Seven Hills Realty Trust (SEVN) Q1 2026 Earnings Report, Transcript and Summary

Good morning, and welcome to Seven Hills Realty Trust First Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the call over to Matt Murphy, Manager of Investor Relations. Please go ahead.

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' beliefs and expectations as of today, April 29, 2026, 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 sevnreit.com. With that, I will now turn the call over to Tom.

Thank you, Matt, and good morning, everyone. On our call today, I will start by providing an update on our first quarter performance and recent investment activity, followed by an overview of our loan portfolio, then Jared will discuss current market conditions and our pipeline before Matt reviews our financial results and guidance. Yesterday, we reported solid first quarter results, reflecting the continued strength of our fully performing loan portfolio and our disciplined underwriting approach. Distributable earnings for the quarter came in at $5.3 million or $0.24 per share, which was at the high end of our guidance. We reached a new high watermark with approximately $776 million in total outstanding loan commitments after originating 3 new loans totaling $67.5 million during the quarter, reflecting our continued progress in deploying the capital raised from our December rights offering. First quarter closings included a $30.5 million loan secured by a medical office property in Atlanta, a $19.5 million loan secured by a grocery-anchored retail property in Palm Desert, California and a $17.5 million loan secured by a select service hotel in Scottsdale, Arizona. We also have 3 additional loans in process that we expect to close in the near term, totaling approximately $78 million, which Jared will speak to in more detail. These originations reflect our ability to source opportunities across property types and geographies while maintaining disciplined underwriting. Importantly, we remain selective in deploying capital and continue to focus on opportunities that meet our return thresholds. Originations so far in 2026 have been executed at a net interest margin of approximately 195 basis points, representing the highest level we have achieved over the past 4 years. When including the impact of exit fees, total returns are incrementally higher. We believe this reflects both the strength of our platform and an improved first quarter transaction environment. Turning to our loan portfolio. As of March 31st, we had total loan commitments of approximately $776 million across 26 floating rate first mortgage loans. Our portfolio continues to demonstrate strong credit performance with a weighted average risk rating of 2.8, no realized losses in all loans current on debt service. Our weighted average all-in yield at quarter end was 7.8% and our weighted average loan-to-value at origination remained conservative at 66%. During the quarter, we received the full repayment of a $16 million loan secured by a hotel in Lake Mary, Florida. And subsequent to quarter end, we received an additional $54.6 million from the repayment of a multifamily loan in Ohio. We are also expecting the repayment of a $26.5 million loan secured by an office building in suburban Chicago as early as this week. Upon payoff, this will reduce our overall office exposure to approximately 21% of the current portfolio. This repayment activity meaningfully increases our available capital and supports continued deployment into new investments. With recent loan repayments, we currently have approximately $110 million of cash on hand and nearly $400 million of available capacity under our secured financing facilities. As previously announced, we extended the maturities of our UBS and Wells Fargo financing facilities to 2028 and doubled the capacity of the Wells Fargo facility to $250 million, further enhancing our ability to deploy capital and continue growing the portfolio. In summary, we believe Seven Hills is well positioned to capitalize on an active pipeline of middle market lending opportunities. While recent headlines have raised concerns around private credit, it is important to note that Seven Hills remains narrowly focused on senior secured commercial real estate lending. This approach is reinforced by RMR's multi-decade track record managing and operating commercial real estate, providing deep asset-level insight, disciplined underwriting and proven experience across market cycles. With strong liquidity, expectations of improving transaction activity and attractive lending spreads, we remain focused on disciplined execution and generating compelling risk-adjusted returns for our shareholders. With that, I'll turn the call over to Jared.

