Good day, and welcome to the Seven Hills Realty Trust Fourth Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Kevin Barry, Senior 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 and Chief Investment Officer, Tom Lorenzini; and Chief Financial Officer and Treasurer, Fernando Diaz. In just a moment, they will provide details about our business and our performance for the fourth 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 Hills' beliefs and expectations as of today, Wednesday, February 21, 2024, 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. 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, sevnreit.com. I will now turn the call over to Tom.

Thanks, Kevin, and good morning, everyone. Thank you for joining our call today. Last evening, we reported strong fourth quarter results highlighted by the highest level of distributable earnings in our three-year history as a commercial mortgage REIT. We are proud of the work that we have done over these past few years and the value we have created for our shareholders. Since the beginning of 2021, Seven Hills has generated a total shareholder return of more than 50% compared to a negative 6% return for our benchmark, the NAREIT commercial mortgage financing index. We believe this meaningful outperformance in the current environment serves as a testament to the strength of our loan book and a direct result of our experienced originations, disciplined underwriting, and asset management teams. We look forward to building on our momentum and continuing to invest our capital in new lending opportunities that further enhance our portfolio. Turning to highlights from the fourth quarter. We generated distributable earnings per share of $0.43, a 13% increase on a sequential quarter basis. We exceeded our $0.35 per share quarterly dividend by 123%. We increased loan production, closing $54 million in new loan commitments. We received over $100 million of loan payoffs, demonstrating the ability for our well-capitalized sponsors to be refinanced in today's market. In our portfolio, with an overall average risk rating of three continues to perform well with no loans in default and no nonaccrual loans. From a macro perspective, we are seeing positive signs that the U.S. economy is performing well. Inflation has declined, the labor market remains very healthy, and GDP grew more than 3% last quarter. With expectations for interest rate cuts in the second half of this year, we believe that we are entering a more favorable environment for real estate transactions and that our business will benefit from increased lending opportunities. Turning to our fourth quarter portfolio activity, we closed two loans with aggregate total commitments of $54 million secured by self-storage and hospitality properties, carrying a weighted average spread of 370 basis points, a weighted average loan to value of 55%, and an average interest rate floor of approximately 4%. Both loans are fully funded at closing, allowing us to put 100% of the committed dollars to work immediately. Our conservatively underwritten portfolio continues to experience repayments across various property types. During the quarter, we received loan payoffs on two office, one retail, and one student housing property. For the full year, our portfolio activity included five originations, totaling approximately $137 million and seven repayments for a combined $172 million, with office loans representing nearly 40% of total repayments. Turning to our loan book as of December 31st, Seven Hills' portfolio remained 100% invested in floating rate loans and consisted of 24 first mortgages with an average loan size of $28 million and total commitments of $670 million, down approximately 7% or $50 million from last quarter, while future fundings remain consistent at only about 6% of our total commitments. Our investments have a weighted average coupon of 9.2% and an all-in yield of 9.6%. In aggregate, the portfolio has a weighted average maximum maturity of three years, including extension options, and a favorable overall credit profile with a loan to value at close of 68%. We continue to make progress diversifying our loan book. Multifamily remains our largest property type, representing one-third of the portfolio. Office accounts were 29%, down from 40% just a few quarters ago, and the balance of our portfolio is comprised of retail, hospitality, and industrial loans. From a capital perspective, our lending partners remain very supportive of our business. In aggregate, our four secured financing facilities provide us with nearly $700 million in borrowing capacity, and we have a weighted average borrowing rate of SOFR plus 217 basis points at the end of the quarter. As macro conditions strengthen, our lenders are offering incrementally more aggressive pricing on our loans, presenting an attractive opportunity for us to expand the net interest margin of our portfolio. Turning to our active deal pipeline, we continue to see a steady flow of deals with approximately $750 million of prospective lending opportunities in various stages of our screening process. In terms of asset type, our pipeline is balanced between acquisition and refinancing requests for industrial, multifamily, retail, and hospitality properties. After a seasonally slower start to the year, we expect our production volume to reaccelerate over the coming months as we deploy capital for our most compelling pipeline opportunities. In closing, during a period of generally challenging commercial real estate conditions, we delivered strong fourth quarter results. Our loan portfolio is healthy, and we continue to execute well on our objectives. With the potential for real estate market conditions to further stabilize in 2024, we remain well positioned to capitalize on new investment opportunities and continue to deliver attractive risk-adjusted returns for our shareholders. With that, I will now turn the call over to Fernando.

