Seven Hills Realty Trust
For the period ended Jun 30, 2024. Filed Jul 29, 2024.
View on SEC.govAbout this filing
A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Jun 30, 2024 · Filed Jul 29, 2024
SEVN$6.63-1.9%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2024-03-31; filed 2024-04-29.
0001452477-24-000020
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-Q
Period ended 2024-06-30; filed 2024-07-29.
0001452477-24-000029
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 96 previous paragraphs and 108 current paragraphs.
72 unchanged; 22 reworded; 5 added; 1 removed; 1 previous and 9 current paragraphs rearranged.
Tables are not compared: 9 previous and 11 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (5)
Current report
However, despite recent economic data indicating slowing U.S. economic growth, including lower retail sales, consumer spending and a slight increase in the unemployment rate, the FOMC has made it clear that inflation remains elevated and that it intends to keep the federal funds rate steady at 5.25% to 5.50% until it is confident that inflation is on pace to reach its longer-term objective of 2%. With no clear sight on the timing or magnitude of a future interest rate cut, CRE investors continue to adjust to a “higher for longer” interest rate environment. CRE owners that were counting on interest rate reductions but are not well capitalized to invest additional capital to deleverage and qualify for a refinance, are more likely to be forced to sell properties to repay debt, likely at distressed prices. Recent increases in CMBS and CRE collateralized loan obligation delinquency rates signal that the prolonged period of elevated interest rates is starting to impact these borrowers and their ability to refinance lower cost debt at current interest rates. For borrowers capable of investing additional equity into their properties, or for borrowers with well performing, cash flowing assets, there appear to be numerous financing options at their disposal.
Current report
Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023:
Current report
Interest and related income. The increase in interest and related income was primarily the result of higher benchmark interest rates during the six months ended June 30, 2024, partially offset by lower outstanding principal balances under our loan investment portfolio. The weighted average benchmark interest rate was 5.38% as of June 30, 2024 as compared to 5.21% as of June 30, 2023. The weighted average principal balance was approximately $607,000 for the six months ended June 30, 2024 as compared to approximately $641,000 for the six months ended June 30, 2023.
Current report
Purchase discount accretion. The decrease in purchase discount accretion was primarily the result of lower amounts outstanding on loans acquired in the Merger during the six months ended June 30, 2024 as compared to the six months ended June 30, 2023.
Current report
Interest and related expenses. The increase in interest and related expenses was primarily the result of higher benchmark interest rates, partially offset by lower outstanding principal balances under our Secured Financing Facilities during the six months ended June 30, 2024. The weighted average benchmark interest rate was 5.32% as of June 30, 2024 as compared to 5.15% as of June 30, 2023. The weighted average principal balance was approximately $431,000 for the six months ended June 30, 2024 as compared to approximately $440,000 for the six months ended June 30, 2023.
Removed paragraphs (1)
Previous report
Since that time, the narrative on declining interest rates has shifted. The U.S. economy continues to be strong and recent employment reports, coupled with stronger than expected inflationary measures, suggest that the FOMC will likely consider fewer rate cuts in 2024 than originally anticipated, if any. As such, it is becoming apparent that CRE investors will likely have to adapt to a “higher for longer” interest rate environment. This could negatively impact property values and put further strain on borrowers seeking to refinance debt that was originated in a much lower interest rate environment. With lower prospects for near term interest rate reductions, property fundamentals and durability of cash flows will be in greater focus and will have a greater impact on refinancing activity going forward. Those CRE owners that are more reliant on rate reductions to qualify for a refinance are more likely to be forced to sell properties, while borrowers with well performing, lower leveraged cash flowing assets will have greater optionality with regards to financing options.
Reworded paragraphs (22)
Previous wording
Market Conditions. During 2023, the CRE industry continued to experience extreme volatility. In response to inflationary pressures, the Federal Open Market Committee of the U.S. Federal Reserve, or the FOMC, increased the federal funds rate by 525 basis points over a 16-month period beginning in March 2022. The pace of the interest rate increases in 2022 and 2023 coupled with macroeconomic and geopolitical uncertainty negatively impacted CRE acquisition and financing transaction activity. By the end of the year, CRE investors seemed cautiously optimistic that inflation had peaked, that the U.S. economy was likely headed for a “soft-landing” and that the FOMC would be poised to reduce the federal funds rate by 125 to 150 basis points as a result of five or six rate cuts in 2024.
Current wording
Market Conditions. Heading in to 2024, CRE investors seemed cautiously optimistic that inflation had peaked, that the U.S. economy was likely headed for a “soft-landing” and that the Federal Open Market Committee of the U.S. Federal Reserve, or the FOMC, would be poised to reduce the federal funds rate by 125 to 150 basis points as a result of five or six rate cuts in 2024. With the anticipation of lower interest rates in the future, investors chose to delay sale or refinancing decisions and overall CRE investment and transaction volume remained tepid well into the second quarter of 2024.
