Seven Hills Realty Trust - Earnings Call - Q2 2025

Executive Summary

• Distributable earnings were $4.5 million, or $0.31 per share, at the high end of guidance; GAAP net income was $2.7 million, or $0.18 per share, as lower SOFR and tighter loan spreads compressed net interest income.
• The Board reduced the quarterly dividend 20% to $0.28 per share to align payout with anticipated earnings amid redeployment at lower net interest margins; cash on hand was $46.0 million with $322.8 million of unused financing capacity, keeping liquidity strong.
• Portfolio credit remains solid: all loans performed, weighted average risk rating held at 2.9, and allowance for credit losses rose to 1.5% of commitments on macro inputs and extensions; originations were $46.0 million and repayments were $70.6 million in Q2 plus $53.8 million in July.
• Management guided Q3 distributable EPS to $0.27–$0.29 and expects year-end commitments near ~$700 million, with activity dependant on repayments; competitive pressure is most acute in multifamily where spreads have tightened 25–35 bps.

What Went Well and What Went Wrong

What Went Well

• “Distributable earnings of $0.31 per share came in at the high end of our guidance, supported by our fully performing $665 million loan portfolio”.
• Originated two selective loans totaling $46.0 million (industrial San Antonio, S+3.40% all-in S+3.88%; multifamily Boise, S+3.50% all-in S+4.29%) demonstrating pipeline convertibility in a competitive market.
• Liquidity remained ample with $46.0 million cash and $322.8 million unused capacity; debt-to-equity remained conservative at ~1.6x, positioning SEVN to deploy into attractive opportunities.

What Went Wrong

• Net interest margin continued to compress on new originations, and declines in the SOFR index pressured earnings; total revenue fell year-over-year to $7.393 million (from $9.380 million), and GAAP EPS declined to $0.18 (from $0.28) .
• CECL allowance increased to 1.5% of commitments, with a $0.912 million provision in Q2, reflecting macro factors and loan extensions; distributable EPS declined sequentially to $0.31 (from $0.34).
• Dividend was reduced to $0.28, acknowledging expected redeployment at lower net interest margins in a declining rate environment; management’s Q3 DE guidance of $0.27–$0.29 signals continued earnings headwinds near term.

Transcript

Speaker 4

Good morning and welcome to the Seven Hills Realty Trust Second Quarter 2025 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 1 on your telephone keypad, and to withdraw your question, please press STAR, then 2. Please note, today's event is being recorded. I would now like to turn the conference over to Matt Murphy, Manager of Investor Relations. Please go ahead, sir.

Speaker 3

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 Realty Trust's beliefs and expectations as of today, July 29, 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 sevenreit.com. With that, I will now turn the call over to Tom.

Speaker 0

Thank you, Matt, and good morning, everyone. On today's call, I will provide an overview of our second quarter performance and recent developments. I will then turn the call over to Jared for an update on our pipeline and insights into current market conditions, followed by Matt Brown, who will review our financial results before we open the line for questions. We are pleased to report strong second quarter results marked by solid portfolio performance and disciplined capital deployment. Distributable earnings came in at $0.31 per share, which was at the high end of our guidance range. We also originated two new first mortgage loans totaling $46 million. The first was a $28 million loan to refinance a newly constructed Class A industrial distribution facility in San Antonio, Texas, and the second was an $18 million loan to refinance a fully renovated 112-unit multifamily property in Boise, Idaho.

Both transactions reflect our selective approach to lending and draw upon our internal multifamily and industrial expertise here at The RMR Group. As of quarter end, all loans in our portfolio remain current on debt service and are performing with a weighted average risk rating of 2.9, unchanged from last quarter. We had $665 million in total commitments across 23 first mortgage loans with a weighted average coupon of SOFR plus 3.64%, an all-in yield of 8.37%, and a loan-to-value at close of 68%. We ended the quarter with approximately $46 million in cash and $323 million in excess borrowing capacity. Now turning to the dividend, as announced earlier this month, the board decided to reduce the quarterly dividend to $0.28 per share. This adjustment reflects our expectation that recycled capital from near-term loan repayments may be redeployed at lower net interest margins in a declining interest rate environment.