Thanks, Tom. Since our last call, we have seen increased volatility across the capital markets, driven in part by the ongoing conflict in Iran and its impact on investor sentiment. Interest rates have also moved higher with the 10-year treasury rate increasing from approximately 3.95% at the end of February to 4.39% today. And the expectation is that the FOMC will maintain its target range for the federal funds rate at 3.5% to 3.75% later this afternoon. While the year began with strong transaction activity, continuing the momentum we saw at the end of 2025, recent market volatility has started to have an impact on owners' decision-making. Over the past month, we have seen some moderation in acquisition and sales activity as market participants take a slightly more cautious approach due to the uncertainty around interest rates, inflation, monetary policy and broader geopolitical developments. With respect to debt capital markets, CMBS market appeared to slow a bit earlier this month given the macroeconomic uncertainty and interest rate volatility. But overall, we have not seen a meaningful pullback in capital availability. Banks, debt funds, life companies and government-sponsored enterprises all remain active. And importantly, our bank partners continue to support transactions through our secured financing facilities. From an activity standpoint, we are seeing a divergence across asset classes. Multifamily refinancing continues to dominate as borrowers work through maturing bridge and construction loans originated in 2021 and 2022. In contrast, for new acquisitions and in many other asset classes, owners that are not under pressure to transact are generally waiting for greater clarity on macroeconomic conditions before moving forward with buy, sell or refinance decisions. However, despite this period of slow acquisition transaction volume, assets still need to be financed and we continue to see consistent demand for flexible lending solutions. As a result, our pipeline remains strong and we have over $125 million of term sheets outstanding for new loan opportunities and 3 loans totaling $78 million currently in diligence that we expect to close imminently. These include a $39.2 million loan secured by a multifamily property in Georgia, a $22.7 million loan secured by a medical office property in Texas and a $16 million loan secured by a self-storage property in Pennsylvania. In addition, we continue to evaluate a range of opportunities across the industrial, storage, retail and hospitality sectors, where we believe we can achieve more attractive risk-adjusted returns relative to more competitive segments of the market. Importantly, we remain disciplined in our approach. While competition remains elevated in certain sectors, particularly multifamily, we are focused on transactions that offer attractive yields. We believe our ability to provide certainty of execution and flexibility to borrowers is a key differentiator in the current environment. Overall, while near-term transaction activity may remain somewhat uneven given ongoing macro uncertainty, we believe the current backdrop represents an attractive opportunity for lenders with available capital and a disciplined underwriting approach. As conditions stabilize, we expect to continue to selectively deploy capital into opportunities that meet both our credit standards and return thresholds. And with that, I'll turn the call over to Matt to discuss our financial results.

Thank you, Jared, and good morning, everyone. Yesterday, we reported first quarter distributable earnings of $5.3 million or $0.24 per share, which includes $0.08 of dilution related to our rights offering in December. As expected, the rights offering has impacted earnings in the near term. However, deployment of the proceeds is progressing well. New loan investments over the last 2 quarters have contributed $0.03 per share to distributable earnings in the first quarter. And as Tom mentioned, originations so far in 2026 have been executed at net interest margins of 1.95%, the highest level over the past 4 years. During the first quarter, interest rate floors remained active for 7 of our loans, a structural feature of our portfolio that actively protects earnings in a declining rate environment. These floors contributed $0.01 per share of earnings protection for the quarter based on SOFR as of March 31st. All but one of our loans contain floors ranging from 25 basis points to 4.34%, providing a meaningful baseline of downside protection as the rate environment evolves. Earlier this month, our Board declared a regular quarterly dividend of $0.28 per share, which equates to an annualized yield of approximately 14% based on yesterday's closing price. Although distributable earnings have not covered our dividend over the past quarter, we remain committed to this dividend level through 2026 at a minimum and expect distributable earnings to trend back to our quarterly dividend level by the end of this year. Overall, we expect second quarter distributable earnings to be in the range of $0.23 to $0.25 per share. As the proceeds from the rights offering are invested and capital from loan repayments is redeployed, we expect the incremental earnings contribution by the end of the year to offset the impact of the higher share count. Credit quality remains strong at Seven Hills. Our CECL reserve stands at a modest 130 basis points of total loan commitments, flat from last quarter and is supported by a conservative portfolio risk rating of 2.8, also unchanged. The portfolio is well diversified by property type and geography and all loans are current on debt service. Importantly, we have no [ 5-rated ] loans, no collateral-dependent loans and no loans with specific reserves. This reflects a disciplined underwriting and asset management process that we believe creates durable long-term value for our shareholders. That concludes our prepared remarks. Operator, please open the line for questions.

[Operator Instructions] And the first question today comes from Jason Weaver with JonesTrading.

