Good morning, and welcome to Seven Hills Realty Trust Third Quarter 2024 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 call over to Melissa McCarthy, Manager of Investor Relations. Please go ahead.

Thank you. Good morning. Joining me on today's call are Tom Lorenzini, President and Chief Investment Officer; Fernando Diaz, 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, October 29, 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. With that, I will now turn the call over to Tom.

Thank you, Melissa, and good morning, everyone. On today's call, I will begin with an overview of our loan portfolio and third quarter performance before turning it over to Jared to discuss the macro perspective and its impact on our pipeline. Fernando will then review our financial results before we open the call for questions. Last evening, we reported third quarter results highlighted by distributable earnings per share that were above analyst consensus estimates. Our continued strong performance is a testament to the quality and strength of our loan book and is a direct result of our disciplined underwriting, originations, and asset management teams. With ample liquidity on hand and an increasingly robust pipeline, we look forward to continuing to pursue attractive lending opportunities that further diversify and grow our portfolio. Turning to a few highlights from the third quarter, we delivered distributable earnings of $0.36 per share. The credit profile of our loan portfolio remained stable with an overall weighted average risk rating of 3.1, with no loans in default and no non-accrual loans. We received three loan payoffs totaling $70.6 million, demonstrating a consistent ability for our well-capitalized sponsors to be refinanced in the current environment, and we furthered our loan production, closing one new commitment totaling $16 million. Our conservatively underwritten portfolio continues to experience repayments across a range of property types. During the quarter, we received the repayment of our two Portland, Oregon multifamily loans totaling $33.1 million in our Auburn University student housing loan for $37.5 million. We also closed one new loan with a repeat borrower of ours, totaling $16 million secured by a recently constructed hotel located in Greater Orlando. As of September 30, Seven Hills' portfolio remained 100% invested in floating rate loans, which consisted of 20 first mortgages with an average loan size of $30 million and total commitments of $594 million, which is a decrease of approximately 9% or $58 million from last quarter. Future fundings remain consistent at approximately 6% of total commitments. Our investments have a weighted average coupon of 8.9% and an all-in yield of 9.3%. In aggregate, the portfolio has a weighted average maximum maturity of 2.5 years when including extension options and a stable overall credit profile with an average risk rating of 3.1, and a weighted average loan to value at close of 68%. None of our loans are rated 5. We continue to make progress diversifying our loan book. As of quarter end, our office exposure was 30%, a slight uptick from last quarter due to the three loan payoffs received in the third quarter, the other office exposure remains greatly reduced from a high of 40% last year and we remain focused on decreasing our office exposure further, as we grow our portfolio. More importantly, all of our office loans remain current and continue to be supported by their sponsors. Multifamily continues to be one of our largest property types at 28% this quarter, and the balance of our portfolio is comprised of retail, industrial, and hotel loans. Our loans are also diversified by geographic region with most properties located in the South and West. From a capital perspective, our lending partners remain very supportive of our business, and we recently extended two of our three repurchase facilities. We extended the City facility for 2 years until September of 2026 and our Wells Fargo facility until March of 2026. With that, I'll now turn the call over to Jared.

Thanks, Tom. I will provide a quick macro perspective update. As the Federal Reserve has begun to lower interest rates, we are beginning to see more optimism in the market, and we anticipate that the reduction of short-term rates will be a catalyst for increased financing activity, which has been muted over the past several quarters. Since August, borrowers have had greater clarity on the future path of interest rates leading to greater conviction on the decisions of whether to buy, sell, or refinance assets. Further, we expect that an improving interest rate environment will enhance asset performance and reduce debt service stress, allowing borrowers additional flexibility to operate their properties and complete business plans, which will lead to an acceleration of refinancing activity. In addition to lower short-term floating rates, credit spreads have been tightening due to increased competition amongst lenders for viable financing opportunities leading up to the Federal Reserve's latest interest rate cut. This combination of lower base rates and credit spreads will lead to an increase in overall liquidity, which will benefit both borrowers and lenders that utilize financing like us. Following the Fed's September rate cut, our pipeline of potential financings increased notably, growing from a weekly average of about $700 million over the prior several months to well over $1 billion today. More specifically, we have continued to see borrowers' appetite for floating rate loans increase whereas earlier this year, many elected to finance or refinance with less expensive fixed rate debt. We have several transactions in process, and we expect to close by year-end, including a $145 million acquisition loan on a Boston hotel that could close as early as next week. This loan is priced at SOFR plus 3.95% and is approximately 50% loan-to-value. With ample available capacity and a conservative leverage profile, we are well-positioned to capitalize on market opportunities as we head into the fourth quarter, which is traditionally our most productive period, and we expect this momentum will continue well into 2025. Now I'd like to turn the call over to Fernando.

