Good morning, and welcome to Seven Hills Realty Trust's Second Quarter 2023 Financial Results Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will an opportunity to ask questions. Please also note that this event is being recorded today. I would now like to turn the conference over to Kevin Barry, Director of Investor Relations. Please go ahead, sir.

Thank you, and good morning, everyone. Thanks for joining us today. With me on the call are President and Chief Investment Officer, 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 second quarter of 2023. 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 Hill's beliefs and expectations as of today, Tuesday, August 1, 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 adjusted distributable earnings and adjusted distributable earnings per share. A reconciliation of GAAP to non-GAAP financial measures can be found in our earnings release presentation that we issued last night, which can be found on our website.

Thank you, Kevin. Good morning, everyone, and thank you for joining the call today. Last night, we announced strong second quarter results that reflected continued progress across many areas of our business. At the same time, we continue to navigate a period of unsettled market conditions and commercial real estate volatility. Let me begin with the highlights. Adjusted distributable earnings achieved the high end of our guidance range and more than covered our regular quarterly dividend. We received repayments totaling approximately $18 million. Loan production increased with one loan closed during the quarter and another closing just after quarter-end for total commitments of $65 million. We took ownership of the office property backing our loan in Yardley, Pennsylvania, one of the smallest loans in our portfolio, and we continue to deliver total shareholder returns that have outperformed the industry benchmark by 35 percentage points since the beginning of last year. The recent uptick in our loan production is indicative of the favorable competitive conditions for alternative lenders like Seven Hills as a result of the regional banking turmoil earlier this year. As regional banks continue to contract and likely face increased regulation, we are seeing a meaningful increase in quality deals enter our pipeline. For example, the two most recent loans that we closed were a fully leased student housing project and a newly delivered Class A industrial asset, both properties that typically would have been well-suited for regional bank lenders. However, our sponsor relationship banks were unable to close on these transactions. With cash and available capacity, we have the unique ability in this environment to continue to originate accretive loans while many other lenders remain sidelined. We believe market sentiment is improving, and there is a significant amount of capital waiting to be deployed as investors gain clarity on the outlook for financing costs. Last week, the Federal Reserve raised interest rates by 25 basis points and may be approaching the end of their rate hike campaign. In recent weeks, market sentiment has grown more optimistic that the Fed will successfully execute a soft landing of the economy. This backdrop bodes well for commercial real estate transaction activity to normalize and prompt further demand for our loan products in the month ahead. Turning to an update on Seven Hills loan book as of June 30, our portfolio remained 100% invested in floating rate loans and consisted of 24 first mortgages, totaling commitments of $678 million. With recent investments in multifamily and industrial loans, nearly half of our commitments are now allocated to these two sectors, and we continue to manage our office exposure lower. Our investments have a weighted average coupon of 9% and an all-in yield of 9.5%. In aggregate, the portfolio has a weighted average loan-to-value ratio of 67% and a weighted average maximum maturity of three years when including extension options. The risk rating for the portfolio was relatively stable at 3 compared to 2.9 last quarter. One of our loans is rated a 5, and we have no non-accrual loans. In general, Seven Hills borrowers are well-capitalized and typically have significant equity invested in their properties, insulating our capital from changes in the value of the underlying collateral. The embedded value in these assets grows as business plans are advanced, further protecting us against possible investment losses. We remain focused on asset managing our portfolio and monitoring our sponsor's progress executing their business plans. As we discussed last quarter, we are particularly focused on our exposure to the macro trends impacting the office sector and the individual performance of our loans. In June, we took ownership through a deed in lieu of foreclosure of an 87,000 square foot office building located in Yardley, Pennsylvania, after the borrower defaulted on the May payment and was unable to continue to support the property. The loan was originated in December of 2019 and had an unpaid balance of $15.9 million or approximately 2% of our loan book at the time. Importantly, this default is not a reflection of our disciplined underwriting, but rather the unique financial circumstances of the borrower and the unfortunate timing of originating this loan on a transitional office property right before the onset of the pandemic. The property itself is a Class A asset located just outside of Philadelphia, representing one of the best office properties in the submarket. Occupancy is over 80% with more than seven years of weighted average lease term. While NOI is slightly positive today, it will continue to increase as free rent concessions for various tenants burn off through the end of the second quarter of 2024. While we prefer to avoid foreclosing on an asset, we are comfortable with this decision, and we believe we are well positioned to minimize any losses. Our affiliation with the RMR Group provides us with deep expertise and experience in operating real estate as well as a wide array of asset management tools to enhance our capabilities and protect shareholder value. As for the remainder of our office exposure, we have nine loans representing 36% of Seven Hills' total principal balance. All of these loans are performing. We have one rated 4 office loan in Dallas which has benefited from the strong and continued commitment from the sponsor, including significant additional equity contributions. Additionally, we received a $5 million paydown on our St. Louis office loan in conjunction with a six-month extension while they continue to execute on their refinancing strategy. From a capital perspective, the strength of our secured financing relationships continues to provide us ample capacity to originate new loans with diverse and competitive sources of capital. Recently, our lending partners have shown increased appetite to finance the investment opportunities we are evaluating, supporting our near-term objectives to grow our portfolio. Looking ahead, we anticipate our deal pipeline to further grow in the back half of the year as we take advantage of our competitive position and the market further stabilizes. Our pipeline includes over $700 million of prospective loans with a mix of industrial, multifamily, hospitality, and self-storage transactions. We have two loans in diligence with an aggregate loan commitment of approximately $45 million, and we look forward to further building on this recent production momentum. And with that, I'll now turn the call over to Tiffany.