I thought it was notable about your origination NIM of 195 in this quarter being about 35 basis points wider than last year's average. Is that a function of just mix? Is it pockets of the market that you're able to access that others aren't? We're just seeing opposite sort of trends at some of your peers. And then where do you see the rest of the year's NIM settling? How much of that step-up is base rate?

Yes. The loans that we did in Q1, the properties were medical office, retail and hospitality. So there was no multifamily in there, which is where we see the tightest pricing and the narrowest margin. So we were able to attract some outsized returns, especially when we look at select service hospitality, which generally tend to price a little bit wider spreads and then medical office as well and then retail. So those are -- it's really product mix, I think, on those. And I would also say that it's -- we take a rifle shot approach to the originations, right? While we have a lot of transactions come through the shop, robust pipeline, we really pick our spots and we're looking to take deals off the street where we're going to achieve that outsized return rather than get into a commodity situation where we're simply bidding against several other lenders and we're just -- everybody is cutting their spreads by 1 or 2 basis points to win the business. We try to avoid those auction-type situations. For the -- going forward, I would tell you that the 3 loans that we're anticipating closing here in short order, net interest margin on those is probably a little bit inside of that 195, probably closer to about 180. And that is just, again, as a function of the product types there. We do have a multifamily loan in there that's fairly sizable relative to the 3, which drives down that net interest margin a little bit. And then the other properties, another medical office and the self-storage, as Jared had mentioned, help round that out. So we're able to maintain a healthy margin, but it's really the multifamily loans where we're seeing the most compression.

Got it. Understood. That's helpful. And then I wanted to ask, after the Olmsted Falls repayment in April, I think you're sitting on a pretty large chunk of liquidity, almost $0.5 billion. What does the qualified pipeline look like by sector and size as well as probability of closing in the near term? And what's the realistic deployment time line?

This is Jared. So right now the pipeline, it averages about $1 billion and it continues to turn over pretty frequently. We're seeing a lot of transactions. And as we mine through them and meet up the ones we want to look at, they get replenished. So we're still seeing quite a bit of activity. The majority of the activity we are seeing today is really for refinancing of assets as opposed to acquisitions. So those are a little bit more challenging to underwrite. We do have 3 loans right now that we're negotiating term sheets on for about $125 million. And the average deal size there is -- it's a little bit barbell, but we're kind of targeting deals that are in the $25 million to $40 million range as a sweet spot. But when you have the pipeline with the majority of it being refinanced, they're a little bit harder to quantify because you don't -- we're trying to determine whether or not the borrowers -- if we want to do deals where borrowers are bringing new cash to the table, we want to do deals that -- we understand a reset basis in the transaction and refinance is much harder to do that than an acquisition. So in terms of our ability to deploy the capital that we have now, like I said, we're negotiating 3 term sheets at $125 million. We're far along in a couple of those right now. I can't handicap whether or not we'll win all of them, but we feel pretty good about it. And then going forward, we'll continue to evaluate quite a bit of multifamily. The majority of our pipeline is in multifamily, but we're not going to -- again, as Tom mentioned, we're not going to chase yields down to win business by 5, 10, 15 basis points. So I think the point is that over the next 2 quarters, we should have the ability to kind of meet our targets of origination activity in that 100 to 300 over the next 2 quarters.

[Operator Instructions] Your next question comes from Chris Muller with Citizens Capital Markets.

So 1Q originations were pretty diverse and you guys touched on this a little bit. But is there a particular asset type that you guys do want to increase exposure to? Are you more just looking at the best opportunities across the board that aren't in super competitive asset classes?

Look, we would certainly like to increase exposure further to multifamily. I think that's beneficial given it's an extremely liquid market, right, with Fannie and Freddie playing there, et cetera, and from an investor standpoint as well. But the transactions that we are going to pursue there are going to be ones where we're feeling -- we feel that we're making a decent return. That said, other product types certainly make sense in today's world. We've seen the self-storage, like that product. Student housing has been attractive to us. Medical office has been attractive to us. Industrial still remains an attractive asset class. So the only thing we're not actively pursuing right now really is new office loans and health care-related assets. So we don't target per se and say, hey, we need to have x percentage per property type. It's a little bit more of a holistic making sure we have a diverse portfolio, which we do and we want to continue to maintain that. But we're really looking for just making the proper returns, risk-adjusted returns, right? So if we can pick off a few multifamilies, we'll do that, but we're more than capable with the other products as well and grocery-anchored retail is somewhere that we are focused as well. So I know that's a broad-based answer for your question, but it's a little less formulaic and more about taking that rifle shot approach and making sure that we're lending against quality real estate and making an outsized return to do so.

