Good morning, and welcome to Seven Hills Realty Trust's Fourth Quarter 2022 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. Now I'd like to turn the call over to Kevin Barry, Director of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Thanks for joining us today. With me on the call are President, Tom Lorenzini; and Chief Financial Officer and Treasurer, Tiffany Sy. In just a moment, they will provide details about our business and our performance for the fourth quarter of 2022. We will then open the call to a question-and-answer session with sell-side analysts. First, I would like to note that the recording and retransmission of today's conference call is strictly prohibited without Seven Hills Realty Trust's prior written consent. 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, Tuesday, February 14, 2023, 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 numbers during this call, including distributable earnings and distributable earnings per share. For a reconciliation of GAAP to non-GAAP financial measures, please see our quarterly earnings release, which is available on our website sevnreit.com. I'll now turn the call over to Tom.

Thank you, Kevin. Good morning, everyone and thank you for joining the call today. Last night, we announced strong fourth quarter earning results, capping off a year in which we made excellent progress growing Seven Hills' loan portfolio and generating higher returns for our shareholders. I would like to highlight a few items in particular. In January, we are pleased to announce a 40% increase in our quarterly dividend to $0.35 per share, or a $1.40 annually, which was a direct result of our strong operating performance and our confidence in the long term outlook for our business. During the quarter, we grew distributable earnings per share 37% on a sequential quarter basis. Our loan book remained healthy with all of our loans current on debt service and our weighted average risk rating remaining below three. Looking back on the past year, Seven Hills generated a total return for our shareholders of over 15%, outperforming the Nareit Mortgage REIT Index by more than 30% since the beginning of 2022. We originated seven loans for approximately $228 million, despite rapidly changing capital markets and slowing commercial real estate transaction volume. We grew and further diversified our borrowing capacity to allow for more than $800 million and we more than doubled distributable earnings for the year to a $1.25 per share. While the economic landscape continues to evolve, we are thrilled with the progress we are making and the opportunity in front of us. As we discussed on our call last quarter, we have been selective in our loan origination activities and focused on building liquidity until there is more clarity on overall market conditions, which we believe are beginning to stabilize. As we saw two weeks ago, Federal Reserve continued to tighten monetary policy, although they have transitions from the aggressive…

Thank you, Tom. Good morning, everyone. As Tom mentioned, Seven Hills reported another exceptional quarter of meaningful earnings growth. Distributable earnings, or DE, was $5.4 million or $0.37 per share. On a sequential quarter basis, this represents an increase of approximately 37% compared to DE of $0.27 per share in the previous quarter. Our earnings growth was driven by rising interest rates in the fourth quarter of 2022. Our weighted average coupon rate increased from 6.6% to 8.1% or approximately 150 basis points quarter-over-quarter. Seven Hills earnings should continue to benefit in the quarters ahead from continued higher interest rate levels and any additional interest rate increases that may occur. In terms of sensitivity, one-month term SOFR at year-end was approximately 430 basis points and is projected to peak in mid-2023 above 5%. We estimate that such an increase would result in an incremental annual benefit to DE of approximately $0.10 per share. General and administrative expenses were $740,000 for the fourth quarter, reflecting a sequential quarter decline of approximately 30%, primarily due to annual share grants that were awarded in September. Going forward, we expect quarterly G&A expense to range between $750,000 and $800,000, excluding noncash share grant expense. Based on our current expectations, including forward-looking interest rates, our pipeline of originations and anticipated loan repayments, we expect next quarter's DE to be between $0.35 and $0.37 per share. Turning to capitalization liquidity; we ended the quarter with $474 million drawn on our secured financing facilities. Our leverage decreased to 1.7 times from 1.9 times at the end of September, mainly due to the loan originated in November that was not levered, but maybe in the future. We ended the year with $71 million of cash on hand. Our cash and available borrowing capacity currently allow for us to…

[Operator Instructions] First question will be from Jason Stewart with Jones Trading. Please go ahead.

Matthew on for Jason. Congrats on the dividend raise. That's awesome in this environment. I'm curious to know how deal structure has changed, points up front, points on the back and overall spread on the loans?

