Good morning, and welcome to Seven Hills Realty Trust's Second Quarter 2024 Financial Results Conference Call. All participants will in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference 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; 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 Hill's beliefs and expectations as of today, July 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. Thank you for joining our call today. As Stephen mentioned, Jared Lewis has joined our team at Seven Hills Realty as Vice President. Jared and I have worked together for over 20 years at Tremont Realty Capital, our Manager, where he leads the underwriting team responsible for screening and structuring new investments. We look forward to Jared's continued contributions to our ongoing success at Seven Hills. Last evening, we reported strong second quarter results highlighted by distributable earnings per share that were above analyst consensus estimates. The continued strength and stability of Seven Hills Investment portfolio is a reflection of our resilient loan book, supported by our disciplined underwriting, originations and asset management teams. With ample liquidity on hand and a robust pipeline of new opportunities under evaluation, we look forward to building on our momentum as we move into the second half of 2024. Turning to a few highlights from the second quarter. We delivered distributable earnings per share of $0.38 and exceeding our $0.35 per share quarterly dividend by 9%. The credit profile of our loan portfolio remains stable with an overall average risk rating of 3, with no loans in the fall and no non-accrual loans. We received one loan payoff for $17.3 million, and we accelerated our loan production, closing $41.6 million across two loan commitments. From a macro perspective, while the U.S. economy has remained resilient with relatively strong economic activity, inflation rates have begun to recede to what the Federal Reserve has indicated is within their comfort level. As a result, the market now expects to see interest rate reductions beginning later this year. An easy rate environment traditionally bodes well for commercial real estate transactions and we continue to believe that lower interest rates will lead to increased…

Thank you, Tom, and good morning. Yesterday afternoon, we reported second 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 early repayment of our hotel loan in Scottsdale, Arizona. In mid-July, we declared our regular quarterly dividend to shareholders of $0.35 per share payable on August 15, which our second quarter DE covered by approximately 109%. On an annualized basis, our dividend equates to a yield of approximately 10.5% based on yesterday's closing stock price. Our CECL reserve remains modest at 120 basis points of our total loan commitments as of June 30 compared to 100 basis points as of March 31. While this metric increased slightly, all loans remain current on their debt service, and we have no non-accrual loans. As a reminder, to help protect us against investment losses, we structured 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 second quarter, Seven Hills maintained its conservative leverage metrics and continues to have substantial liquidity. We ended the quarter with over $345 million of liquidity consisting of $69 million of cash on hand and $276 million of borrowing capacity, and we had a weighted average borrowing rate of sulfur plus 216 basis points at the end of the quarter. Total debt to equity increased from 1.5 times to 1.6 times at the end of the previous quarter, primarily due to the loan repayment 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 third quarter. We expect distributable earnings to be flat sequentially at $0.35 when excluding the $0.03 of prepayment income that we saw in the second quarter. This guidance reflects our expected originations 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 line for questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question today is from Jason Weaver with Jones Trading. Please go ahead.

Hi. Good morning. Thanks for taking my question. I was hoping you could address a little bit more about the origination environment, specifically how it pertains to the level of competition within the marketplace, and that's specifically within your buy backs? If that is -- the level of the amount of capital coming in is in any way crowding out the opportunity set for yourself?

Sure, Jason. I would tell you that the market is competitive. And one of the reasons its competitive is because there's a -- there's certainly a dearth of new transactions. Sales transactions happening in the marketplace. So we're seeing more refinance opportunities. And ultimately, what happens in a lot of these transactions is that they may not end up happening, right? Borrowers may simply be kind of shopping around a little bit to see if they can get a better deal than your current lender. And ultimately, they don't transact and they stick with their current lender. When we do find transactions that work, especially, with an acquisition and has decent cash flow and a solid debt yield is of the quality sponsorship wise and real estate wise that we want, we find that to be a very competitively bid situation, because there is ample liquidity on the sidelines with various debt funds, even with the -- we're starting to see the other commercial mortgage REITs start of originations again. So those transactions that work are very competitively bid. We would anticipate and it's our hope that in the back half of the year, if you start to see some rate relief that will cause more transactions to trade, i.e., more sales and then there'll be more opportunities for lenders such as us, but also there'll be a bigger pool of transactions to bid on. Because right now, when you find one that works, we generally find ourselves competing against five or six or 10 different lenders.