Previous wording
The CMBS market has started to see increased activity given recent spread tightening, while the larger, more established CRE collateralized loan obligation lenders are increasing new originations for eventual securitization. Life insurance companies continue to expand their product offerings to borrowers, offering both low leverage, fixed rate term debt as well as floating rate transitional loans, which were once reserved for banks and alternative lenders, like us. This has resulted in greater optionality for borrowers and increased competition amongst lenders to finance quality properties in today’s environment.
Current wording
CMBS activity increased through the first half of 2024. Strong demand from bond buyers has allowed borrowers to take advantage of tightening credit spreads for 10-year and 5-year loans, the latter of which has become more popular for both bond investors and borrowers. Life insurance companies continue to expand their product offerings to borrowers, offering both low leverage, fixed rate term debt as well as floating rate transitional loans, which were once reserved for banks and alternative lenders, like us. The banking sector continues to be impacted by legacy CRE exposure and increased capital charges imposed by regulators but have become more active by evaluating new loans for strategic, long-term clients. Agency lenders Fannie-Mae and Freddie-Mac are active but are also facing increased competition from CMBS/conduit providers, life-insurance companies and alternative lenders, like us. Oversupply issues in certain multifamily markets have put downward pressure on rents, making it more difficult to qualify for agency financing. Given that multifamily properties are generally coveted by most lenders, competition amongst lenders to provide financing on this sector has continued to increase.
Previous wording
Despite strong U.S. economic growth, certain segments of the CRE industry are beginning to encounter erosion in operating fundamentals. Despite strong employment figures, the U.S. office market continues to suffer from the post pandemic shift in work habits and weak demand for office space in general. Retail assets, particularly needs based and grocery anchored retail, continue to benefit from a strong consumer and employment market. The apartment and industrial sectors remain the most coveted property types amongst lenders and investors, but have recently started to experience challenges due to excess supply. The lack of affordable housing in the United States and the rent versus buy dynamic favor the apartment sector. New industrial development has slowed considerably but continues to benefit from strong demand. Although new development absorption may take longer than originally expected, both sectors are expected to eventually reach equilibrium and rents will begin to increase again.
Current wording
Certain segments of the CRE industry are beginning to experience a deterioration in operating fundamentals. The U.S. office market continues to suffer from the post pandemic shift in work habits and weak demand for office space. Retail assets, particularly needs based and grocery anchored retail, have benefited from a strong consumer and employment market, but recent reports of declining retail sales and weakening consumer demand may eventually have an impact on performance. The industrial sector remains a preferred asset class among lenders and investors, however oversupply in certain markets and more measured corporate demand have impacted the pace of rent growth. The lack of affordable housing in the United States and the rent versus own dynamic continue to favor the apartment sector. Oversupply in certain markets however, has caused a slowdown, and in some markets, a decline in rent growth. For most markets, it is expected that the imbalance between supply and demand will be short lived and once these markets reach equilibrium, rents will increase again.
Previous wording
Despite current market conditions and headwinds facing the CRE industry, we believe the CRE lending market remains well positioned to handle these challenges given that there is ample liquidity available to borrowers with well performing properties. National banks have curtailed lending activity somewhat, but regional and local banks are continuing to evaluate transactions for borrowers with healthy balance sheets.
Current wording
Despite the current market conditions and headwinds facing the CRE industry, we believe the CRE lending market remains well positioned to handle these challenges given that there is ample liquidity available to borrowers with well performing properties.
Previous wording
The interest income on our loans and interest expense on our borrowings float with benchmark rates, such as SOFR. Because we generally intend to leverage approximately 75% of the amount of our investments, as benchmark rates increase above the floors of our loans, our income from investments, net of interest and related expenses, will increase. Decreases in benchmark rates are mitigated by interest rate floor provisions in all but one of our loan agreements with borrowers, ranging from 0.10% to 5.20%; therefore, changes to income from investments, net, may not move proportionately with the increase or decrease in benchmark rates. As of March 31, 2024, SOFR was 5.33%, which exceeds the floors established by all of our loans, and as a result none of our loan investments currently had active interest rate floors.
Current wording
The interest income on our loans and interest expense on our borrowings float with benchmark rates, such as SOFR. Because we generally intend to leverage approximately 75% of the amount of our investments, as benchmark rates increase above the floors of our loans, our income from investments, net of interest and related expenses, will increase. Decreases in benchmark rates are mitigated by interest rate floor provisions in all but one of our loan agreements with borrowers, ranging from 0.10% to 5.20%; therefore, changes to income from investments, net, may not move proportionately with the increase or decrease in benchmark rates. As of June 30, 2024, SOFR was 5.34%, which exceeds the floors established by all of our loans, and as a result none of our loan investments currently had active interest rate floors.
