Seven Hills Realty Trust (SEVN)·Q3 2025 Earnings Summary

Executive Summary

• Q3 2025 distributable earnings were $4.2M ($0.29/share), at the high end of guidance and “in line with consensus,” supported by a fully performing loan portfolio; GAAP net income was $3.4M ($0.23/share) .
• Balance sheet liquidity improved materially: cash rose to $77.5M with $309.6M of unused financing capacity; portfolio all‑in yield remained resilient at SOFR+3.97% versus a borrowing rate of SOFR+2.15% .
• Management guided Q4 2025 distributable EPS to $0.29–$0.31, aided by a September loan closing and an additional student housing loan expected to close shortly, and by SOFR floors beginning to activate as rates fall .
• Dividend held at $0.28/share (declared Oct 9), sustaining a ~97% payout of Q3 DE and signaling confidence in near‑term earnings despite competitive spread compression and repayment headwinds .
• Near‑term stock catalysts: confirmation of Q4 DE within the new range, execution on 3–4 incremental loans by year‑end, and potential earnings support from active SOFR floors versus lower benchmark rates .

What Went Well and What Went Wrong

What Went Well

• Fully performing portfolio with no non‑accruals and conservative risk metrics; CECL reserve held at 1.5% of commitments, risk rating steady at 2.9 .
• New originations: closed a $34.5M first mortgage on a 100% leased mixed‑use retail/medical office in NYC; executed a $37.3M student housing loan application in College Park, MD expected to close in Q4 .
• Robust pipeline exceeding $1B, with rising acquisition financing activity and management highlighting disciplined selection in student housing, necessity‑based retail, industrial, and hospitality for stronger spreads .

Management quotes:

• “Distributable earnings…$0.29 per share…came in at the high end of our guidance.”
• “Our pipeline is robust and well‑diversified…we are currently evaluating over $1 billion of loan opportunities.”
• “All but one of our loans contains interest rate floors…with SOFR now hovering just below 4%, certain of our floors have become active.”

What Went Wrong

• Net interest margin compression persists amid competitive multifamily pricing and tighter securitized markets; management views NIM as at/near trough but still a headwind .
• Repayments outpaced originations since April, reducing DE by ~$0.06/share; originations added only ~$0.03/share, diluting sequential DE versus prior quarters .
• Total revenue and net interest income declined year‑over‑year as index rates fell and spreads compressed; “continued headwinds” from declining SOFR and lower leverage acknowledged .

Financial Results

Dividend progression:

Portfolio and funding KPIs:

Segment breakdown – property type mix (% of principal):

Geographic mix (% of principal):

KPIs and credit detail:

• Office exposure: 27% of portfolio; no urban/CBD office; sponsors have contributed incremental equity to reserves; office risk rating skewed to 4 with committed sponsors .
• CECL reserve: 1.5% of total commitments; non‑cash and added back to DE .

Guidance Changes

Notes:

• Management expects loan floors to provide earnings protection as SOFR declines; at quarter‑end no floors were active per the sensitivity table, but “with SOFR now hovering just below 4%,” some floors have become active post‑quarter .

Earnings Call Themes & Trends

Management Commentary

• “We delivered strong third quarter results supported by our fully performing loan portfolio with Distributable Earnings of $0.29 per share…” — Tom Lorenzini .
• “As SOFR continues to decline, we will see our SOFR floors begin to become active, providing a benefit to earnings…” — Tom Lorenzini .
• “We ended the quarter with $77 million of cash on hand and $310 million of capacity on our secured financing facilities.” — Matt Brown .
• “We have a solid reputation in the marketplace that we deliver as advertised…we’ve been very judicious about trying to uncover loans with a little bit higher yielding.” — Tom Lorenzini .

Q&A Highlights

• Repayments: Expect potentially one additional repayment by year‑end ($15.3M); bulk of scheduled repayments in H2 2026 .
• Originations outlook: Comfortable with 3–4 additional loan closings by year‑end; sourcing 80% via brokers, 20% direct; leveraging platform expertise to win higher‑yielding deals .
• CECL dynamics: Reserve could decline with lower SOFR but depends on multiple macro/portfolio factors; reserve is non‑cash and added back to DE .
• Liquidity & fees: Cash higher due to July repayments ($54M) vs $34M new loans; origination fees are included in yield and typically ~1¢ per share per quarter .
• NIM trajectory: Management believes NIM is at/near trough and expects stabilization/reversal as capital is deployed into appropriately selected transactions .

Estimates Context

• Management stated Q3 distributable EPS was “in line with consensus” while at the high end of guidance; however, S&P Global consensus EPS and revenue were unavailable at time of check .
• Actual revenue per S&P’s revenue definition (interest and related income plus revenue from real estate owned) was $14.09M; no consensus data was returned for comparison (S&P Global consensus unavailable) .

Key Takeaways for Investors

• Earnings quality remains solid: DE at $0.29/share with all loans current, risk rating 2.9, and CECL steady at 1.5% of commitments — a supportive backdrop for dividend sustainability .
• Liquidity is a differentiator: $77.5M cash and $309.6M capacity position SEVN to capitalize on growing acquisition financing demand and selective higher‑spread opportunities .
• Rate dynamics may shift earnings mix: SOFR floor activation should cushion declining benchmarks; watch Q4 execution against $0.29–$0.31 DE guidance .
• Spread competition persists, but strategy fits the market: Emphasis on student housing, necessity‑based retail, industrial, and selective hospitality where underwriting edge supports risk‑adjusted returns .
• Office risk is contained: No CBD exposure, sponsors adding equity; expect controlled recycling rather than forced deleveraging .
• Near‑term trading implication: Confirmation of Q4 DE and announced closings (College Park student housing and 3–4 additional loans) could be positive catalysts; failure to redeploy repayments at adequate spreads is the main risk .
• Medium‑term thesis: Discipline plus platform sourcing and floors can offset macro rate headwinds; watch NIM stabilization and portfolio growth (~+$100M net vs YE2024) to underpin valuation .

Additional Q3 2025 Press Releases

• Q3 results press release referencing the detailed earnings presentation and call logistics (Oct 27) .
• Dividend announcement embedded in presentation: $0.28/share declared Oct 9; payable ~Nov 13 .

Cross‑references and clarifications:

• The interest rate sensitivity appendix noted no active floors at quarter‑end; management subsequent remarks indicate floors became active as SOFR dipped below ~4% post‑quarter .
• Non‑GAAP DE payout ratio ~97% in Q3 reflects prudent dividend maintenance amid spread compression .