Thank you, Jared. Yesterday, we reported third quarter 2024 distributable earnings for DE of $5.3 million or $0.36 per share, which was $0.01 above our guidance, primarily due to the increased fee amortization resulting from the early repayment of our student housing loan in Auburn, Alabama. In October, we declared our regular quarterly dividend to shareholders of $0.35 per share to be paid on November 14. On an annualized basis, the dividend yield on our stock is approximately 10.3%, based on yesterday's closing price. Our CECL reserve remains modest at 160 basis points of our total loan commitments as of September 30 compared to 120 basis points as of June 30. Our CECL provision increased by $1.5 million from the second quarter, primarily driven by unfavorable CRE pricing forecasts used in our CECL model and increased provisions for our office loans. We note that while the CECL reserve increased slightly, all loans remain current under debt service, and we have no non-accrual loans. 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 third quarter, Seven Hills maintained its conservative leverage metrics and continues to have ample liquidity. We ended the quarter with $82 million of cash on hand and $318 million of borrowing capacity and a weighted average borrowing rate of SOFR plus 215 basis points. Total debt to equity decreased to 1.4 times from 1.5 times at the end of the previous quarter, primarily due to the three loan repayments in the quarter. 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, as we enter an easing rate environment. Turning to our outlook and guidance. We expect fourth quarter distributable earnings to be in the range of $0.31 to $0.33 per share due to the amount of third quarter payoffs and the timing of the closing of new originations currently in our pipeline. As Tom and Jared discussed, we have an actively growing pipeline with several loans in advanced stages. However, these loans will not close until later this quarter or early next year. Once these loans have closed, they should contribute to our earnings going forward. We feel comfortable with the current dividend level. That concludes our prepared remarks. And with that, operator, please open the lines for questions.

I will now begin the question-and-answer session. And our first question comes from Jason Weaver with JonesTrading. Please go ahead.

Hi, thanks for taking my question. So first of all, you did comment on a little bit of the pipeline with the Boston hotel that is supposed to be closing next week. But I was curious as well about the upcoming expected maturities in 4Q and 1Q that's initial maturities. And if any discussions are pending regarding either shifting to permanent or extensions that are in the works there?

Sure, Jason. A couple of the pending maturities that you're looking at in the schedule there, we have two office loans, one in Bellevue and the other one in Carlsbad, which have both been extended in the near term for 90 days while we finalize longer-term extensions. I will tell you that on the Carlsbad transaction, we are anticipating that will be a two-year extension. And then on the Bellevue transaction, that would be a three-year extension. We also have a property in Downers Grove, Illinois that is maturing at the end of this month. It's a $29.5 million outstanding credit where the borrower is currently working on a refinance of that position. So we're hopeful that, that will come back to us here by the end of the month. And then we also have another transaction in Downers Grove, Illinois, an office transaction I think it's about $23.5 million outstanding balance that matures at the end of the year, and they qualify for their extension and they've indicated to us that they will extend. So we have one office loan that could be coming back to us at the end of the month, pending their work right now under refinance and then the other one will be extended.

Got it. That's helpful. And regarding the comments that you have about $400 million-some-odd liquidity and $82 million in cash. I wonder, have you given any consideration to possibly using securities as a placeholder until the origination environment becomes a lot more robust?

As far as purchasing securities? Yes. Look, we certainly had those discussions. That generally is in our traditional business plan, if you will. We are currently, as Jared alluded to in his remarks, the pipeline is pretty significant right now. We have quite a few transactions in works that we can put this capital to work. So we're comfortable holding on to the cash that we have and certainly the dry powder with the capital providers to fund the new loans in the pipeline.

Understood. Thank you for that color.

Next question comes from Jason Stewart with Janney Montgomery Scott. Please go ahead.

Hi, good morning. Thanks for taking the question. And I appreciate the comments on the color in the market. I'm just curious if, in the last, say, two weeks, the interest rate volatility that has been realized has changed people's confidence in business plans and desire to borrow and transaction activity.

Well, what we've seen, Jason, is we've had a lot of the transactions that we look at today. We are doing much more significant immediate funding, not so much future fundings, meaning a lot of these properties are more stabilized or they need less value add. So we end up competing with fixed rate lenders on that product. We'll compete certainly with the agencies on certain multifamily loans. We'll compete with some of the life companies and some of the commercial credits. As that treasury volatility, as you pointed out, has increased, I think we're at around 430 in the 10-year right now, that makes that decision to go fixed rate not as easy. So we're seeing borrowers kind of come back to us saying they'll take that floating rate loan because we see that near-term rates are decreasing. And I'll bridge this really just to a better interest rate environment when I can fix it in two, three, or four years down the road. So it certainly impacts our business in the higher treasury, helps us win some deals. It also makes it a little more difficult for some of our borrowers to refinance us in the fixed-rate market, but we win more opportunities that we took.

