Seven Hills Realty Trust (SEVN) Q3 2026 Earnings Report, Transcript and Summary

Good day and welcome to the 7 Hills Realty Trust Third Quarter 26 Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Matt Murphy, Manager of Investor Relations. Please go ahead.

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 the recording, retransmission, 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 2000 and other securities laws. These forward looking statements are based on 7 Hills beliefs and expectations. As of today, 10/28/2026, 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 7reit.com. With that, I will now turn the call over to Tom.

Thank you, Matthew, and good morning, everyone. On our call today, I will begin with an overview of our third quarter activity and portfolio performance. Jared will then discuss market conditions and our investment pipeline, before Matthew reviews our financial results and outlook. The third quarter was highly productive for 7 Hills as we continued deploying capital into accretive investments while reducing our legacy office exposure. We generated distributable earnings of $0.24 per share excluding a modest loss associated with the repayment of our Dallas office loan. As I will discuss shortly, we believe this loan's resolution was a positive outcome for 7 Hills that will further support ongoing earnings growth within the portfolio. Origination activity accelerated meaningfully during the quarter as we continued to capitalize on attractive lending opportunities across our target sectors. We originated 3 loans totaling a $122 million representing our highest quarterly loan origination volume since the fourth quarter of 2021. These investments included a $68 million loan secured by a Class A multifamily property in Chattanooga, Tennessee a $30 million loan secured by a 95% leased retail property in Charlotte, North Carolina and a $24.3 million loan secured by a high end retail property in Park City, Utah. Importantly, virtually 100% of the loan proceeds from these 3 loans were funded at closing, eliminating any earnings drag on unfunded future commitments. We also received $139 million of proceeds during the quarter improving our portfolio composition and enhancing our ability to pursue new lending opportunities. Included in this activity was the repayment of our Dallas office loan which was resolved at approximately 97% of its $44.2 million outstanding balance reflecting a $1.5 million discount that was significantly below the $6.3 million CECL reserve allocated to the investment. We believe this represents a highly favorable resolution. In addition, the repayment unlocked approximately $46 million of previously trapped capacity due to the under levered nature of the loan. This allows us to efficiently redeploy this capital into new investments and grow our portfolio. As a result of our origination and repayment activity, office exposure declined from 19% at the end of the second quarter to 13% at the end of the third quarter. Going forward, we expect our office exposure to continue trending lower into the high single digits over the coming quarters as additional office loans are repaid and capital is redeployed. Turning to portfolio performance. Our loan book continues to perform well. Reflecting the benefits of our disciplined underwriting approach and active asset management. Our portfolio maintained a weighted average all in yield of approximately 7.8% at quarter end and credit performance was steady as all borrowers remained current on debt service. Our weighted average risk rating increased from 2.9 last quarter to 3.2. Driven by 2 1-rated loans being repaid as well as a single office loan in Carlsbad, California being downgraded to a risk rating of 5 as it approached maturity and a negotiated resolution was in progress. Subsequent to quarter end, the Carlsbad property was sold, netting approximately $22.1 million, which represents a recovery of approximately 90% of the loans $24.7 million outstanding principal balance. This outcome was consistent with the discounted payoff we agreed to and reflects a discount of approximately $2.6 million in line with the CECL reserve allocated to the investment. While this repayment occurred after quarter end and is not reflected in our third quarter results, it further reduced our office exposure to 10% and unlocked an additional investment capacity of approximately $11 million due to the under levered nature of the loan. Furthermore, I would like to put the recent realized losses into Since writing our first loan in the spring of 2018, we have closed 72 loans for $1.93 billion The combined realized losses incurred totaled 0.2%. A track record we are extremely proud of and certainly 1 of the best amongst our peer group. We believe the resolution of these office loans represents significant progress in not only reducing our legacy office exposure, improving the overall composition of the portfolio, enhancing our ability to redeploy capital into new investments that will drive future earnings growth. Our only remaining office maturity in 2026 is a $23.5 million loan backed by a 95% leased asset in Suburban Chicago but we remain actively engaged with the sponsor regarding a path forward. And expect to provide an update in the fourth quarter. Additionally, Nearly 80% of our portfolio has been originated since 2024 in a higher interest rate environment. This positions us well for the current operating environment and provides increased visibility into the portfolio's future performance. Looking ahead, we remain focused on actively deploying capital into assets that meet our disciplined underwriting and return objectives. Our pipeline remains healthy. We currently have 3 loans in diligence, totaling over $120 million that we expect to close over the next couple of weeks. Based on our current outlook, we now expect to achieve sustainable dividend coverage in the first half of 2027. This timing primarily reflects certain loan closings occurring later than anticipated rather than any change in our origination assumptions. We remain committed to our current quarterly dividend of $0.28 per share and believe our active pipeline growing lending capacity, continued reduction in legacy office exposure positions 7 Hills to create long term value for our shareholders. With that, I will turn the call over to Jared to discuss current market conditions and provide further details on our pipeline.