Previous wording
In order to maintain our qualification for taxation as a REIT, we are generally required to distribute substantially all of our taxable income, subject to certain adjustments, to our shareholders. We believe that one of the factors that investors consider important in deciding whether to buy or sell securities of a REIT is its distribution rate. Over time, Distributable Earnings and Distributable Earnings per common share may be useful indicators of distributions to our shareholders and are measures that are considered by our Board of Trustees when determining the amount of distributions. We believe that Distributable Earnings and Distributable Earnings per common share provide meaningful information to consider in addition to net income, net income per common share and cash flows from operating activities determined in accordance with GAAP. These measures help us to evaluate our performance excluding the effects of certain transactions, the variability of any management incentive fees that may be paid or payable and GAAP adjustments that we believe are not necessarily indicative of our current loan portfolio and operations. In addition, Distributable Earnings, excluding incentive fees, is used in determining the amount of base management and management incentive fees payable by us to Tremont under our management agreement.
Current wording
In order to maintain our qualification for taxation as a REIT, we are generally required to distribute substantially all of our taxable income, subject to certain adjustments, to our shareholders. We believe that one of the factors that investors consider important in deciding whether to buy or sell securities of a REIT is its distribution rate. Over time, Distributable Earnings and Distributable Earnings per common share may be useful indicators of distributions to our shareholders and are measures that are considered by our Board of Trustees when determining the amount of distributions. We believe that Distributable Earnings and Distributable Earnings per common share provide meaningful information to consider in addition to net income, net income per common share and cash flows from operating activities determined in accordance with GAAP. These measures help us to evaluate our performance excluding the effects of certain transactions and GAAP adjustments that we believe are not necessarily indicative of our current loan portfolio and operations. In addition, Distributable Earnings, excluding incentive fees, is used in determining the amount of base management and management incentive fees payable by us to Tremont under our management agreement.
Previous wording
(1)Excludes the impact of the unaccreted purchase discount resulting from the excess of the fair value of the loans TRMT then held for investment and that we acquired as a result of the Merger over the consideration we paid in the Merger. The purchase discount of $36,443 was allocated to each acquired loan and is being accreted into income over the remaining term of the respective loan. As of March 31, 2024 and December 31, 2023, the unaccreted purchase discount was $1,202 and $2,347, respectively.
Current wording
(1)Excludes the impact of the unaccreted purchase discount resulting from the excess of the fair value of the loans TRMT then held for investment and that we acquired as a result of the Merger over the consideration we paid in the Merger. The purchase discount of $36,443 was allocated to each acquired loan and is being accreted into income over the remaining term of the respective loan. As of June 30, 2024 and December 31, 2023, the unaccreted purchase discount was $420 and $2,347, respectively.
Previous wording
(2)Excludes the impact of our allowance for credit losses. As of March 31, 2024 and December 31, 2023, our allowance for credit losses for our loan portfolio and unfunded loan commitments was $6,525 and $5,828, respectively.
Current wording
(2)Excludes the impact of our allowance for credit losses. As of June 30, 2024 and December 31, 2023, our allowance for credit losses for our loan portfolio and unfunded loan commitments was $7,840 and $5,828, respectively.
Previous wording
As of March 31, 2024, we had $628,891 in aggregate loan commitments, consisting of a diverse portfolio, geographically and by property type, of 21 first mortgage loans. As of March 31, 2024, we had three loans representing approximately 15% of the amortized cost of our loan portfolio with a loan risk rating of “4” or “higher risk”.
Current wording
As of June 30, 2024, we had $652,198 in aggregate loan commitments, consisting of a diverse portfolio, geographically and by property type, of 22 first mortgage loans. As of June 30, 2024, we had five loans representing approximately 24% of the amortized cost of our loan portfolio with a loan risk rating of “4” or “higher risk”.
Previous wording
As of March 31, 2024, outstanding advancements under our Secured Financing Facilities had a weighted average interest rate of 7.50% per annum, excluding associated fees and expenses. As of March 31, 2024 and April 25, 2024, we had a $422,592 aggregate outstanding principal balance under our Secured Financing Facilities.
Current wording
As of June 30, 2024, outstanding advancements under our Secured Financing Facilities had a weighted average interest rate of 7.48% per annum, excluding associated fees and expenses. As of June 30, 2024 and July 25, 2024, we had a $418,989 and $397,747, respectively, aggregate outstanding principal balance under our Secured Financing Facilities.