Yes, that makes sense given that most of these are stabilized. That's helpful information. Looking at the portfolio overall, risk ratings are stable. Some may question the stability of the office sector in terms of size, but it is performing well, and you plan to refinance the loans that are performing the best, which is reasonable. If we take a broader view, what needs to change for this cycle where you originate good loans, they receive risk ratings of one and two, and get refinanced, while the office sector continues to perform but remains stagnant?

Yes. So we discussed this quite a bit. I mean, office, everything that we read and that we experienced shows that office maybe has bottomed. We don't expect this hockey stick trajectory to lease up all the office space right now. But we think things are at least bottomed and they've begun to maybe stabilize. So we think it is really just time that some of these office properties need. All the loans that we have, they're all well-leased. They all have pretty decent wealth to them. They have cash flow. We have sponsors that are standing behind them. So they really just need time. They need to see some cap rate compression and they need to see liquidity come back into that market because we are really only seeing on office trades opportunistic buyers that are looking to just kind of steal a deal, if you will, and buy very cheaply. If we begin to see institutional equity come back into the office market, that will certainly help. There will be liquidity, cap rates might come down a little bit. And then if rates continue their downward trend, the sponsors could be in a good position to take us up.

Yes, that's helpful. I appreciate it. I have one final question and then I'll step back. Fernando, could you repeat your reasoning for increasing the CECL reserve? I apologize for needing you to go over it again. Thank you.

Yes, no problem at all. Yes. So what happened with the CECL reserve, we basically were driven by unfavorable CRE pricing forecasts that we used in our CECL model and also our increased provisions in our office loans. That was the main driver there. Does that answer your question?

Yes. Thanks, guys.

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

Hi, guys. Thanks for taking my questions and congrats on a nice quarter. So I guess, how are you guys thinking about portfolio size over the next couple of quarters? I know repayments came in a little heavier this quarter, but it sounds like the pipeline is very strong. So I guess, are we near a trough portfolio size? And then on the other side of that, what size portfolio can the existing capital base support as it sits today?

Hi, Chris, this is Jared. I guess to answer your question on the pipeline and sort of what we have in the future, we are looking at about $225 million to $250 million of transactions right now where we've got bona fide term sheets out, and we have the ability to fund probably about $200 million of those in the next quarter or so. In terms of the maximum portfolio size that we could get to, we're probably talking just shy of $1 billion when we're fully leveraging and most efficiently leveraging. But at the moment right now, we probably feel like we've got good run room to do another $200 million in the short term here, pending future rollover of the portfolio in early 2025.

Got it. So plenty of capacity for some growth there. And then I guess on the yield side of things. So it looks like the yields on your new loans in the quarter were above the portfolio average, which is nice to see even with short-term rates coming down. Is that typical of what you guys are seeing out there? Or is this more of just a one-off type opportunity?

Well, we're seeing rates. So we're definitely seeing some more competition among the rates with respect to rates. But can you repeat the question one more time, if you don't mind?

Yes. I guess just how are spreads and yields looking like in the market today compared to your existing portfolio and what you've seen over the last year or so?

Yes, I apologize. We have noticed increasing competition and tighter spreads. However, we've realized that by being patient, we can secure deals for our portfolio that offer slightly higher yields since we are not pursuing the transactions typically financed through CLO execution. In the multifamily sector, for example, bids we made in the low-3s ended up going off in the mid-2s, a pricing level we choose not to chase. Fortunately, we are beginning to see a rise in transaction volume, which is enabling us to achieve the rates and returns we aim for in our portfolio. With this increase in transaction and financing activity, I believe we will have opportunities to strategically choose our investments over the next three to six months.

Got it. That's helpful. And then if I could squeeze one last one in. Do you guys have any updates on the Yardley office sale, any expectations around timing of that?

Right now, the expectation is that we are going to hold it in the near term. It is something we'll be bringing up to the Board later. But there is quite a bit of activity on the leasing front. They're currently 80% to 81% leased. There's a couple of outstanding LOIs on that property that could potentially bring the occupancy up into the low 90s, which greatly changes the economic profile of that asset. So we're playing those out over the next, call it, through the end of the year. And then I think we will have a more wholesome discussion with the Board as to what we want to do. But that property is generating cash flow.

So no rush to get through that. That makes a lot of sense.

Correct.

Thanks for taking my question, guys.

That 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, and thank you, everyone, for joining today. We appreciate your continued interest in Seven Hills Realty Trust.

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