Full Transcript: Seven Hills Realty Trust Q1 2026 Earnings Call

On Wednesday, Seven Hills Realty Trust (NASDAQ:SEVN) discussed first-quarter financial results during its earnings call. The full transcript is provided below. This transcript is brought to you by Benzinga APIs. For real-time access to our entire catalog, please visit https://www.benzinga.com/apis/ for a consultation. View the webcast at https://event.choruscall.com/mediaframe/webcast.html?webcastid=m6CKm8dC Summary Seven Hills Realty Trust reported first quarter distributable earnings of $5.3 million, or $0.24 per share, at the high end of their guidance, driven by the strength of their loan portfolio and disciplined underwriting. The company originated three new loans totaling $67.5 million, increasing total outstanding loan commitments to approximately $776 million, and has three additional loans in process totaling $78 million. Management remains focused on senior secured commercial real estate lending, emphasizing disciplined execution and generating compelling risk-adjusted returns, despite recent geopolitical and market volatility. The company maintains strong liquidity with $110 million of cash on hand and $400 million of available capacity under secured financing facilities, and expects second-quarter distributable earnings to be between $0.23 and $0.25 per share. Management highlighted their ability to source opportunities across various property types and geographies, and noted a strong loan pipeline of over $125 million in term sheets for new loan opportunities. Full Transcript OPERATOR Good morning and welcome to Seven Hills Realty Trust's first quarter 2026 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 one on your telephone keypad. To withdraw your question, please press star then two. 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. Matt Murphy (Manager of Investor Relations) 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, broadcast 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@7REIT.com with that, I will now turn the call over to Tom. Tom Lorenzini (President and Chief Investment Officer) 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 in 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 water mark with approximately $776 million in total outstanding loan commitments after originating three new loans totaling $67.5 million during the quarter, reflecting our continued progress in deploying the capital raised from our December rates 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 three 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 four 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. Jared Lewis (Vice President) Thanks Tom. Since our last call, we've 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, the 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 bridging 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 three loans totaling $78 million currently in diligence that we expect to close in that way. 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. With that, I'll turn the call over to Matt to discuss our financial results. Matt Brown (Chief Financial Officer and Treasurer) 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 a 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 two quarters have contributed $0.03 per share to distributable earnings in the first quarter and as Tom mentioned, origination so far in 2026 have been executed at net interest margins of 1.95%, the highest level over the past four years. During the first quarter, interest rate floors remained active for seven 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 31, 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 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 five 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 shareholders. That concludes our prepared remarks Operator Please open the line for questions. OPERATOR We will now begin the question and answer session. To ask a question, you may press Star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press Star then two. At this time we will pause momentarily to assemble our roster. And the first question today comes from Jason Weaver with Jones Trading. Please go ahead. Jason Weaver (Equity Analyst) Hi good morning guys. Thanks for taking my question. I thought it was notable about your origination NIM of 195 in this quarter being about 35 basis points wider than the 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 a step up is base rate? Tom Lorenzini (President and Chief Investment Officer) Yeah, thanks for the question. The 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 tend to price a little bit wider spreads and then Medical office as well and retail. So those are just it's really product mix I think on those and I would also say that it's you know, we take a rifle shot approach to the originations. Right, you know, while we have a lot of transactions come through the shop robust pipeline, we really pick our spots and we're looking to take 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's cutting their spreads by one or two basis points to win the business. We try to avoid those auction type situations going forward. I would tell you that the three 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 three, which drives down that net interest margin a little bit. And then the other properties, another medical office and a 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. Jason Weaver (Equity Analyst) 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 half a billion. What does the qualifying pipeline look like by sector and size as well as probability of closing in the near term, and what's the realistic deployment timeline? Jared Lewis (Vice President) Thanks, Jason. This is Jared. So right now the pipeline averages about a billion dollars and it continues to turn over pretty frequently. We're seeing a lot of transactions, and as we mine through them and weed out 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 three loans right now that we're negotiating term sheets on for about $125 million. And the average deal size there is, you know, it's a little bit barbell, but we're kind of targeting deals that are in the 25 to 40 million dollars range of the sweet spot. But when you have a 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. You know, when these deals with borrowers are bringing new cash to the table, we want to do deals that we understand a reset basis in the transaction and a refinance is much harder to do that than in an acquisition. So in terms of our ability to deploy the capital that we have now, like I said, we're negotiating three 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 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 deals down to win business by 5, 10, 15 basis points. So I think the point is that over the next two quarters we should have the ability to kind of meet our targets of origination activity in that 100 to 300 over the next two quarters. Jason Weaver (Equity Analyst) Thank you. I appreciate the color OPERATOR again. If you have a question, please press star then one. Your next question comes from Chris Muller with Citizens Capital Markets. Please go ahead. Chris Muller (Equity Analyst) Hey everyone, thanks for taking the questions. 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 or are you more just looking at the best opportunities across the board that aren't in super competitive asset classes? Tom Lorenzini (President and Chief Investment Officer) 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, etc. 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. So the only thing we're not actively pursuing right now really is new office loans and healthcare 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, you know, risk adjusted Returns. Right. So if we can pick off a few multifamily, 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 you know, 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. Chris Muller (Equity Analyst) 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? Tom Lorenzini (President and Chief Investment Officer) Yeah, I think we touched on a little bit. Certainly the first quarter we saw quite a bit of activity. We were very happy with what we saw coming through the pipeline with the war. And I ran 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've closed, the loans that we're closing and add a couple spec loans in there, probably $200 million. And we are really from a repayment standpoint, you know, 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 you know, Q4 or Q3 and Q4, another couple hundred million dollars of net portfolio growth. Chris Muller (Equity Analyst) 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? Tom Lorenzini (President and Chief Investment Officer) 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 six 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, 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 you know, looking to dispose of the asset maybe. Maybe late this year. Chris Muller (Equity Analyst) Very helpful. Thanks again for taking the questions. OPERATOR And your next question comes from Christopher Nolan with Ladenburg Thalman. Please go ahead. Christopher Nolan (Equity Analyst) Hi. Is it fair to say that, just to follow up on the last question, in terms of the portfolio growth, did you say that you're expecting roughly a couple hundred million dollars in incremental portfolio growth for 2026? Tom Lorenzini (President and Chief Investment Officer) Yeah. Ideally, Chris, we end up, you know, close to 950 or so at the end of the year for total portfolio size. Christopher Nolan (Equity Analyst) 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're going to have to toss in more equity to do that. And so does CECL sort of require you to increase your allowance as long rates go up? Matt Brown (Chief Financial Officer and Treasurer) Yeah, 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 repairs. Christopher Nolan (Equity Analyst) 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 to. 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 put in more equity or no real impact at all? Tom Lorenzini (President and Chief Investment Officer) A couple 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 a project is 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. Christopher Nolan (Equity Analyst) Thanks, Tom. OPERATOR 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. Tom Lorenzini (President and Chief Investment Officer) 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. That concludes our call. Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.