions. We remain committed to our current quarterly dividend of $0.28 per share, and believe our active pipeline, growing lending capacity, and continued reduction in legacy office exposure positions Seven Hills to create long-term value for our shareholders. With that, I'll turn the call over to Jared to discuss current market conditions and provide further details on our pipeline.

Thank you, Tom. Through most of this year and much of the third quarter, commercial real estate capital markets have performed well. Despite continuous interest rate volatility, ongoing concerns regarding inflation, rising energy costs, and continued geopolitical uncertainty, transaction activity remains strong and financing activity has been robust. The recent spike in longer-term Treasury yields and greater uncertainty surrounding the path of the federal funds rate has created a more challenging environment for many market participants today. We are beginning to see signs of slowing sale transaction activity as buyers, sellers, and lenders adjust return expectations to reflect the current and potential future interest rate environment. We are also starting to see a growing number of situations where certain lenders have had to reprice loan quotes or revisit transactions as market conditions have evolved.

In many of these cases, higher interest rates have materially changed financing terms or caused lenders to step away from opportunities altogether. Despite the heightened level of interest rate volatility and a potential slowdown in property sale activity, we continue to see significant demand for debt capital, driven by the substantial volume of loans originated during 2021, 2022, that are scheduled to mature over the next several years, which we believe will continue to create a meaningful and durable opportunity for Seven Hills. The current macroeconomic climate should benefit lenders with the ability to source and evaluate transactions based on the quality of the underlying asset, the strength of sponsorship, and the merits of a specific business plan, rather than relying on lower interest rates as a means of value creation.

To that end, we continue to see a number of attractive lending opportunities that no longer fit a traditional lender's loan sizing parameters, and sponsors are in need of flexible capital and a lender that can deliver certainty of execution, like Seven Hills. In addition to industrial and multifamily, we continue to see opportunities spanning a variety of property types, including retail, medical office, self-storage, and student housing. While there continues to be heightened competition among alternative lenders for high-quality opportunities, pricing for new investments has firmed up, and the focus today is on certainty of execution in addition to pricing. We believe these conditions will continue to provide attractive risk-adjusted returns and support ongoing capital deployment. Looking ahead, activity in our pipeline remains healthy. As Tom mentioned, we currently have three loans in across the market.

We expect refinancing demand to remain a meaningful driver of our pipeline and origination activity. With that, I'll turn the call over to Matt to discuss our financial results.