Thanks, Tom, and good morning, everyone. Thank you for joining us today. Yesterday afternoon, we reported adjusted distributable earnings or adjusted DE of $5.5 million or $0.37 per share. On a sequential quarter basis, adjusted DE decreased by $0.02 compared to $0.39 per share in the previous quarter, primarily due to the effect of loan repayments in the first half of the year and a partial quarter of interest from the Yardley loan, slightly offset by the positive impact of rising interest rates on our net interest income during the second quarter. I would like to note that adjusted DE excludes the impact of real estate owned, which is not core to our business model. As of June 30, our CECL reserves represented 87 basis points of our total loan commitments compared to 83 basis points at March 31. We had previously reserved $1.3 million related to the Yardley loan. And as a result of taking ownership of the property, we wrote off approximately $700,000, resulting in a recovery of more than $600,000. As of June 30, we did not have any collateral dependent loans or loans with specific reserves, and none of our loans were rated a 5. We ended the quarter with $454 million drawn on our secured financing facilities, and our leverage remained modest with total debt to equity increasing slightly to 1.7 times from 1.6 times at the end of the previous quarter. Just last week, we extended the maturity date of our UBS repurchase facility by 12 months to February 2025. We remain focused on creating value by investing in accretive loans to grow earnings and deliver attractive returns to our shareholders. Since the beginning of 2022, shares of Seven Hills have achieved a positive total shareholder return of 19% compared to a negative 16% return on the NAREIT mortgage commercial financing index. We believe the strong outperformance is a clear indication of our manager's expertise in originating and actively managing commercial real estate loans. It is also worth noting our manager's long-term hold position of 1.8 million shares in the company or approximately 12% of our shares outstanding, demonstrating meaningful alignment with our shareholders. In mid-July, we declared a regular quarterly dividend to Seven Hills shareholders of $0.35 per share, payable on August 17, which was covered by the second quarter's adjusted DE by 106%. On an annualized basis, our dividend equates to a yield of approximately 14% based on yesterday's closing stock price. Looking ahead, the recent acceleration in our loan production, combined with our outlook for loan originations during the back half of 2023 provides further support for Seven Hills' dividend coverage going forward. Additionally, the Federal Reserve's interest rate hike last week will further benefit our floating rate portfolio. Based on our expectations for additional new loan originations, future interest rates, and flat G&A expenses, we expect adjusted DE for the third quarter of 2023 to be within a range of $0.39 to $0.41 per share. That concludes our prepared remarks. Operator, please open the line for questions.

We will now begin the question-and-answer session. And our first question here will come from Matthew Erdner with Jones Trading. Please go ahead.

