sevn-20220331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-34383

Seven Hills Realty Trust

(Exact Name of Registrant as Specified in Its Charter)


Maryland			20-4649929
(State of Organization)			(IRS Employer Identification No.)

Two Newton Place, 255 Washington Street, Suite 300, Newton, MA 02458-1634

(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code 617-332-9530

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol

Name of each exchange on which registered

Common Shares of Beneficial Interest

SEVN

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided in Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Number of registrant's common shares of beneficial interest, $0.001 par value per share, outstanding as of April 25, 2022: 14,597,079

Table of Contents

SEVEN HILLS REALTY TRUST

FORM 10-Q

March 31, 2022

INDEX


		Page
PART I	Financial Information
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets — March 31, 2022 and December 31, 2021	1
	Condensed Consolidated Statements of Operations — Three Months Ended March 31, 2022 and 2021	2
	Condensed Consolidated Statements of Shareholders’ Equity — Three Months Ended March 31, 2022 and 2021	3
	Condensed Consolidated Statements of Cash Flows — Three Months Ended March 31, 2022 and 2021	4
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28
	Warning Concerning Forward-Looking Statements	29
PART II	Other Information	33
Item 1A.	Risk Factors	33


Item 6.	Exhibits	33
	Signatures	34

References in this Quarterly Report on Form 10-Q to SEVN, we, us or our mean Seven Hills Realty Trust and its consolidated subsidiaries unless otherwise expressly stated or the context indicates otherwise.

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PART I. Financial Information

Item 1. Financial Statements

SEVEN HILLS REALTY TRUST

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

(unaudited)


	March 31,		December 31,
	2022		2021
ASSETS
Cash and cash equivalents	$	8,953	$	26,197
Restricted cash	9		98
Loans held for investment, net	622,710		570,780


Prepaid expenses and other assets	3,353		2,918
Total assets	$	635,025	$	599,993

LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, accrued liabilities and deposits	$	967	$	1,561
Secured financing facilities, net	367,679		339,627

Due to related persons	1,126		1,111
Total liabilities	369,772		342,299

Commitments and contingencies

Shareholders' equity:
Common shares of beneficial interest, $0.001 par value per share; 25,000,000 shares authorized; 14,597,079 shares issued and outstanding	15		15
Additional paid in capital	237,706		237,624
Cumulative net income	35,776		24,650
Cumulative distributions	(8,244)		(4,595)
Total shareholders' equity	265,253		257,694
Total liabilities and shareholders' equity	$	635,025	$	599,993

See accompanying notes.

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SEVEN HILLS REALTY TRUST

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except per share data)

(unaudited)


	Three Months Ended March 31,
	2022		2021
INCOME FROM INVESTMENTS:
Interest income from investments	$	9,579	$	2,001
Purchase discount accretion	5,935		—
Less: interest and related expenses	(1,737)		—
Income from investments, net	13,777		2,001

OTHER EXPENSES:
Base management fees	1,063		715
General and administrative expenses	946		592
Reimbursement of shared services expenses	560		326
Other transaction related costs	37		—
Total other expenses	2,606		1,633

Income before income tax expense	11,171		368
Income tax expense	(45)		(18)
Net income	$	11,126	$	350

Weighted average common shares outstanding - basic	14,505		10,202
Weighted average common shares outstanding - diluted	14,519		10,202

Net income per common share - basic and diluted	$	0.76	$	0.03

See accompanying notes.

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SEVEN HILLS REALTY TRUST

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(amounts in thousands)

(unaudited)


	Number of			Additional
	Common	Common		Paid In		Cumulative		Cumulative
	Shares	Shares		Capital		Net Income		Distributions		Total
Balance at December 31, 2021	14,597	$	15	$	237,624	$	24,650	$	(4,595)	$	257,694

Share grants	—	—		82		—		—		82

Net income	—	—		—		11,126		—		11,126
Distributions	—	—		—		—		(3,649)		(3,649)
Balance at March 31, 2022	14,597	$	15	$	237,706	$	35,776	$	(8,244)	$	265,253

Net assets at December 31, 2020	10,202	$	10	$	192,884	$	—	$	—	$	192,894

Net income	—	—		—		350		—		350

Balance at March 31, 2021	10,202	$	10	$	192,884	$	350	$	—	$	193,244

See accompanying notes.

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SEVEN HILLS REALTY TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)


	Three Months Ended March 31,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	11,126	$	350
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Accretion of purchase discount	(5,935)		—
Share based compensation	82		—
Amortization of deferred financing costs	209		—
Amortization of loan origination and exit fees	(1,298)		(254)
Changes in operating assets and liabilities:

Prepaid expenses and other assets	(520)		(219)
Accounts payable, accrued liabilities and deposits	(594)		(1,815)
Due to related persons	15		553
Net cash provided by (used in) operating activities	3,085		(1,385)

CASH FLOWS FROM INVESTING ACTIVITIES:
Origination of loans held for investment	(90,036)		(54,840)
Additional funding of loans held for investment	(3,219)		(204)
Repayment of loans held for investment	48,643		—