Great. Thanks for that color. And along those time lines, I wonder if your estimate of picking – activity picking up in the back half of this year, has moved marginally in line with the last six weeks? We’ve seen a number of softer economic figures that indicate there might be some more monetary easing in. Has that – have you grown in complement in that view?

Yeah, I think so. You also need to look back kind of at the beginning of the year or at the end of last year when people were expecting 4 to 6 rate cuts in 2024, we saw an uptick in volume coming in into our pipeline. And then as the Fed back off of that and the market back off, and so we’re not going to have nearly that level of interest rate cuts. We might not have any. And we saw volume drop off. Now we’re starting to go again another way where we’re starting to see volume pick up because I think sponsors are -- they’re optimists. And if they believe that the Fed is going to be on a rate-cutting path over the next several quarters, they want to get ahead of that and start thinking about financing, start thinking about selling and seeing if they can better they lie, if you will, with their cost of capital. So as the Fed begins to cut, I think you’re going to see optimism come in from the real estate investors, and you’ll see, again, we’ll start to see more transactions happen.

All right. Thanks again, guys and congratulations for quarter.

Thank you.

[Operator Instructions] The next question is from Chris Muller with Citizens JMP. Please go ahead.

Hi, everyone. Thanks for taking the question. So kind of following up on that, that last theme. You guys are one of the only commercial mortgage rates as actively lending. Some of the other guys are starting to pick up, and maybe we see a little bit of that as everyone reports. But I guess, how are you guys thinking about portfolio growth over the coming quarters? And is this pace of origination, a good ballpark or do you think that will start to pick up as that pipeline starts to fall out a little more? Thanks.

Well, again, as we -- as I mentioned in the prepared remarks, Chris, we're anticipating six transactions in 2024, six to eight, I would say, we've already closed two this year. We have one that's in diligence, and we do have a pretty solid pipeline. Our goal would be really to -- from a production standpoint, I think we're probably looking at $200 million of total production or so for 2024, and we think that, that's achievable. Most of -- obviously, most of which is going to happen in Q3 and Q4.

Got it. That's helpful. And then I guess with the rent concessions on the Yardley office now expired, is the sale in 2024 a possibility? And have you guys started marketing that property yet?

We have not started marketing that property. I think our -- we've been planning to hold that through 2024. I think in the environment that you're in today, to put an office building on the marketplace, performing office building that has cash flow. I don't know that you'll get the -- quite the attention you would get, right, until that market because it'll stabilize a little bit more. That is adding a couple of cents to DE. The property is well leased. They continue to renew tenants there. They continue to have tours for the vacant space there. I think we're 81% or so occupied there. So really, the property is performing well. It fits well within our portfolio. RMR manages that asset. So really, it's just kind of a status quo at the moment. We'll make that decision with the Board probably going into 2025 to determine what we want to do there.

Got it. Thanks for taking the question.

Sure. Thank you, Chris.

The next question is from Jason Stewart with Janney. Please go ahead.

Hi. Thanks for taking the question. Fernando, I missed the guidance. If you could just repeat that for me, I'd appreciate that. Thank you.

Sure. Yeah. We're guiding $0.35, which excludes $0.03 of prepayment income that we saw in the second quarter from our prepayment of one of our hotel loans, so $0.35 for the next quarter.

Okay. And obviously, that includes the Yardley contribution rate, obviously, I should…

That is correct. Exactly, yeah. $0.02 that we get from – yes.

Okay. I got it. That’s it from me. Thanks a lot.

Thanks.

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

Thanks, Gary. Thanks, everyone, for joining us today. We look forward to seeing you at the JM Financial Services Conference in Washington, D.C. in September.

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