Seven Hills Realty Trust Q2 FY2025 earnings call

• Tom mentioned strong second quarter results with solid portfolio performance and disciplined capital deployment, originated 2 new first mortgage loans, distributable earnings at high end of guidance range, portfolio loans current, and dividend reduced. • Jared discussed slower transaction activity in second quarter due to uncertainty, but pipeline remained strong with over $1 billion in monthly loan registrations, focus on multifamily and industrial sectors, and selective capital deployment. • Matt Brown reviewed second quarter distributable earnings, CECL reserve details, cash position, leverage level, and dividend reduction reflecting declining SOFR curve and redeployment at lower net interest margins.

Distributable earnings came in at $0.31 per share, which was at the high end of the guidance range. Originated 2 new first mortgage loans totaling $46 million. All loans in the portfolio remained current on debt service with a weighted average risk rating of 2.9. 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%. Ended the quarter with approximately $46 million in cash and $323 million in excess borrowing capacity. Distributable earnings for the second quarter were $4.5 million or $0.31 per share. CECL reserve was 150 basis points of total loan commitments as of June 30 compared to 130 basis points as of March 31.

• Anticipate third quarter distributable earnings to be in the range of $0.27 to $0.29 per share. • Expect year-end portfolio size to be around $700 million with potential for 2 to 3 additional loans totaling approximately $100 million repaid in the back half of the year, and positive year-over-year portfolio growth. • Dividend reduction aligns with anticipated earnings and preserves ability to deploy capital into attractive opportunities.

• Macro-economic factors and loan extensions contributed to CECL reserve increase. • Uncertainty regarding timing and magnitude of future interest rate cuts weighs on property sales volume. • Competitive environment in lending, especially in multifamily sector, leads to lower spreads.

Q: Jason Weaver asked about the expected year-end portfolio size and dependency of dividend on reaching $200 million in originations for the second half.

A: Tom said ended quarter at $665 million in total commitments, anticipating net production to bring to $700 million, and repayment dependent. Matt added dividend level expected to be stable over 12 months with $700 million portfolio.

Q: Chris Muller asked about leverage in the back half and NIM compression.

A: Matt said leverage expected to remain at 1.6x debt to equity as office loans are underlevered. Jared said NIM compression in multifamily sector due to competitive bond market pricing.

Q: Jason Stewart asked about dividend and difference between distributable earnings and taxable earnings, and through-cycle ROE.

A: Matt said distributable earnings track taxable earnings closely. Tom said couldn't provide through-cycle ROE immediately but could discuss offline.