sevn-20240331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-34383

Seven Hills Realty Trust

(Exact Name of Registrant as Specified in Its Charter)


Maryland			20-4649929
(State of Organization)			(IRS Employer Identification No.)

Two Newton Place, 255 Washington Street, Suite 300, Newton, MA 02458-1634

(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code 617-332-9530

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol

Name of each exchange on which registered

Common Shares of Beneficial Interest

SEVN

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided in Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Number of registrant's common shares of beneficial interest, $0.001 par value per share, outstanding as of April 25, 2024: 14,805,494.

Table of Contents

SEVEN HILLS REALTY TRUST

FORM 10-Q

March 31, 2024

INDEX


		Page
PART I	Financial Information
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets — March 31, 2024 and December 31, 2023	1
	Condensed Consolidated Statements of Operations — Three Months Ended March 31, 2024 and 2023	2
	Condensed Consolidated Statements of Shareholders’ Equity — Three Months Ended March 31, 2024 and 2023	3
	Condensed Consolidated Statements of Cash Flows — Three Months Ended March 31, 2024 and 2023	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26
	Warning Concerning Forward-Looking Statements	27
PART II	Other Information	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 6.	Exhibits	29
	Signatures	30

References in this Quarterly Report on Form 10-Q to "SEVN", "we", "us" or "our" mean Seven Hills Realty Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.

Table of Contents

PART I. Financial Information

Item 1. Financial Statements

SEVEN HILLS REALTY TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

(unaudited)


	March 31,		December 31,
	2024		2023
ASSETS
Cash and cash equivalents	$	93,298	$	87,855
Loans held for investment	588,635		626,462
Allowance for credit losses	(5,149)		(4,376)
Loans held for investment, net	583,486		622,086

Real estate owned, net	11,130		11,278
Acquired real estate leases, net	3,937		4,137
Accrued interest receivable	3,400		3,632
Prepaid expenses and other assets, net	2,459		2,537
Total assets	$	697,710	$	731,525

LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, accrued liabilities and other liabilities	$	3,734	$	3,808
Secured financing facilities, net	421,171		454,422

Due to related persons	1,247		2,047
Total liabilities	426,152		460,277

Commitments and contingencies

Shareholders' equity:
Common shares of beneficial interest, $0.001 par value per share; 25,000,000 shares authorized; 14,805,494 and 14,811,410 shares issued and outstanding, respectively	15		15
Additional paid in capital	239,704		239,443
Cumulative net income	76,893		71,660
Cumulative distributions	(45,054)		(39,870)
Total shareholders' equity	271,558		271,248
Total liabilities and shareholders' equity	$	697,710	$	731,525

See accompanying notes.

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SEVEN HILLS REALTY TRUST

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except per share data)

(unaudited)


	Three Months Ended March 31,
	2024		2023
INCOME FROM INVESTMENTS:
Interest and related income	$	16,311	$	15,856
Purchase discount accretion	1,145		1,185
Less: interest and related expenses	(8,673)		(7,694)
Income from loan investments, net	8,783		9,347
Revenue from real estate owned	579		—
Total revenue	9,362		9,347
OTHER EXPENSES:
Base management fees	1,080		1,072
Incentive fees	50		—
General and administrative expenses	963		796
Reimbursement of shared services expenses	691		643
Provision for (reversal of) credit losses	697		(987)
Expenses from real estate owned	645		—
Total other expenses	4,126		1,524
Income before income taxes	5,236		7,823
Income tax expense	(3)		(20)
Net income	$	5,233	$	7,803

Weighted average common shares outstanding - basic and diluted	14,675		14,582


Net income per common share - basic and diluted	$	0.35	$	0.53

See accompanying notes.

