Good morning, and welcome to the Seven Hills Realty Trust Second Quarter 2025 Financial Results Conference Call. Please note, today's event is being recorded. I would now like to turn the conference over to Matt Murphy, Manager of Investor Relations. Please go ahead, sir.

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, 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, July 29, 2025, 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.

Thank you, Matt, and good morning, everyone. On today's call, I will provide an overview of our second quarter performance and recent developments. I will then turn the call over to Jared for an update on our pipeline and insights into current market conditions, followed by Matt Brown, who will review our financial results before we open the line for questions. We are pleased to report strong second quarter results marked by solid portfolio performance and disciplined capital deployment. Distributable earnings came in at $0.31 per share, which was at the high end of our guidance range. We also originated two new first mortgage loans totaling $46 million. The first was a $28 million loan to refinance a newly constructed Class A industrial distribution facility in San Antonio, Texas, and the second was an $18 million loan to refinance a fully renovated 112-unit multifamily property in Boise, Idaho. Both transactions reflect our selective approach to lending and draw upon our internal multifamily and industrial expertise here at the RMR Group. As of quarter-end, all loans in our portfolio remained current on debt service and are performing with a weighted average risk rating of 2.9, unchanged from last quarter. We had $665 million in total commitments across 23 first mortgage loans with a weighted average coupon of SOFR plus 3.64%, an all-in yield of 8.37%, and a loan-to-value at close of 68%. We ended the quarter with approximately $46 million in cash and $323 million in excess borrowing capacity. Now turning to the dividend. As announced earlier this month, the Board decided to reduce the quarterly dividend to $0.28 per share. This adjustment reflects our expectation that recycled capital from near-term loan repayments may be redeployed at lower net interest margins in a declining interest rate environment. I would like to emphasize that this change does not reflect any weakness in our loan portfolio. Credit performance remains strong. All loans are fully performing, and we have no 5-rated loans or nonaccrual loans. We believe the new dividend better aligns our payout with anticipated earnings and supports long-term value creation by preserving our ability to deploy capital into attractive investment opportunities as they emerge. While this decision was not taken lightly, we believe that the new quarterly dividend, which annualizes the 10.5% yield based on yesterday's closing price, provides an attractive return to shareholders while giving us the flexibility to continue executing our strategy in this uncertain environment. Looking ahead, we could see two to three additional loans totaling approximately $100 million repaid in the back half of this year. This is in addition to the four loans that paid off in the quarter or just after for approximately $120 million. We anticipate positive year-over-year portfolio growth ending 2025 with approximately $700 million in outstanding commitments. While redeployment spreads may trend lower relative to assets being repaid, we believe our selective approach, strong sponsor relationships, and current liquidity position us well to navigate this environment while optimizing for long-term value creation. With that, I will turn the call over to Jared to discuss current market conditions and our pipeline.

Thanks, Tom. During the second quarter, transaction activity slowed considerably as tariff announcements and global trade negotiations created additional uncertainty, causing borrowers and lenders to take pause early in the quarter as they contemplated the potential impact of these developments. Markets have since moved past this initial shock, but uncertainty still exists regarding the timing and magnitude of potential future interest rate cuts, which continues to weigh on property sales volume. Despite these macro headwinds and slower sales activity, our pipeline remains strong. During the quarter, we averaged over $1 billion in monthly loan registrations, reflecting the strength of our origination platform and ongoing demand from borrowers for flexible floating rate debt solutions in today's volatile environment. As such, in addition to loan requests to finance transitional and value-added business plans, we continue to see additional opportunities to finance properties that are relatively stabilized today, but where borrowers prefer short-term floating rate debt that provides greater flexibility to sell or refinance in a lower interest rate environment or when overall market conditions improve. We see significant demand for this type of financing in the multifamily and industrial sectors, where properties are coming off bridge and construction loans and have demonstrated strong leasing activity, but need additional time to optimize rents and NOI. Competition among lenders remained elevated across most asset classes, but in particular, the multifamily sector. Demand for securitized products, including CMBS and CRE CLO has continued to support the debt markets, and with fewer overall transactions and more lenders competing for each deal, spreads are considerably lower. In this current competitive environment, we continue to be selective in how we deploy capital. Rather than winning loans solely by being a low-cost provider, we are more focused on smaller middle-market transactions where we can earn more attractive yields by providing borrowers with creative and flexible financing terms to suit their specific needs. Additionally, we are increasingly active in sectors where we believe we have a competitive advantage, including the industrial, student housing, necessity-based retail, and medical office sectors. These are asset types and markets where we have strong operating knowledge and long-standing relationships, which in turn allows us to underwrite with greater confidence. To that end, we are currently in diligent on a $34 million loan to refinance a mixed-use retail and medical office property that is scheduled to close later in the quarter. If the Fed cuts interest rates later this year, we would expect to see a meaningful pickup in acquisition activity as cap rate expectations begin to move and bid-ask spreads compress, which should lead to a wider array of lending opportunities. Our strong current pipeline with potential for increased activity gives us great confidence in our ability to replace legacy loans rescheduled to pay later this year with new investments that meet our underwriting standards. We look forward to providing updates in the quarters ahead as we continue to originate new investments that align with our strategy. With that, I'll turn the call over to Matt Brown.