Thank you, Tom. Through most of this year and much of the third quarter, commercial real estate capital markets have performed well. Despite continuous interest rate volatility, ongoing concerns regarding inflation, rising energy costs, and continued geopolitical uncertainty, transaction activity remains strong and financing activity has been robust. The recent spike in longer term treasury yields and greater uncertainty surrounding the path of the federal funds rate has created a more challenging environment for many market participants today. We are beginning to see signs of slowing sale transaction activity as buyers, sellers and lenders adjust return expectations to reflect the current and potential future interest rate environment. We are also starting to see a growing number of situations where certain lenders have had to reprice loan quotes or revisit transactions as market conditions have evolved. In many of these cases, higher interest rates have materially changed financing terms or caused lenders to step away from opportunities altogether. Despite the heightened level of interest rate volatility, and a potential slowdown in property sale activity, we continue to see significant demand for debt capital. Driven by the substantial volume of loans originated during 2022 and 2020 that are scheduled to mature over the next several years. Which we believe will continue to create a meaningful and durable opportunity for 7 Hills. The current macroeconomic climate should benefit lenders with the ability to source and evaluate transactions based on the quality of the underlying asset strength of sponsorship and the merits of a specific business plan. Rather than relying on lower interest rates as a means of value creation. To that end, we continue to see a number of attractive lending opportunities that no longer fit a traditional lender's loan sizing parameters. And sponsors are in need of flexible capital and a lender that can deliver certainty of execution. Like 7 Hills. In addition to industrial and multifamily, we continue to see opportunities spanning a variety of property types. Including retail, medical office, self storage, and student housing. While there continues to be heightened competition among alternative lenders for high quality opportunities, pricing for new investments has firmed up and the focus today is on certainty of execution in addition to pricing. We believe these conditions will continue to provide a attractive risk adjusted returns and support ongoing capital deployment. Looking ahead, activity in our pipeline remains healthy. As Tom mentioned, we currently have 3 loans in diligence totaling over $120 million and we continue to evaluate a steady flow of perspective opportunities. Given the significant volume of upcoming loan maturities across the market, we expect refinancing demand to remain a meaningful driver of our pipeline and origination activity. With that, I will turn the call over to Matthew to discuss our financial results.

Thank you, Jared, and good morning, everyone. Yesterday, we reported third quarter distributable earnings of $3.8 million or $0.17 per share. Which included a $1.5 million or $0.07 per share realized loss associated with the repayment of our Dallas office loan. Distributable earnings excluding this loss were $5.3 million or $0.24 per share at the midpoint of our guidance and in line with consensus estimates. As it relates to this $1.5 million realized loss, as Tom mentioned, the shortfall had been more than fully reserved through our CECL allowance in prior quarters, the release of this reserve was the primary driver of a net $3.6 million reversal of credit losses this quarter. Just as important, this was a meaningfully under levered loan and its repayment roughly doubles the lending capacity to approximately $93 million Lastly, we are earning a net spread of only 100 basis points on this loan, the redeployment of these proceeds should generate higher net spreads coupled with the unlocked additional capacity resulting in further growth to our earnings. Turning to credit. Our CECL reserve stands at $9.5 million or 1.30% of total loan commitments. Down from 1.90% last quarter largely driven by the resolution of the Dallas office loan. All of our loans are current on debt service, and the portfolio's weighted average risk rating increased, from 2.9 last quarter to 3.2. The increase was largely driven by 2 1-rated loans being repaid for $71 million in the quarter as well as our Carlsbad, California office loan being downgraded to a risk rating of 5 before its resolution earlier this week. We expect to recognize a realized loss of $2.6 million on this office loan in the fourth quarter. Which was fully reserved for as of September 30. From a liquidity standpoint, we ended the quarter with $51.5 million of cash and approximately $426 million of unused capacity under our secured financing facilities. The 2 loans we closed in late September totaling $98 million were unlevered at quarter end. Financing these loans at our typical advance rates would generate approximately $78 million of additional liquidity available for redeployment. During the quarter, we also extended our Citibank facility to September 2028 and we now have no facility maturities until September 2028. Our debt to equity ratio remains conservative at 1.4x and our liquidity positions us to fund our targeted portfolio growth. Turning to our outlook. I wanna start by walking through the drivers of earnings growth. First, the 2 loans we closed in late September contributed only modestly to our results, but they will contribute fully for the fourth quarter. Second, we have 3 loans totaling over $120 million in diligence, that we expect to close in the fourth quarter not including several additional investments the team is currently evaluating. And third, we are able to further grow our portfolio by approximately $57 million due to the increased capacity resulting from the 2 office loan repayments, while also lending at meaningfully higher net interest margins. To put this in perspective, at today's spreads and advance rates, each $100 million in net portfolio growth adds approximately $0.04 per share to quarterly distributable earnings. Closing the gap between our third quarter run rate and our dividend requires approximately $220 million of net portfolio growth and we have the capital in place to fund it. Taking these factors into consideration, we expect fourth quarter distributable earnings, excluding any realized losses, to be in the range of $0.25 to $0.27 per share. Our reported distributable earnings will also reflect the an approximately $0.11 per share realized loss on our Carlsbad loan which was fully reserved. With origination activity picking up in the second half of the year, we are seeing our distributable earnings trending back towards our quarterly dividend level. Earlier this month, our board declared a regular quarterly dividend of $0.28 per share, distributable earnings remain below our dividend, we continue to expect meaningful earnings growth as recently closed loans begin contributing and additional investments are funded. In addition, our portfolio remains 100% floating rate, and sustained increases in benchmark rates provide an incremental benefit to earnings. Based on our current pipeline and capital deployment expectations, we now expect to achieve sustainable dividend coverage during the first half of 2027. In closing, we believe continued financing demand is generating an attractive pipeline of new opportunities and the combination of declining office exposure expanding lending capacity and a healthy origination pipeline positions 7 Hills to continue growing earnings and shareholder value into 2027 and beyond. That concludes our prepared remarks. Operator, please open the line for questions.