Table of Contents

SEVEN HILLS REALTY TRUST

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(amounts in thousands)

(unaudited)


	Number of Common Shares	Common Shares		Additional Paid In Capital		Cumulative Net Income		Cumulative Distributions		Total

Balance at December 31, 2023	14,811	$	15	$	239,443	$	71,660	$	(39,870)	$	271,248
Share grants	—	—		336		—		—		336
Share repurchases	(6)	—		(75)		—		—		(75)
Net income	—	—		—		5,233		—		5,233
Distributions	—	—		—		—		(5,184)		(5,184)
Balance at March 31, 2024	14,805	$	15	$	239,704	$	76,893	$	(45,054)	$	271,558





Balance at December 31, 2022	14,709	$	15	$	238,505	$	52,290	$	(19,231)	$	271,579
Cumulative-effect adjustment upon adoption of credit loss accounting standard	—	—		—		(6,595)		—		(6,595)
Share grants	—	—		121		—		—		121
Share repurchases	(1)	—		(13)		—		—		(13)
Share forfeitures	(1)	—		(1)		—		—		(1)
Net income	—	—		—		7,803		—		7,803
Distributions	—	—		—		—		(5,147)		(5,147)
Balance at March 31, 2023	14,707	$	15	$	238,612	$	53,498	$	(24,378)	$	267,747

See accompanying notes.

Table of Contents

SEVEN HILLS REALTY TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)


	Three Months Ended March 31,
	2024		2023
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	5,233	$	7,803
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of purchase discount	(1,145)		(1,185)
Provision for (reversal of) credit losses	697		(987)
Amortization of loan origination and exit fees	(582)		(1,004)
Amortization of deferred financing costs	325		307
Straight line rental income	(278)		—
Depreciation and amortization	368		—
Share based compensation	336		120
Changes in operating assets and liabilities:
Accrued interest receivable	232		8
Prepaid expenses and other assets	336		1,101
Accounts payable, accrued liabilities and other liabilities	2		(113)
Due to related persons	(800)		527
Net cash provided by operating activities	4,724		6,577

CASH FLOWS FROM INVESTING ACTIVITIES:

Additional funding of loans held for investment	(886)		(1,651)
Repayment of loans held for investment	40,440		51,918


Net cash provided by investing activities	39,554		50,267

CASH FLOWS FROM FINANCING ACTIVITIES:

Repayments under secured financing facilities	(33,224)		(38,125)




Payments of deferred financing costs	(352)		(318)

Repurchase of common shares	(75)		(13)
Distributions	(5,184)		(5,147)
Net cash used in financing activities	(38,835)		(43,603)

Increase in cash and cash equivalents	5,443		13,241
Cash and cash equivalents at beginning of period	87,855		71,067
Cash and cash equivalents at end of period	$	93,298	$	84,308

SUPPLEMENTAL DISCLOSURES:
Interest paid	$	8,421	$	7,408
Income taxes (refunded) paid	$	(64)	$	3

Table of Contents

SEVEN HILLS REALTY TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Note 1. Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2023, or our 2023 Annual Report. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim periods have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the accompanying condensed consolidated financial statements include the allowance for credit losses, the valuation of real estate owned and the fair value of financial instruments.

Note 2. Recent Accounting Pronouncements

On November 27, 2023, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, or ASU No. 2023-07, which requires public entities to: i) provide disclosures of significant segment expenses and other segment items if they are regularly provided to the Chief Operating Decision Maker, or the CODM, and included in each reported measure of segment profit or loss; ii) provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by ASC 280, Segment Reporting, or ASC 280, in interim periods; and iii) disclose the CODM’s title and position, as well as an explanation of how the CODM uses the reported measures and other disclosures. Public entities with a single reportable segment must apply all the disclosure requirements of ASU No. 2023-07, as well as all the existing segment disclosures under ASC 280. The amendments in ASU No. 2023-07 are incremental to the requirements in ASC 280 and do not change how a public entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments. ASU No. 2023-07 should be applied retrospectively to all prior periods presented in the financial statements and is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. We are currently evaluating the impact ASU No. 2023-07 will have on our consolidated financial statements and disclosures.

SEVEN HILLS REALTY TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Note 3. Loans Held for Investment, net

We originate first mortgage loans secured by middle market and transitional commercial real estate, or CRE, which are generally to be held as long term investments. We fund our loan portfolio using cash on hand and advancements under our Secured Financing Facilities, as defined in Note 5. See Note 5 for further information regarding our secured financing agreements.

