Good morning, and welcome to the Seven Hills Realty Trust First Quarter 2024 Financial Results Conference Call. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.

Good morning. Joining me on today's call are Tom Lorenzini, President and Chief Investment Officer; and Fernando Diaz, Chief Financial Officer and Treasurer. 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 30, 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 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. And with that, I will turn the call over to Tom.

Thanks, Stephen. Good morning, everyone, and thank you for joining our call today. Last night, we reported strong first quarter results highlighted by distributable earnings per share that were above the high end of our guidance range. The continued strength and stability of Seven Hills' investment portfolio once again helped to deliver positive total shareholder returns that exceeded our Nareit industry benchmark for the quarter. We believe this ongoing outperformance serves as a testament to the strength of our loan book and our disciplined underwriting, originations, and asset management teams. With ample liquidity on hand, we look forward to continuing to build on our momentum throughout 2024. Turning to a few highlights from the first quarter. We delivered distributable earnings per share of $0.38, exceeding our $0.35 per share of quarterly dividend by 9%. The credit profile of our loan portfolio remained stable with an overall average risk rating of 3 with no loans in default and no nonaccrual loans. We received over $40 million of loan payoffs, demonstrating the continued ability of our well-capitalized sponsors to execute on their business plans in today's market. And we delivered total shareholder return that outperformed the industry benchmark by more than 7 percentage points, equating to cumulative outperformance of more than 60% since the beginning of 2022. From a macro perspective, the U.S. economy has remained resilient amid a backdrop of relatively strong economic data and inflation readings above the Federal Reserve's comfort level. As a result, expectations for interest rate cuts have shifted and are now weighted towards the back half of this year. While we believe that lower interest rates will ultimately create a more favorable environment for real estate transactions and result in increased lending opportunities, we are confident our current production pipeline provides a steady flow of attractive investment opportunities to further expand our loan book this year. Turning to our first quarter portfolio activity. Our conservatively underwritten portfolio continues to experience repayments across various property types. During the quarter, we received three loan payoffs, including one office, one retail, and one industrial property for a total of $40.4 million. We did not close on any new loans during the first quarter, which is traditionally a slower period of the year. Post quarter end, however, on April 25, we closed a multifamily loan with a total commitment of $17.8 million with a coupon of SOFR plus 315 basis points for an all-in yield of 9% when including loan fees. Turning to our loan book as of March 31. Seven Hills' portfolio remains 100% invested in floating rate loans and consisted of 21 first mortgages with an average loan size of $30 million and total commitments of nearly $630 million, down approximately 6% or $40 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 9.1% and an all-in yield of 9.6%. In aggregate, the portfolio has a weighted average maximum maturity of 2.8 years when including extension options and a stable overall credit profile with an average risk rating of 3 and a loan-to-value at close of 68%. We continue to make progress diversifying our loan book. As of quarter end, multifamily was our largest property type at 35%. Our office exposure has declined to 28% compared to 40% a year ago. And the balance of our portfolio is comprised of retail, hospitality, self-storage, and industrial loans. In terms of portfolio vintage, after the repayments we received during the first quarter, Seven Hills' portfolio now consists entirely of loans that were originated subsequent to the onset of the pandemic. 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 had a weighted average borrowing rate of SOFR plus 218 basis points at the end of the quarter. Turning to our active deal pipeline. We continue to see a steady flow of deals of over $600 million of prospective lending opportunities in various stages of our screening and diligence process, consisting of acquisition and refinancing requests for industrial, multifamily, self-storage, retail, and hospitality properties, including one loan for $23.8 million currently under application and in diligence and expected to close within the next 45 days. In closing, our portfolio and overall credit performance remains strong and our business continues to deliver solid results. While interest rates are likely to remain higher for longer, we believe we are well positioned to accelerate loan production this year, selecting the most compelling investment opportunities for our portfolio and continue to generate attractive returns for our shareholders. With that, I will now turn the call over to Fernando.