Hey, thanks for taking the question. Appreciate the comments there. So you anticipate the deal pipeline to grow in the second half. Is there an asset class specifically of those four, which you guys are favoring? And then in terms of geography, what are you guys seeing out there? And where most of the opportunity is coming from?

As far as product type, Matt, we’re seeing still quite a bit of multifamily and industrial. Those are probably two of the primary product types that we have in the pipeline currently. I would tell you that hospitality is probably a close third followed by retail and then storage as some of the mid-year products. But we still like the multifamily sector. Certainly, rent growth has slowed in many markets, but we still think that there are solid fundamentals there and the same with industrial. And as far as geography, recent transactions we’re looking at have been in the Southeast as well as a couple of opportunities in the Midwest right now. We have quite a bit of West Coast loan requests inside the pipeline now, but nothing that's actionable at this time.

Thank you. And then turning to the current portfolio, the Dublin, Ohio office is scheduled to mature this quarter with the fully extended maturity date of August 16. Are you able to provide an update there? And are you guys expecting a pay down? Or could you just give me some expectations around that? Thanks.

Yeah, sure. So we're in full communication with the sponsor on that transaction as we are with all our loans. They have been in the process of attempting to refinance the asset and they're currently under application with a lender to do so. At the same time, we're working towards an extension with them. So they’ll attract both the refinance and the potential 12-month extension with us. In conjunction with that extension, there would be a requirement to pay down the loan right now by $2 million.

Our next question will come from Chris Muller with JMP Securities. Please go ahead.

Hey, everyone. Thanks for taking the questions, and congrats on another nice quarter. So I wanted to talk about the office that you guys took ownership of. This is the first time that you guys have had to manage through a problem asset in the REIT. Can you just talk about your asset management capabilities and then how RMR fits into that picture? Thanks.

Sure. One of the benefits that we have here at Seven Hills is our affiliation with the RMR Group. So when we took over ownership in June, the RMR team has assumed management of the property, and they are going to continue to execute on the business plan, which is ideally to lease up the remaining space. We're holding that right now as an investment for sale. So we hope to exit that within the next 12 months. But from a management of the day-to-day operation, we've executed a management agreement with RMR to rely on their expertise to run the asset. Again, the property is over 80% leased, and there’s no near-term rollover. There is about 15,000 square feet that could be leased. So we feel like we’re in a pretty good position with that asset.

Got it. And can you talk about what triggered that loan from going to from a 4 rating to you guys taking ownership in a quarter? And then with the free rent in place for that asset, does that make a sale unlikely prior to that expiring, or would you be able to get something done before those free rents expire?

First question first. The loan was rated a 4, the property, again, because it's 80% leased will have strong cash flow once the free rent burns off. So we didn't have a distressed asset per se. The borrower, we were working with the borrower. The borrower was continuing their efforts to raise additional capital. We were optimistic that they were going to be successful. Ultimately, they were not. They missed the payment, and then we executed the deed-in-lieu of foreclosure. So it wasn't moved to a 5 because the property itself—the loan backed by the property—was really not in a distressed situation. It was really a situation where the sponsorship was unable to raise additional capital to keep it current. So it's a little bit different than 30% occupied and losing cash flow. This does have a slightly positive NOI to it. As for the second question, the free rents are quantifiable. You can certainly sell an asset and provide a credit to any buyer for that free rent. You don’t need to wait until the free rent has expired because the leases are contractual, they're signed, and tenants are in place. It’s simply a concession, and that’s an easily quantifiable number that we can provide a credit to or some sort of offset at the time of sale.

Got it. That's helpful. And then just one quick housekeeping one for Tiffany. I don't think I saw in the deck; it's probably buried in the Q somewhere, but how much of the purchase discount accretion is left from the TRMT merger?

Well, there's $4.4 million left, $4.5 million left of that. We expect that to burn off about $1 million a quarter through Q2 2024.

Perfect. Thanks for taking the question, everyone.

Thanks.

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

Thank you, everyone, for joining us today and for your interest in Seven Hills Realty Trust.

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