The table below provides overall statistics for our loan portfolio as of March 31, 2024 and December 31, 2023:


	As of March 31, 2024			As of December 31, 2023
Number of loans	21			24
Total loan commitments	$	628,891		$	670,293
Unfunded loan commitments (1)	$	38,259		$	40,401
Principal balance	$	590,632		$	629,892


Carrying value	$	583,486		$	622,086
Weighted average coupon rate	9.14		%	9.19		%
Weighted average all in yield (2)	9.58		%	9.64		%
Weighted average floor	1.41		%	1.36		%
Weighted average maximum maturity (years) (3)	2.8			3.0
Weighted average risk rating	3.0			3.0

(1)Unfunded loan commitments are primarily used to finance property improvements and leasing capital and are generally funded over the term of the loan.

(2)All in yield represents the yield on a loan, including amortization of deferred fees over the initial term of the loan and excluding any purchase discount accretion.

(3) Maximum maturity assumes all borrower loan extension options have been exercised, which options are subject to the borrower meeting certain conditions.

The tables below represent our loan activities during the three months ended March 31, 2024 and 2023:


	Principal Balance		Deferred Fees and Other Items		Amortized Cost
Balance at December 31, 2023	$	629,892	$	(3,430)	$	626,462
Additional funding	1,044		(158)		886

Repayments	(40,304)		(136)		(40,440)

Net amortization of deferred fees	—		582		582
Purchase discount accretion	—		1,145		1,145
Balance at March 31, 2024	$	590,632	$	(1,997)	$	588,635


	Principal Balance		Deferred Fees and Other Items		Amortized Cost
Balance at December 31, 2022	$	678,555	$	(8,626)	$	669,929
Additional funding	1,884		(14)		1,870

Repayments	(51,743)		(175)		(51,918)

Net amortization of deferred fees	—		1,004		1,004
Purchase discount accretion	—		1,185		1,185
Balance at March 31, 2023	$	628,696	$	(6,626)	$	622,070

SEVEN HILLS REALTY TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

The tables below detail the property type and geographic location of the properties securing the loans in our portfolio as of March 31, 2024 and December 31, 2023:


	March 31, 2024					December 31, 2023
Property Type	Number of Loans	Amortized Cost		Percentage of Value		Number of Loans	Amortized Cost		Percentage of Value
Multifamily	7	$	208,610	35	%	7	$	207,734	33	%
Office	6	166,618		28	%	7	181,268		29	%
Industrial	4	110,181		19	%	5	118,707		19	%
Retail	2	57,387		10	%	3	72,962		12	%
Hotel	2	45,839		8	%	2	45,791		7	%
	21	$	588,635	100	%	24	$	626,462	100	%


	March 31, 2024					December 31, 2023
Geographic Location	Number of Loans	Amortized Cost		Percentage of Value		Number of Loans	Amortized Cost		Percentage of Value
South	7	$	208,046	35	%	8	$	222,477	36	%
West	8	170,369		29	%	9	185,294		30	%
Midwest	4	128,970		22	%	4	128,876		20	%
East	2	81,250		14	%	3	89,815		14	%
	21	$	588,635	100	%	24	$	626,462	100	%

Credit Quality Information and Allowance for Credit Losses

We evaluate the credit quality of each of our loans at least quarterly by assessing a variety of risk factors in relation to each loan and assigning a risk rating to each loan based on those factors. The higher the number, the greater the risk level. See our 2023 Annual Report for more information regarding our loan risk ratings.

As of March 31, 2024 and December 31, 2023, the amortized cost of our loan portfolio within each internal risk rating by year of origination was as follows:


March 31, 2024
Risk Rating	Number of Loans	Percentage of Portfolio		2024		2023		2022		2021		Prior		Total
1	—	—	%	$	—	$	—	$	—	$	—	$	—	$	—
2	3	14	%	—		83,229		—		—		—		83,229
3	15	71	%	—		49,141		195,121		144,692		29,571		418,525
4	3	15	%	—		—		—		86,881		—		86,881
5	—	—	%	—		—		—		—		—		—
	21	100	%	$	—	$	132,370	$	195,121	$	231,573	$	29,571	$	588,635

SEVEN HILLS REALTY TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)


December 31, 2023
Risk Rating	Number of Loans	Percentage of Portfolio		2023		2022		2021	2020	Prior	Total
1	—	—	%	$	—	$	—	$