Sure. I could take that. Matthew, thanks for calling in. A couple of different things that are brought up there, right? So when we're looking at a transaction, given the higher interest rate environment that we're in and the higher debt service that is a direct result of these increased rates, right, so we can horse trade a little bit with our sponsorship when we're looking at the overall coupons, and we can talk about putting -- increasing an exit fee on the back end of a loan so that the impact is not fully borne by current debt service. That's one way to -- one thing that we're looking at. Other things that we're looking at today, really, we're adjusting our methodology and how we're looking at debt yields both going in on the transaction and on the exit to make sure that we're in a good position when it comes time for a potential refinance or a sale of the asset. So those debt yields have increased, obviously, over the last year. What used to be a 6.5% multifamily, maybe at the exit, maybe today that's closer to 8% to 8.5%, building in additional room there. Other things that we're looking at and when we're sizing transactions really is where is the interest rate cap at closing and making sure the loans are properly capitalized with interest reserves and rebalancing requirements to get -- to underwrite appropriately to that interest rate cap.

That's helpful. And then on the early payout, was there an exit fee that was generated there?

On all the loan that paid off earlier this year?

Yes.

I don't recall if that particular loan had an exit fee to it. I don't know.

I don't recall.

Yes.

It was not material. That's what I would say here. It wasn't material enough to consider that kind of one-timer that would impact our...

Right. And the exit fees, keep in mind, are amortized over the loan. It's different than when we're getting prepayment early repayment income, whereas we might have somebody that -- we might have a loan that has 18 months of minimum interest and they're paying us off in 1.16 [ph], right? And then they have to pay the differential there over the two months of a penalty. So the exit fee really is -- just yield to us, whether it's a spread or it's in fees.

That's true.

[Operator instructions] Our next question will be from Chris Muller, JMP Securities. Please go ahead.

Hey guys. Thanks for taking my questions and congrats on a nice finish out to the year. So I wanted to ask on the pace of originations in 2023. It sounds like you guys are expecting maybe a full restart to the year with the Fed continuing to tighten. So do you think it will be a slower start and then things will wrap back up into the back half of the year?

Yes. Our expectation, Chris, is that the second half of the year will certainly be more robust than the first half. December -- end of last year was quite slow. January was quite slow. We are starting to see things pick up. I would tell you that our pipeline today is double what it was four to five weeks ago. We do have, as I mentioned, numerous transactions in the term sheet stage, which is encouraging to us. And I think that the market simply just waiting for clarity from the Fed, right? It looks like the 50 basis points are probably baked in kind of into the forward curve right now, anticipating -- not anticipating much more. I think that the market is starting to adjust, and people understand now what the ground rules might be for their cost of capital when they're looking at new transactions. So we're expecting much more activity in the second half. As Tiffany mentioned, we've got about $175 million of capacity and we also have an unlevered loan. If we were to choose to lever that, we could -- that pushes up probably closer to $240 million of capacity of new loans. And then if there's any additional repayments that we're not planning on coming in, early repayments, that number could grow from there. So we expect to do another $250 million to $300 million of overall production through the year.

Got it. That's helpful. And like you said, financing capacity is not a constraint for you guys right now. So is it reasonable to accept net portfolio growth in 2023 maybe weighted towards the back end of the year? And then just what does leverage look like throughout the year? Will that ramp up slowly or you think it'll ramp up quickly in the back half like originations [ did ]?

When you talk -- leverage from our that -- our leverage from our repo providers?

Yes, that's right.

Yes.

Yes. I would expect that's certainly going to wrap up in the second half of the year correspondingly with the increase in originations. We have the luxury right now, and this is what we did at the end of the year, where we don't necessarily need to leverage our position because we have the cash on hand -- have ample cash on hand, and we've just assumed, put that to work in the loans. And we'll continue to do so and then modestly leverage the positions. And as we get towards the end of the year, we can increase that leverage for additional new loans.

All right. Thanks for taking the questions.

This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Tom Lorenzini to close the call.

Thank you, Max, and thank you, everyone, for joining us on the call today. We look forward to speaking with you again soon.

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.