I would like to emphasize that this change does not reflect any weakness in our loan portfolio. Credit performance remains strong. All loans are fully performing, and we have no 5-rated loans or non-accrual loans. We believe the new dividend better aligns our payout with anticipated earnings and supports long-term value creation by preserving our ability to deploy capital into attractive investment opportunities as they emerge. While this decision was not taken lightly, we believe that the new quarterly dividend, which annualizes to 10.5% yield based on yesterday's closing price, provides an attractive return to shareholders while giving us the flexibility to continue executing our strategy in this uncertain environment. Looking ahead, we could see two to three additional loans totaling approximately $100 million repaid in the back half of this year.

This is in addition to the four loans that paid off in the quarter or just after for approximately $120 million. We anticipate positive year-over-year portfolio growth ending 2025 with approximately $700 million in outstanding commitments. While redeployment spreads may trend lower relative to assets being repaid, we believe our selective approach, strong sponsor relationships, and current liquidity position us well to navigate this environment while optimizing for long-term value creation. With that, I will turn the call over to Jared to discuss current market conditions on our pipeline.

Speaker 3

Thanks, Tom. During the second quarter, transaction activity slowed considerably as tariff announcements and global trade negotiations created additional uncertainty, causing borrowers and lenders to take pause early in the quarter as they contemplated the potential impacts of these developments. Markets have since moved past this initial shock, but uncertainty still exists regarding the timing and magnitude of potential future interest rate cuts, which continues to weigh on property sales volume. Despite these macro headwinds and slower sales activity, our pipeline remains strong, and during the quarter, we averaged over $1 billion in monthly loan registrations, reflecting the strength of our origination platform and ongoing demand from borrowers for a flexible, floating-rate debt solution in today's volatile environment.

As such, in addition to loan requests to finance transitional and value-added business plans, we continue to see additional opportunities to finance property that are relatively stabilized today, but where borrowers prefer short-term floating-rate debt that provides greater flexibility to sell or refinance in a lower interest rate environment or when overall market conditions improve. We see significant demand for this type of financing in the multifamily and industrial sectors, where properties are coming off bridge and construction loans and have demonstrated strong leasing activity but need additional time to optimize for rent and NOIs. Competition among lenders remains elevated across most asset classes, particularly the multifamily sector. Demand for securitized products, including CMBS and CRE/CLO, has continued to support the debt markets, and with fewer overall transactions and more lenders competing for each deal, spreads are considerably lower.

In this current competitive environment, we continue to be selective in how we deploy capital. Rather than winning loans solely by being a low-cost provider, we are more focused on smaller, middle-market transactions where we can earn more attractive yields by providing borrowers with creative, flexible financing terms to suit their specific needs. Additionally, we are increasingly active in sectors where we believe we have a competitive advantage, including the industrial, student housing, necessity-based retail, and medical office sectors. These are asset types and markets where we have strong operating knowledge and longstanding relationships, which in turn allows us to underwrite with greater confidence. To that end, we are currently in diligence on a $34 million loan to refinance a mixed-use retail and medical office property that is scheduled to close later in the quarter.

If the Fed cuts interest rates later this year, we would expect to see a meaningful pickup in acquisition activity as cap rate expectations begin to move and bid-ask spreads compress, which should lead to a wider array of lending opportunities. Our strong current pipeline with potential for increased activity gives us great confidence in our ability to replace legacy loans rescheduled to pay later this year with new investments that meet our underwriting standards. We look forward to providing updates in the quarters ahead as we continue to originate new investments that align with our strategy. With that, I'll turn the call over to Matt Brown. Thank you, Jared, and good morning, everyone. Yesterday, we reported second quarter distributable earnings of $4.5 million, or $0.31 per share, at the high end of our guidance range for the quarter.

Our CECL reserve remains modest at 150 basis points of our total loan commitments as of June 30, compared to 130 basis points as of March 31. The $912,000 reserve increase was primarily due to macroeconomic factors and loan extensions, partially offset by repayments in the quarter. We do not have any collateral dependent loans or loans with specific reserves. We ended the quarter with $46 million of cash on hand, an all-in yield of SOFR plus 398 basis points, and a weighted average borrowing rate of SOFR plus 220 basis points. Total debt to equity remained at 1.6 times. We believe that our current leverage level, available borrowing capacity, and expected upcoming loan repayments provide us with a strong opportunity to originate creative loans. Earlier this month, we declared a quarterly dividend of $0.28 per share, representing a 20% reduction from the previous level.