Net cash used in investing activities	(44,612)		(55,044)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from secured financing facilities	130,160		—
Repayments under secured financing facilities	(101,597)		—




Payments of deferred financing costs	(720)		(76)


Distributions	(3,649)		—
Net cash provided by (used in) financing activities	24,194		(76)

Decrease in cash, cash equivalents and restricted cash	(17,333)		(56,505)
Cash, cash equivalents and restricted cash at beginning of period	26,295		103,564
Cash, cash equivalents and restricted cash at end of period	$	8,962	$	47,059

SUPPLEMENTAL DISCLOSURES:


Interest paid	$	1,584	$	—
Income taxes paid	$	47	$	1,830

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SUPPLEMENTAL DISCLOSURE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH:

The table below provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows:


	As of March 31,
	2022		2021
Cash and cash equivalents	$	8,953	$	46,839
Restricted cash	9		220
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows	$	8,962	$	47,059

See accompanying notes.

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SEVEN HILLS REALTY TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Note 1. Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2021, or our 2021 Annual Report. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim periods have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the accompanying condensed consolidated financial statements include the fair value of financial instruments.

Note 2. Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update, or ASU, No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires that entities use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. As a smaller reporting company, we expect to adopt ASU No. 2016-13 on January 1, 2023. We are currently assessing the potential impact the adoption of ASU No. 2016-13 will have on our condensed consolidated financial statements. The effect of the adoption of ASU No. 2016-13, if material, will be presented as a cumulative-effect adjustment to equity as of the date of adoption.

In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminated the guidance for and recognitions of troubled debt restructurings for all entities that have adopted ASU No. 2016-13. Instead, an entity must apply the loan refinancing and restructure guidance in Accounting Standards Codification, or ASC, Topic 310, Receivables (Topic 310), to determine whether a modification results in a new loan or continuation of an existing loan. If a borrower is experiencing financial difficulty, enhanced disclosures are required. ASU No. 2022-02 also amended the guidance on vintage disclosures to require disclosure of current period gross write-offs by year of origination. We expect to adopt ASU No. 2022-02 prospectively on January 1, 2023, concurrently with the adoption of ASU No. 2016-13. We are currently assessing the potential impact the adoption of ASU No. 2022-02 will have on our condensed consolidated financial statements.

Note 3. Loans Held for Investment

We originate first mortgage loans secured by middle market and transitional commercial real estate, or CRE, which are generally to be held as long term investments. We funded our loan portfolio using cash on hand and advancements under our secured financing facilities. Additionally, we acquired the loan portfolio of Tremont Mortgage Trust, or TRMT, in the merger of TRMT with and into us on September 30, 2021, or the Merger, with our common shares. See Note 4 for further information regarding our secured financing agreements.

SEVEN HILLS REALTY TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

The table below provides overall statistics for our loan portfolio as of March 31, 2022 and December 31, 2021:


	As of March 31, 2022			As of December 31, 2021
Number of loans	27			26
Total loan commitments	$	684,547		$	648,266
Unfunded loan commitments (1)	$	47,812		$	57,772
Principal balance	$	636,831		$	590,590


Carrying value	$	622,710		$	570,780
Weighted average coupon rate	4.57		%	4.54		%
Weighted average all in yield (2)	5.10		%	5.08		%
Weighted average floor	0.61		%	0.68		%
Weighted average maximum maturity (years) (3)	3.7			3.8
Weighted average risk rating	2.8			2.9

(1) Unfunded loan commitments are primarily used to finance property and building improvements and leasing capital and are generally funded over the term of the loan.

(2) All in yield represents the yield on a loan, including amortization of deferred fees over the initial term of the loan and excluding any purchase discount accretion.

(3) Maximum maturity assumes all borrower loan extension options have been exercised, which options are subject to the borrower meeting certain conditions.

The tables below represent our loan activities during the three months ended March 31, 2022 and 2021:


	Principal Balance		Deferred Fees and Other Items		Carrying Value
Balance at December 31, 2021	$	590,590	$	(19,810)	$	570,780
Additional funding	3,304		—		3,304
Originations	91,184		(1,148)		90,036
Repayments	(48,247)		—		(48,247)
Net amortization of deferred fees	—		902		902
Net purchase discount accretion	—		5,935		5,935
Balance at March 31, 2022	$	636,831	$	(14,121)	$	622,710


	Principal Balance		Deferred Fees and Other Items		Carrying Value
Balance at December 31, 2020	$	92,863	$	(984)	$	91,879
Additional funding	274		—		274
Originations	55,515		(675)		54,840
Net amortization of deferred fees	—		254		254
Balance at March 31, 2021	$	148,652	$	(1,405)	$	147,247

SEVEN HILLS REALTY TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

The tables below detail the property type and geographic location of the properties securing the loans in our portfolio as of March 31, 2022 and December 31, 2021:


	March 31, 2022					December 31, 2021
Property Type	Number of Loans	Carrying Value		Percentage of Value		Number of Loans	Carrying Value		Percentage of Value
Office (1)	13	$	276,406	45	%	13	$	269,865	47	%
Multifamily	6	142,220