We will now begin the question-and-answer session. Our first question comes from Marissa Lobo of UBS. Go ahead please.

Thank you and good morning. Looking at liquidity, given the significant liquidity still available, where do you ultimately expect leverage to settle once the current pipeline is funded.

Good morning, Marissa. it is a good question. Our leverage is conservative at 1.4x at September 30. it is been around that level for several quarters now. It is important to note that those the $98 million of loans were unlevered at quarter end. So we did not see an increase in leverage. But as we deploy capital in the fourth quarter, and into early 2027, we expect that leverage to grow to above 2.0x.

Okay. Great. Thank you. And you had several early repayments that we saw in the quarter across student housing, hotels, self storage. Can you speak to what drove those payoffs and what you are seeing in refinancing liquidity across those sectors?

Sure. The student housing transaction was actually a sale. Our understanding is that they literally received an offer that they could not turn down as it was significantly higher than they were anticipating. So that was not a planned repayment, I guess. Absent the offer that they received. On the self storage, the prop. That loan was performing as expected. They simply. He the sponsor there had refinanced the portfolio. We only had 2 of the assets, and then he refinanced another. I think another 3 or 4 and put them together and then and then the larger refinance on that. And then on the hotel transaction, they had fully executed their business plan there. That property was performing quite well. And they simply were looking to refinance into a more permanent debt structure. And pay back our floating rate debt.

Okay. Thank you. Appreciate the color.

Our next question comes from Jason Weaver of Jones Trading. Go ahead please.

Hey, guys. Good morning. Seeing the third quarter origination spreads have come down almost 90 basis points since first quarter. Where do you expect that number to settle in? And is that related to mix shift with the Chattanooga property coming relatively tight? What would you think the sustainable run rate would be going forward once, you know, the mix is more normal.

Jason, this is Jared. So the Chattanooga deal definitely had an impact on sort of where the net margins were and spreads were for those 3 loans. It was a larger loan, obviously, but it was a very well performing asset. In sort of a-- it provides a really efficient use of capital because 100% of those dollars were deployed day 1. So you know, net, while the spread was a little bit lower, it is a sort of a. Like a cornerstone and a real good cash flowing asset that eats up a lot of useful capital for us, which was great.

Going forward, the 3 loans that we have got currently in diligence sort of make up for a good chunk of that lower spread. I cannot get into too much of the details as to where those are pricing right now, but we made up margins on those in those 3 loans that we are currently in diligence on and plan to close in the next month or so. And then, you know, from a steady state, perspective, and I can-- you know, Matthew can probably speak to where we settle out going forward. But you know, we are we are seeing deals, and we are we are pricing loans right now with net margins anywhere from 145 to 165. Give or take. So it is really just gonna be a deal by deal basis. But yeah, overall, I think that a good assumption is somewhere between a net spread of 160 and probably 180.

Got it. that is good color. I appreciate it. And then on the reserve release, it looks like the allowance came down to 1.30% of commitment. Beyond the Dallas specific reversal, did any of that reflect the change in the macro overlay, or was it related to other properties in particular?

No. It was not anything specific to the macro. With the $122 million of new loans we did in the quarter, we established reserves on that. So that made up a good chunk of kind of the delta between the $4.7 million reduction from the Dallas loan and the 3.6 million total reversal that netted out.

Got it. Thank you for that.