Thank you, Jared, and good morning, everyone. Yesterday, we reported second quarter distributable earnings of $4.5 million or $0.31 per share at the high end of our guidance range for the quarter. Our CECL reserve remains modest at 150 basis points of our total loan commitments as of June 30 compared to 130 basis points as of March 31. The $912,000 reserve increase was primarily due to macroeconomic factors and loan extensions, partially offset by repayments in the quarter. We do not have any collateral dependent loans or loans with specific reserves. We ended the quarter with $46 million of cash on hand, an all-in yield of SOFR plus 398 basis points, and a weighted average borrowing rate of SOFR plus 220 basis points. Total debt to equity remained at 1.6x. We believe that our current leverage level, available borrowing capacity, and expected upcoming loan repayments provide us with a strong opportunity to originate accretable loans. Earlier this month, we declared a quarterly dividend of $0.28 per share, representing a 20% reduction from the previous level. This reduction reflects a declining SOFR curve and the expectation that loan repayment proceeds will be redeployed at lower net interest margins. We believe the reduced rate is sustainable for at least the next 12 months and aligns with our anticipated earnings while continuing to deliver an attractive yield for our shareholders. This decision does not reflect any deterioration in our loan portfolio, which continues to perform, supported by a conservative overall risk rating of 2.9, which was unchanged from Q1. Turning to our outlook and guidance. Based on current expectations for loan originations and repayments, including $54 million of repayments that occurred in July, we expect third quarter distributable earnings to be in the range of $0.27 to $0.29 per share. That concludes our prepared remarks. Operator, please open the line for questions.

And our first question today comes from Jason Weaver at JonesTrading. Please go ahead.

Tom, I'm trying to bridge back to your prepared remarks. You mentioned expected year-end portfolio size of somewhere around $700 million, and I believe that might pencil to around $200 million or just above $200 million in originations for the second half. And then thinking about what Matt had said in the prepared remarks, how sensitive is that, is the dependency on the sustainability of dividend on getting to that $200 million level?

Thanks, Jason. So a couple of things there. We ended the quarter at about $665 million in total commitments, right? And then we had two payoffs subsequent with gross commitments about $58 million. And then we're under wrap right now on another transaction that Jared mentioned for about $34 million. So that kind of brings us to about $640 million. From there, we anticipate net production of probably another couple of loans that will bring us to about $700 million for the year. And then the rest of the originations that we discussed really is dependence on repayments. So we have five loans that are maturing between now and the end of the year for about $140 million of total committed dollars. Of those five, it is anticipated that they will all qualify for their extensions. However, one or two may actually end up paying off prior to year-end, even though they're extending here in the next month or so, just to give them more time. So when you say it's $200 million, the number really varies. I mean it could be anywhere from $90 million, the current $34 million under wrap plus two new transactions about $30 million a piece. And then from there, it could be another $50 million to $75 million just depending on repayments. So we are a little bit on the repayment dependent, if that makes sense.

Got it. Yes, that's helpful. How do you view the new $0.28 level in that context? I heard that Matt mentioned you expect it to remain stable over the next 12 months. However, if production were to decline after this quarter, which is not a prediction, would that jeopardize that level?

We are confident about maintaining the current dividend level for at least the next 12 months. As previously mentioned, our ability to deploy new capital relies on the continuation of loan repayments. We anticipate reaching around $700 million in total commitments by year-end, and at that level, we are comfortable with the dividend. We have carefully considered what the appropriate dividend rate should be, and we believe that this figure is sustainable for the upcoming year.

And I would add to that, Jason, that if we don't have the volume of originations, right, that just means that certain loans didn't repay. And keep in mind, those are typically at higher spreads and higher yielding than what we're currently lending at. So that would further support the dividend rather than detract from it.