That's helpful. And then I guess, were 1Q origination volumes impacted at all by the geopolitical disruptions? And just how are you thinking about net portfolio growth over the coming quarters?

Yes, I think we touched on a little bit. Certainly, the first quarter, we saw quite a bit of activity. We're very happy with what we saw coming through the pipeline. With the war in Iran, things have slowed a little bit from a transaction standpoint. I think borrowers and investors, if they don't need to make a decision right now, they might pause just to see what's going to happen with interest rates given all the volatility that there's been. That said, there's still adequate flow. We anticipate this quarter with the loans that we closed, the loans that we're closing and had a couple of spec loans in there, probably $200 million. And we are really -- from a repayment standpoint, we mentioned we do have an office loan that we believe is repaying possibly this week. And beyond that, we're not expecting any other payoffs in the quarter. So we should have pretty good net portfolio growth, maybe $50 million, $75 million, something along those lines compared to where we are today. And then Q4 -- or Q3 and Q4, another couple of hundred million dollars of net portfolio growth.

Got it. Very helpful. And if I could just squeeze one last one in. Are there any updates you guys could share on the plans for the Yardley REO property?

That property continues to perform just remarkably well. Occupancy right now remains at about 81%, 82%. We did renew a large tenant in there. The WALT is almost 6 years now on that asset. And there's been quite a bit of activity over the last quarter of new tenants coming in and looking at. We've done some test fit-outs for a few tenants that are looking for space. So our goal there really would be if we were able to lease a little bit incrementally some additional space, then we can consider chatting with the Board and looking to dispose of the asset maybe late this year.

And your next question comes from Christopher Nolan with Ladenburg Thalmann.

Is it fair to say that -- just a follow-up on the last question in terms of the portfolio growth. Did you say that you're expecting roughly a couple of hundred million dollars in incremental portfolio growth for 2026?

Yes. Ideally, Chris, we end up close to $950 million or so at the end of the year for total portfolio size.

Great. And then on the allowance reserve, does the steeper yield curve sort of impact the reserving? And what I'm thinking about is if someone has a property and interest rates are higher and they have to refinance, they've got to toss more equity to do that. And so does CECL sort of require you to increase your allowance as loan rates go up?

Yes. It's an interesting question. There's a lot of factors that go into the CECL reserve. Some of them are related to our specific portfolio maturities, et cetera, as well as a lot of economic factors. What I would say is we would expect our reserve at 1.3% of total commitments to be probably hanging around there for a while. It could tick down a little bit. Tom mentioned an office loan we're expected to repay in the near term. We have some other office loan maturities coming up this year. But overall, we have a pretty modest overall reserve at 1.3%, which I think is on the low end for some of our mortgage REIT peers.

Great. And final question. Given the jump in fuel prices, for projects which are being repositioned with the developer, is there any sort of requirement for the developer? I mean, obviously, the construction costs are going to go up, the inputs are going to go up. How does that impact your underwriting? Do you require the developer to put in more equity or no real impact at all?

A couple of things. One, our portfolio as far as future fundings is really somewhat limited. I think it's 6% of the total commitment. So it's not that sizable. But if we're in a situation where it's a value-add transaction and there are cost increases beyond what we have budgeted for when we close the transaction, there's typically going to be an equity rebalance that's required from sponsorship, meaning if they -- if a project has started and they commence rehab or construction, what have you, and there's x dollars available inside the loan to fund those costs, but the costs actually come in higher, they would be required to rebalance and come to the table with equity to do so.

This concludes our question-and-answer session. I would like to turn the conference back over to Tom Lorenzini, President and Chief Investment Officer, for any closing remarks.

Thanks, everyone, for joining today's call. We look forward to seeing many of you at the upcoming Nareit Conference in New York City this June. Please reach out to Investor Relations if you're interested in scheduling a meeting with Seven Hills. Operator, that concludes our call.

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