This reduction reflects a declining SOFR curve and the expectation that loan repayment proceeds will be redeployed at lower net interest margins. We believe the reduced rate is sustainable for at least the next 12 months and aligns with our anticipated earnings, while continuing to deliver an attractive yield for our shareholders. This decision does not reflect any deterioration in our loan portfolio, which continues to perform, supported by a conservative overall risk rating of 2.9, which was unchanged from Q1. Turning to our outlook and guidance, based on current expectations for loan originations and repayments, including $54 million of repayments that occurred in July, we expect third quarter distributable earnings to be in the range of $0.27 to $0.29 per share. That concludes our prepared remarks. Operator, please open the line for questions.

Speaker 4

Thank you. We will now begin the question-and-answer session. To ask a question, you may press STAR, then 1 on your telephone keypad. If your question has already been addressed and you would like to remove yourself from queue, please press STAR, then 2. Once again, ladies and gentlemen, that's STAR, then 1 if you have a question. Our first question today comes from Jason Weaver at JonesTrading. Please go ahead.

Hi, good morning, guys. Thanks for taking my question. Tom, I'm trying to bridge back to your prepared remarks. You mentioned expected year-end portfolio size of somewhere around $700 million, and I believe that might pencil to around $200 million or just above $200 million in originations for the second half. Thinking about what Matt had said in the prepared remarks, how sensitive is that dependency on the sustainability dividend on getting to that $200 million level?

Speaker 0

Thanks, Jason. A couple of things there. We ended the quarter at about $665 million in total commitments, right? We had two payoffs subsequent with gross commitments about $58 million. We're underwritten right now on another transaction that Jared mentioned for about $34 million. That kind of brings us to about $640 million. From there, we anticipate net production, right? Probably another couple of loans that'll bring us to about $700 million for the year. The rest of the originations that we discussed really is dependence on repayments. We have five loans that are maturing between now and the end of the year for about $140 million of total committed dollars.

Yeah.

Of those five, it's anticipated that they're all going to extend. They generally qualify for their extensions. However, one or two may actually end up paying off prior to year-end, even though they're extending here in the next month or so, just to give them more time. When you say it's $200 million, the number really varies. It could be anywhere from the $90 million, the current $34 million underwritten plus two new transactions, about $30 million apiece. From there, it could be another $50 million to $75 million, just depending on repayments. We are a little bit on the repayment dependent, if that makes sense.

Got it. Yeah, that's helpful. How do you think about the new $0.28 level in that context? I heard that Matt said you expect that to be stable over 12 months, but if you see, you know, if production were to drop off after this quarter, not saying it will, would that put that level at risk?

Speaker 3

It could, but I think we feel pretty comfortable about the dividend level for at least the next 12 months. As Tom had just mentioned, deployment of new capital is dependent on loans continuing to repay. We do expect to be around $700 million in total commitments by the end of the year. At that level, we feel really good about the dividend. We thought a lot about what that right dividend rate should be. This was a number that we thought was sustainable for at least 12 months.

Speaker 0

I would add to that, Jason, that if we don't have the volume of originations, right, that just means that those loans didn't, certain loans didn't repay. Keep in mind, those are typically at higher spreads and higher yielding than what we're currently lending at. That would further support the dividend rather than detract from it.

Got it. That's helpful. Thank you. Maybe a little bit more broadly, you know, talk about where you're seeing the most attractive opportunities today, and you know, how is the competitive environment shaping up within that?

Speaker 3

Yeah, it definitely is a competitive environment. We continue to see quite a bit of activity in the multifamily and industrial sectors. As I'm sure you're aware, a lot of lending activity in those two sectors occurred in 2022, 2021, a lot of bridge loans and new construction activity. Many of those deals are rolling off the books today. We're seeing quite a bit of opportunities in those two sectors where borrowers have executed on a lion's share of their business plans, but they just need additional time for properties to season and/or rents to churn one or two more times before they feel confident in either refinancing or selling. We're seeing a lot of activity in those two sectors for that reason. We continue to see other opportunities. As Tom mentioned, we're agnostic to property types specifically and want to see good opportunities and good markets with solid borrowers.

We are underwritten on a mixed-use retail and medical office property where we feel like we're getting a great risk-adjusted return. As I mentioned, it's pretty competitive. Rates have tightened up in that multifamily sector, but we feel confident in our ability to find opportunities where others may not.