Got it. That's helpful. And then maybe a little bit more broadly, talk about where you're seeing the most attractive opportunities today? And how is the competitive environment shaping up within that?

Yes. So this is Jared. It definitely is a competitive environment. We continue to see quite a bit of activity in the multifamily and industrial sectors. As I'm sure you're aware, a lot of lending activity in those two sectors occurred in 2022 and 2021, a lot of bridge loans and new construction activity, and many of those deals are rolling off the books today. As a result, we're seeing quite a bit of opportunities in those two sectors where borrowers have executed on the lion's share of their business plans, but they just need additional time for properties to season and/or rents to churn one or two more times before they feel confident in either refinancing or selling. So we're seeing a lot of activity in those two sectors for that reason. And as always, we continue to see other opportunities. As Tom mentioned, we're agnostic to property types specifically. We want to see good opportunities in good markets with solid borrowers. So we are under wrap on a mixed-use retail and medical office property where we feel like we're getting a great risk-adjusted return. So as I mentioned, it's pretty competitive. Rates have tightened up in that multifamily sector, but we feel confident in our ability to find opportunities where others may not.

Our next question today comes from Chris Muller of JMP Securities.

Congrats on a solid quarter. So I wanted to ask how you guys are thinking about leverage in the back half of the year. And given there's no near-term office maturities, should we expect leverage to remain at the lower end until some of those office loans pay off?

Yes. So we ended the quarter at 1.6x debt to equity, and we would expect that level to continue. As you did mention, we are underlevered on our office loans. Until those recycle out of the system, we would expect leverage to remain pretty consistent with where it is today.

Got it. And then you guys have a nice slide in the deck on the NIM compression there. Is there anything you can point to that's driving more compression on the loan side than you're seeing on the financing side of things? Just kind of trying to dig down into that compression a little bit.

Sure. So where the deals that are being priced most aggressively is certainly in the multifamily sector just because of the fact that they're supported, their back leverage, generally speaking, is financed with CRE CLO. And as that bond market goes, so does the ability for lenders to price competitively there. While we see lots of opportunities in the multifamily sector, it's become quite frankly, more of a commodity than it is not. That's where that compression happens. We want to put more multifamily loans on the books. We want to do more of that, but we certainly appreciate the fact that those spreads have come in 25 to 35 basis points, and the financing for those lenders is a little bit more attractive. We are getting the benefit, however, of that pricing, that back leverage pricing. Our repos deliver good pricing when the bond markets are humming along and the CRE CLO market is active. So we get the benefit of it, but we just don't get that final 10 or 15 basis points of spread reduction that those CLO lenders get. We find the yield elsewhere and feel that we're pretty good at identifying opportunities where our flexibility, whether it be prepayment flexibility or leverage flexibility, can help us win business to generate the returns that we're looking for.

Got it. Very helpful. And do you guys have any thoughts on if we do end up getting Fed cuts in the back half of this year, how that would impact the NIM there?

Sure. I mean that will certainly help overall borrowing costs, and that will accrete from the market where we have more clarity on the direction of interest rates. So it's not necessarily as much about the quantity of the reduction. It's just about where we are in terms of the cycle. I think the last end of the second quarter activity slowed; it's kind of a wait-and-see approach, but there's certainly a lot of pent-up demand and liquidity on the sidelines looking to transact. I think that if interest rates do get reduced, it will certainly stoke the new investment sales market.

And our next question today comes from Jason Stewart of Janney Montgomery Scott.

I have a quick question regarding the dividend. Do distributable earnings closely align with taxable earnings, or should we be aware of any significant differences as we near the end of the year?

No, taxable income and distributable earnings track pretty closely.

Okay. And then in terms of spreads, spreads were on the new originations up a little bit quarter-over-quarter, obviously, different asset classes. Is that coming in line with where you thought when you started the dividend discussion last quarter?

Yes. I think they are in line with what we've been thinking. I think we've been spot on in our thought process there. The two deals that closed in the quarter, I think the weighted average spread there was 3.45 or so, which is about 25 basis points inside of what the rest of the portfolio is. But that's consistent with what we've been thinking.

Okay. Once we eliminate the office component, or if we reallocate that capital to more productive areas, what is the through-cycle return on equity? Currently, the dividend on adjusted book is around 6%. What do you anticipate the through-cycle return on equity will be if we can adjust and move beyond the office situation?

I don't really have a sense for that right now for you, Jason. It's certainly something we can get back to you on and discuss offline.

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

Thank you, everyone, for joining today's call. Please reach out to Investor Relations if you are interested in scheduling a call or a meeting with Seven Hills.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.