Thank you, Tom, and good morning. Yesterday, we reported continued earnings growth for the fourth quarter of 2023. Distributable earnings or DE came in at $6.3 million or $0.43 per share. On a sequential quarter basis, DE grew approximately 13%, driven by higher net interest income on the loans we originated during the third and fourth quarters, lower incentive fees, and the favorable impact of prepayment and excess fees, partially offset by four loan repayments during the quarter. Our CECL reserve remains modest at 87 basis points of our total loan commitments as of year-end, compared to 74 basis points as of September 30th. While our reserve increased slightly, we have reduced our office exposure by nearly 11% to 29% as of year-end compared to 40% in the first quarter of 2023. We remain focused on diversifying our portfolio into real estate sectors with more attractive fundamentals. As a reminder, we structured all of our loans with risk mitigation mechanisms such as cash flow sweeps, interest reserves, and rebalancing requirements to help us protect against investment losses, and we do not have any collateral dependent loans or loans with specific reserves. Seven Hills' financial profile remains strong with conservative leverage and ample liquidity. We ended the quarter with $88 million of cash on hand and $239 million of reinvestment capacity across our four secured financing facilities. Total debt to equity decreased to 1.7x from 1.8x at the end of the previous quarter primarily due to loan repayments. Longer-term, we believe our available borrowing capacity can be further utilized to benefit the earnings potential of our portfolio. As Tom mentioned, Seven Hills continues to generate strong returns and significantly outperform our peer group. We are highly focused on maximizing value for our shareholders and extremely pleased with the upside we achieved over the past year and since we became a mortgage REIT. We continue to believe that we have a tremendous opportunity to invest our capital in accretive loans, asset manage our loan book, and further demonstrate the strength of our lending platform to the investment community. Our run rate earnings over the last few quarters have comfortably exceeded our dividend level. In mid-January, we declared our regular quarterly dividend of $0.35 per share, equating to a DE payout ratio of 81% for the fourth quarter. On an annualized basis, our dividend reflects an attractive yield of approximately 11% based on our current stock price. At quarter end, book value per share was $18.31, up slightly compared to the previous quarter, primarily due to earnings exceeding our dividend, partially offset by a nominal increase to our CECL reserve. Turning to our outlook, we believe Seven Hills remains well positioned in the current lending environment, and we expect originations to increase as we advance further into 2024. Our earnings potential will also be dependent on interest rates, loan repayment activity, the strength of our loan book, and our ability to maximize net interest margin. For the first quarter of 2024, we expect distributable earnings to be within the range of $0.35 to $0.37 per share, which will continue to cover our quarterly dividend. This guidance assumes flat G&A expenses compared to the previous quarter and that interest rates will remain consistent with current levels. That concludes our prepared remarks. And with that, operator, please open the lines for questions.

The first question comes from Matthew Erdner with JonesTrading.

This first one is around the California Carlsbad office loan. I'm kind of curious as to why it has a four rating given the lease occupancy is 93%. Is there a big tenant in that building where the lease is coming up, and that's not backfilled yet? But could you kind of talk through that office property?

Sure. The primary reason is really just because it's office right now. That particular asset is leased well, as you noticed, at 93%. In fact, they've got some activity on lease in a couple of small suites in the space now that we think might convert from NOI to leases, so we expect it to get better. They have grown the NOI there quite a bit since closing to the tune of $200,000 to $250,000, I believe. They have been executing on their business plan. There is a tenant in here that has about 15% of the GLA that is very lightly utilizing their space, so that factored into our decision as well. We think we're covered from a loan-to-value perspective, and we think that there's sufficient equity on top of us. The sponsor recently stepped up there at the end of last year to buy a new cap and invested another $700,000 to do so. So obviously, they're very committed to the asset as well. We just felt it was prudent given that it's office. There is one tenant here that's fairly sizable that has term on the lease but is lightly utilizing their space. So, just a combination of multiple factors on that particular asset.

Yes, that's helpful. I appreciate the color there. And then as rates kind of go down, we've seen a CLO go off this year. Are you guys looking to or exploring the opportunity of going into CLO to kind of get more permanent financing there?

We talk about that quite a bit. And right now, given our portfolio, I think that we've got some loans in there that have more age to them. I'm not sure that they would be good for CLO. We are certainly feeling the repercussions of the CLO. We saw the same transaction go off, which is probably the MF1 transaction, which immediately put some compression on spreads but also brings in liquidity into the marketplace, which is beneficial for everybody. We will certainly entertain a CLO going forward. But in order to do so, I think we have to ramp up production a little bit further than where we currently are.

Our next question comes from Chris Muller with Citizens JMP. Please go ahead.

Congrats on a nice end to the year. So you guys have done a couple of hotel loans recently. Can you talk about how you guys evaluate a good market for hotels? Are you looking at more business travel-type locations or vacation types? Just any color you can give there would be helpful.

Yes, sure. The two that we did, I wouldn't say they were business hotels. They certainly had significant demand generators, which is clearly what you want to see for a hotel. The one that we did in Anaheim was extremely well located and close to Disneyland. So that was really the primary driver there. The transaction that we did in Scottsdale was very close to the Mayo Clinic, which is undergoing rapid development and expansion in that particular market. So that was a significant demand driver there as well. We're not looking at business-focused hotels, but more leisure or necessity-based travel is a way to look at that. And point of reference on those two loans, both of those loans—there was no future funding on those loans. Both of those loans probably could have been permanent financed in the market if the borrower had selected to do that, but they were really looking for flexible capital, which is what we were able to bring to the market and recapitalize those deals for them. So those loans, at some point, I'm assuming the promo is out in a couple of years. So we were fortunate enough to do some very attractive financing on two relatively new hospitality properties.

Got it. That's helpful. And then, I guess, on geography. So there's not much of a trend in where your originations are being concentrated, which I think does a good job highlighting your guys' national footprint. Can you just talk about any markets you like today in any markets you're avoiding, especially as you start to get more offensive in the back half of the year?

Well, I don't know that there's any market that we've redlined per se. I would tell you that we've never been a gateway city lender. We've never been a heavy Manhattan, L.A., or San Francisco type lender, and I don't know that we would necessarily want to go into those urban centers right now. We still do like the Sunbelt. Multifamily, their rent growth is slowing—we've seen that—but we still think that there's good value there in the multifamily space. We also see value in industrial. Self-storage and hospitality are two other sectors where we find good opportunities. Given our origination staff and all the office RMR we have across the country, we're continuing to look at opportunities wherever they may be.

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 our call today. Thank you for your interest in Seven Hills Realty Trust.

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