Speaker 0

All right, thanks for clarifying that. I appreciate the time.

Thank you.

Speaker 4

Thank you. As a reminder, if you'd like to ask a question, please press STAR, then 1. Our next question today comes from Chris Muller of JMP Securities. Please go ahead.

Hey guys, thanks for taking the questions and congrats on a solid quarter. I wanted to ask how you guys are thinking about leverage in the back half of the year. Given there's no near-term office maturities, should we expect leverage to remain at the lower end until some of those office loans pay off?

Speaker 3

Yeah, we ended the quarter at 1.6 times debt to equity. We would expect that level to continue, as you did mention. We are underleveraged on our office loans, and until those recycle out of the system, we would expect leverage to remain pretty consistent with where it is today.

Got it. You guys have a nice slide in the deck on the NIM compression there. Is there anything you can point to that's driving more compression on the loan side than you're seeing on the financing side of things? Just kind of trying to dig down into that compression a little bit.

Sure. Where the deals that are being priced most aggressively is certainly in the multifamily sector, just because of the fact that they're supported, their back leverage, generally speaking, is financed with CRE/CLO. As that bond market goes, so does the ability for lenders to price competitively there. While we offer to, we see lots of opportunities in the multifamily sector. It's become, quite frankly, it's more of a commodity than it is not. That's where that compression happens. We want to put more multifamily loans on the books. We want to do more of that. We certainly appreciate the fact that those spreads have come in 25 to 35 basis points, and the financing for those lenders is a little bit more attractive. We are getting the benefit, however, of that pricing, that back leverage pricing.

Our repos deliver us good pricing when the bond markets are humming along and the CRE/CLO market's active. We get the benefit of it, but we just don't get that final 10 or 15 basis points of spread reduction that those CLO lenders get. We find the yield elsewhere, and we find that we're pretty good at identifying opportunities where our flexibility, whether it be prepayment flexibility or leverage flexibility, can help us win business to generate the returns that we're looking for.

Got it. Very helpful. Do you guys have any thoughts on, if we do end up getting Fed cuts in the back half of this year, how that would impact the NIM there?

Sure. I mean, that will certainly help overall borrowing costs, and that'll accrete to us as well. In addition, I think that will just help with the mindset of investors, particularly buyers today and sellers, to be more willing to transact going into a market where we have more clarity on the direction of interest rates. It's not necessarily as much about the quantity of the reduction. It's just about kind of where we are in terms of the cycle. I think the last end of the second quarter activity slowed, it's kind of a wait-and-see approach. There's certainly a lot of pent-up demand and liquidity on the sidelines looking to transact. I think that if interest rates do get reduced, it will certainly stoke the new investment sales market.

Got it. Very helpful. Thanks for taking the questions.

Speaker 4

Thank you. Another nice question today comes from Jason Stewart at Janney Montgomery Scott. Please go ahead.

All right, thank you. It's a quick question on the dividend. Is the dividend, is distributable earnings, does that track taxable earnings pretty closely, or is there any meaningful difference we should think about as we approach the end of the year there?

Speaker 3

No, taxable income and DE track pretty closely.

Okay, thanks. In terms of spreads, you know, spreads were on new originations up a little bit quarter over quarter, obviously different asset classes. Is that coming in in line with where you saw it, you know, when you started the dividend discussion last quarter?

Speaker 0

I think they are in line with what we've been thinking. I think we've been kind of spot on in our thought process there. The two deals that closed in the quarter, I think the weighted average spread there was 345 bps or so, which is about 25 bps inside of what the rest of the portfolio is. That's consistent with what we've been thinking.

Okay. Once we take the office and, for the sake of discussion, take office out of the equation, or you can migrate that capital into more productive uses, what's a through cycle ROE? Because if I look at the dividend today, on an adjusted book, it's sort of in the 6% range. Where do you think an adjusted, where would the through cycle ROE be, assuming we can sort of right size and move on from office?

I don't really have a sense for that right now for you, Jason. Certainly something we can get back to you on and discuss offline.

Okay. All right. Thank you.

Thank you.

Speaker 4

Thank you. This concludes the question-and-answer session. I'd like to turn the conference back over to Tom Lorenzini for any closing remarks.

Speaker 0

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

Speaker 4

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.