Thank you, Tom, and good morning. Yesterday afternoon, we reported first quarter 2024 distributable earnings, or DE, of $5.6 million or $0.38 per share, which was $0.01 above the high end of our guidance range, primarily due to the timing of loan repayments during the quarter. Our run rate earnings over the last few quarters have comfortably exceeded our dividend level. In mid-April, we declared our regular quarterly dividend to shareholders of $0.35 per share payable on May 16, which our first quarter DE covered by approximately 109%. On an annualized basis, our dividend equates to a yield of approximately 11% based on yesterday's closing stock price. Our CECL reserve remains modest at 100 basis points of our total loan commitments as of March 31. And all loans remain current on debt service, and we have no nonaccrual loans. We remain focused on further diversifying our portfolio into real estate sectors with fundamentals we deem to be more attractive and have reduced our office exposure to 28% as of quarter end compared to 40% in the first quarter of 2023. As a reminder, to help protect us against investment losses, we structure all of our loans with risk mitigation mechanisms such as cash flow sweeps, interest reserves, and rebalancing requirements. And we do not have any collateral-dependent loans or loans with specific reserves. In the first quarter, Seven Hills maintained its conservative leverage metrics and continues to have substantial liquidity. We ended the quarter with $93 million of cash on hand and $272 million of reinvestment capacity across our four secured financing facilities. Total debt to equity decreased to 1.6x from 1.7x at the end of the previous quarter, primarily due to the three loan repayments that Tom discussed. We believe that our conservative leverage and available borrowing capacity provide a strong opportunity to originate accretive loans that will benefit the company going forward. Turning to our outlook and guidance for the second quarter. We expect distributable earnings to be within a range of $0.35 to $0.37 per share, which will continue to cover our quarterly dividend. This guidance reflects our recent origination and repayment activity and assumes flat G&A expenses 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.

Could you talk a little bit about the pipeline and what you guys are really looking for to accelerate that loan growth, whether it be specific property types, geographic regions? And I guess, how quickly do you think that you can scale up the portfolio to an optimal size?

Thanks for the call. It's Tom here. We lend nationwide, and that's our main focus. We haven't excluded any specific markets for lending. In terms of our products, we're actively involved in the multifamily sector and recently closed a multifamily loan. We also have a self-storage property under application and in diligence on the West Coast, which we expect to close in the next 45 days. Industrial lending is viable in certain locations, and the hospitality sector is performing well, leading us to explore several opportunities there. We've projected around $175 million in loans for the year, planning to do six loans averaging between $28 million and $30 million each. Depending on repayment velocity, we could increase that. We anticipate a few repayments before year-end, potentially adding another $50 million to $80 million for reinvestment. We believe we can achieve our target of six loans for the year 2024.

Awesome. That's good color there. And then I noticed a couple of occupancies on the office, particularly the one in Dallas ticked up to 73% from 67% quarter-over-quarter. Could you talk about what you're seeing in leasing in your guys' properties and just the overall market there?

Yes, regarding the Dallas transaction, there has been a slight increase in leasing activity. They also changed their leasing team, which has led to more foot traffic and property tours. For our asset, the Floral Vale transaction in Yardley, Pennsylvania, we are experiencing positive leasing momentum as well; we've had several tours conducted by our leasing brokers. We're currently under a letter of intent for a modest increase in occupancy with a new tenant moving into the space. Overall, the office sector remains challenging. Success largely depends on the effectiveness of the leasing team and securing sponsors willing to invest in tenant improvements and commissions to attract new tenants. We remain cautiously optimistic about our office portfolio. All debts are serviced on time, and we have available cash as needed for tenant improvements, leasing, and other required expenses.

The next question comes from Chris Muller with Citizens JMP.

So I want to hit on the pipeline a little bit as well. So I think on the last call, you guys said there was like $750 million in the pipeline there. Can you talk about kind of the dynamics that are playing out there? Are loans falling out of the pipeline before reaching the finish line? Or are you guys just not seeing loans you like there or just maybe building some defensive or even opportunistic capital right now?

It's a combination of several factors. A few months ago, there was a sense of optimism in the market that the Fed would lower rates, which led some existing borrowers to consider refinancing their loans. However, recent messaging from the Fed and the overall economy has indicated that we will likely experience higher interest rates for an extended period. This shift has diminished interest from many who were thinking about refinancing. Additionally, there are still overleveraged transactions from 2021, particularly in the multifamily sector, that are coming due and may require some cash infusion. When we underwrite these transactions, we sometimes find that sponsors aren't willing to provide the necessary cash, leading to missed opportunities. Furthermore, there's considerable capital on the sidelines from lenders, making the competition intense when a favorable transaction arises. We've experienced spread compression, where we can find a deal we want to pursue, but other entities may outbid us, often because they have connections with CLOs or other securitized options that allow them to offer lower rates than we deem acceptable. There are opportunities available, but it's currently more challenging to finalize these deals.

Got it. That's very helpful. And then changing gears a little bit here, so it looks like the purchase accretion discount should run out in the next maybe quarter or two. It looks like that added about $0.08 to revenues in the first quarter here. So I guess, my question is do you expect GAAP earnings to run below the dividend level in the near term and we'll see some book value decline as a result of that?

Chris, this is Fernando, I'll take that. We are expecting this accretion to run off by the third quarter. So it will be progressive. The second quarter and third quarter will be down, like I said. So we don't believe that's going to be impacting that much in terms of the earnings. Obviously, as we ramp up our production, as Tom alluded, that's going to help us balance that as well.

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

Thanks, everyone, for joining us today. We look forward to seeing many of you at the Nareit Conference in New York City in June. Operator, this concludes our call today.

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