Our next question comes from Christopher Butler of Citizens Capital Markets. Go ahead please.

Hey, everyone. Thanks for taking the questions this morning. So really great outcome on the Dallas office property there. I guess the question is, did something improve at the property or in that market that resulted in you guys being over-reserved? Just curious how that kind of played out.

Couple of things there. The Again, the asset was performing fine. They continue to lease space there. But through our negotiations with them for a potential extension there, sponsorship, you know, was very bullish on. Remained very bullish on the asset. We had the asset appraised and just through a negotiated payoff, we arrived at the number that we arrived at, and we felt very comfortable with it. We simply had a larger CECL reserve on there really just based on kind of the broader Dallas market and kind of what we-- where we saw some trades happening, and we wanted to certainly be conservative with the way that we that we presented that reserve. So there was not anything you know, in particular to point to say that, you know, did we over reserve on that in hindsight? Potentially, but again I think we would rather take that tact than be under reserved on these situations.

Got it. I mean, sometimes the stars just align. that is a really great outcome there. And I guess, given the increased capacity that you guys cited following these resolutions, you have a target portfolio size over the next year or so in mind? I know in the past, you have talked about getting to $1 billion Is that kind of back in the cards now? Just how are you thinking about portfolio growth over the next year?

Yeah, I think that is absolutely in the cards. We are at the end of Q3, we are about $745 million You back off the Carlsbad payoff that just occurred and then the new closings that we plan to have will be mid-$800 millions, $850 million, something along those lines. And we have additional transactions that we are certainly looking at right now. So we would hope to close the. Close out the year somewhere around $900 million, maybe potentially more. And then I think 2027, you know, we are expecting to maintain between a $1 billion and $1.1 billion of portfolio size.

Got it. Very helpful. Appreciate you guys taking the questions today. Thank you.

The next question comes from Craig Kucera of B. Riley Securities. Go ahead please.

I am curious to hear as to whether or not the Yardley office asset is up for sale or any update on what is going on there?

Yes, sure. Sure. So we are in active lease discussions with a tenant there. We hope to have something that we can report in the fourth quarter that where we have got an executed lease. And then at that point, you know, we are gonna be approaching 90 some odd percent leased on the asset. And I think our business plan will then be to monetize that come early to mid-27. And that will, that will free up some additional capacity for us too at the same time, which would be great. Right. So that will give us another I think, $40-some-odd million of potential loan capacity upon repayment. Or upon sale.

Got it. And just kind of going through your loan portfolio, it looks like you had a few loans that moved from a risk rating of 3 to 4. Can you give us some color on what is going on in both the Downers Grove office loan and the Fontana industrial loan?

Yeah. Sure. So those both move primarily due to near term maturities. We are in conversations with both of those sponsors right now. The Fontana loan is a both of those loans are actually with repeat sponsors of ours. My anticipation would be that probably some short term extensions there. But we are But we are anticipating positive outcomes of both. I just do not know that they are gonna be repaid exactly on the maturity date at this point on the current maturity date.

Right. And just 1 more for me. I think you mentioned that you were looking for $0.25 to $0.27 in the fourth quarter. Earnings available for distribution. Was that net of the $0.11 loss or was that not including that?

That was not including that $0.11 loss.

Okay. I just wanted to confirm that. Thank you.

The next question comes from Christopher Nolan of Ladenburg Thalmann. Go ahead please.

Hi. As a follow-up on the $0.11 will that be accompanied by a reserve release?

So we have set the reserve as of September 30 to match that. $2.6 million loss that we will realize in the fourth quarter. So from a net income standpoint, there will be no impact there.

Okay. And if you guys can articulate what you think in terms of capital management, the stock trading at 44% of book value and in specific, I would like to see, what it needs to get to start implementing share repurchases.

it is a fair question. At today's pricing, which we are obviously not pleased with, you can make an argument that it would be accretive to do a share repurchase plan. In December 2025, when we completed the rights offering, the strategy was to grow the portfolio, because at 7 Hills, you know, we were-- you know, the size was an issue there. And we are really seeing that origination activity picking up here in the second half of the year. We are trending towards getting back to dividend coverage. And we think that is really the best path right now to continue doing what we do best, originating, underwriting, asset managing loans. To really narrow that gap between share price and book value per share.

Right. Okay. And then final question. GAAP EPS well exceeded the dividend, but book value per share went down. It looks like to me that there were some share issuances in the quarter.

Were these to employees? That is correct. In September of each year, the compensation committee generally grants share grants to officers and employees of Tremont, SEVN and RMR. And were these at close to the current share trading price? They are at the-- it is the fair value of the share price on the day of grant. And they vest over 5 years.

This 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.

Thank you, everyone, for joining today's call. Please reach out to Investor Relations if you are interested in scheduling a meeting with 7 Hills. Operator, that concludes our call.

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