Good morning, and welcome to the Seven Hills Realty Trust First Quarter 2024 Financial Results Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the call over to Stephen Colbert, Director of Investor Relations. Please go ahead.

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 provide a steady flow of attractive…

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 4 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 3 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.

[Operator Instructions] 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. So from a geographic region, certainly, we lend nationwide as you're aware. There's really -- and that continues to be the focus, right? So we've not redlined any particular markets that we're going to lend into. From a product standpoint, I would tell you that we're still very active in the multifamily sector. As I noted, we just closed a multifamily loan. We currently have under application right now and in diligence a self-storage property that we're looking at in the West Coast. We expect that to close in the next 45 days or so. Industrial still makes sense in certain locations. And hospitality, we're seeing hospitality perform very well right now. And we're looking at a few opportunities there as well. What we've modeled for production is about $175 million of loans for the year. I think we're projected to do 6 loans at about $28 million to $30 million a piece. And then from there, we could increase that depending on the velocity of repayments that we have. We do expect a couple of repayments in the -- before the end of the year yet, so maybe there's another $50 million to $80 million that comes back that we can reinvest. But we see no reason why we can't hit our target right now of the 6 loans for the year of '24.

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. So the Dallas transaction, they were -- they did have some -- a modest uptick in leasing there. They actually changed their leasing team there as well, which has generated additional foot traffic and additional tours of the property. As far as what we're seeing in leasing for the one asset that we own, the Floral Vale transaction that you're aware of in Yardley, Pennsylvania, we've seen some positive leasing momentum there as well. We've had numerous tours for our leasing brokers there. And we're looking at currently under an LOI for a modest increase in occupancy there with a new tenant that's moving into the space. So overall, office is difficult, as you're aware. I think it really depends on the leasing team that you have there and if you have capitalized sponsors that are willing to contribute the cash necessary to the TI spend and the commission spend, right, to attract those new tenants. So we are cautiously optimistic, I would say, on our office portfolio. Everybody is current on debt service. All loans are -- and available cash as needed for TIs, leasing and for [ care aid ] if that's the case, so...

[Operator Instructions] 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?

Chris, I think it's a little bit of all of those things that you just mentioned. There's been -- going back a few months, right, I think the optimism in the market was, "Hey, the Fed is going to lower rates. Maybe now is the time I can entertain a refinance if I'm an existing borrower and get off my current loan, maybe ride the curve down and put some better financing in place." So a good number of those transactions just didn't happen, right, because the messaging coming from the Fed and the economy in general is just said, "Hey, look, we're going to be at a higher interest rate period for a longer time." So I think it took a little bit of wind out of the sails, if you will, for quite a few people that might have been looking to refinance. The other thing that we're seeing, there's still, in the market, you have overleveraged transactions that were written in 2021 maybe that are coming due, especially in the multifamily sector, where we're trying to be active, which are going to require some cash in. So we'll often underwrite transactions that we want to go after. And there may be some cash required from the sponsorship to balance that out, and they're not willing to do that. So that transaction doesn't happen. The other dynamic that you have going on is there's just a lot of dry powder, I think, on the sidelines with a lot of lenders. So when you find a transaction that works, it's very competitive. And we've seen spread compression. So we may find ourselves in situations where we certainly want the transaction, we're putting best foot forward and somebody really just kind of comes in and almost buys the business, if you will, because they might be speaking to a CLO or some other securitized execution. And they're willing to do it much cheaper than we feel appropriate. So there is flow out there. It's just a little more difficult to get it across the goal line right now.

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 2. 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. 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.