Previous wording
Interest and related income. The decrease in interest and related income was primarily the result of lower outstanding principal balances under our loan investment portfolio during the three months ended March 31, 2024. The weighted average aggregate principal balance of our loan investments was approximately $613,000 for the three months ended March 31, 2024 as compared to approximately $646,000 for the three months ended December 31, 2023.
Current wording
Interest and related income. The increase in interest and related income was primarily the result of a prepayment premium received during the three months ended June 30, 2024, partially offset by a lower average outstanding principal balance for our loan investment portfolio. The weighted average aggregate principal balance of our loan investments was approximately $601,000 for the three months ended June 30, 2024 as compared to approximately $613,000 for the three months ended March 31, 2024.
Previous wording
Purchase discount accretion. The increase in purchase discount accretion was primarily due to accelerated accretion of a loan prepayment during the three months ended March 31, 2024.
Current wording
Purchase discount accretion. The decrease in purchase discount accretion was primarily due to accelerated accretion related to a loan prepayment during the three months ended March 31, 2024 and lower amounts outstanding on loans acquired in the Merger during the three months ended June 30, 2024 as compared to the three months ended March 31, 2024.
Previous wording
Interest and related expenses. The decrease in interest and related expenses was primarily the result of lower outstanding principal balances under our Secured Financing Facilities during the three months ended March 31, 2024. The weighted average principal balance was approximately $439,000 for the three months ended March 31, 2024 as compared to approximately $448,000 for the three months ended December 31, 2023.
Current wording
Interest and related expenses. The decrease in interest and related expenses was primarily the result of lower outstanding principal balances under our Secured Financing Facilities during the three months ended June 30, 2024. The weighted average principal balance was approximately $422,000 for the three months ended June 30, 2024 as compared to approximately $439,000 for the three months ended March 31, 2024.
Previous wording
Incentive fees. We recognize management incentive fees payable to Tremont in accordance with our management agreement. The decrease in management incentive fees was due to lower "core earnings," as defined in our management agreement, for the three months ended March 31, 2024 as compared to the three months ended December 31, 2023.
Current wording
Incentive fees. We recognize management incentive fees payable to Tremont in accordance with our management agreement. The increase in management incentive fees was due to higher "core earnings," as defined in our management agreement, for the three months ended June 30, 2024 as compared to the three months ended March 31, 2024.
Previous wording
Provision for credit losses. The provision for credit losses represents the increase in the allowance for credit losses on our loan portfolio and unfunded commitments. The increase in the allowance for credit losses during the three months ended March 31, 2024 was primarily attributable to declining values for CRE and unfavorable CRE pricing forecasts used in our CECL model.
Current wording
Provision for credit losses. The provision for credit losses represents the increase in the allowance for credit losses on our loan portfolio and unfunded commitments. The increase in the allowance for credit losses during the three months ended June 30, 2024 was primarily attributable to declining values for CRE and unfavorable CRE pricing forecasts used in our CECL model and increased provisions for certain of our office loans.
Previous wording
Expenses from real estate owned. Expenses from real estate owned represent expenses from the operations of an office property located in Yardley, PA that was transferred to real estate owned through a deed in lieu of foreclosure in June 2023. The increase in expenses from real estate owned was primarily due to increases in depreciation and utility expense.
Current wording
Expenses from real estate owned. Expenses from real estate owned represent expenses from the operations of an office property located in Yardley, PA that was transferred to real estate owned through a deed in lieu of foreclosure in June 2023. The decrease in expenses from real estate owned was primarily due to a decrease in depreciation expense.
Previous wording
Income tax (expense) benefit. Income tax (expense) benefit represents income taxes paid or payable by us or refunded or refundable to us in certain jurisdictions where we are subject to state income taxes.
Current wording
Income tax expense. Income tax expense represents income taxes paid or payable by us in certain jurisdictions where we are subject to state income taxes.
Previous wording
General and administrative expenses. The increase in general and administrative expenses was primarily due to increases in share based compensation, partially offset by decreases in professional fees during the three months ended March 31, 2024 as compared to the three months ended December 31, 2023.
Current wording
General and administrative expenses. The decrease in general and administrative expenses was primarily due to decreases in professional fees, partially offset by an increase in share based compensation during the six months ended June 30, 2024 as compared to the six months ended June 30, 2023.
Previous wording
The decrease in cash provided by operating activities for the 2024 period compared to the 2023 period was primarily the result of a lower average loan investment balance in the 2024 period, partially offset by higher benchmark interest rates. The decrease in cash provided by investing activities is primarily due to decreased loan repayments in the 2024 period. The decrease in cash used in financing activities is primarily due to decreased repayments on our Secured Financing Facilities during the 2024 period.
Current wording
The decrease in cash provided by operating activities for the 2024 period compared to the 2023 period was primarily the result of a lower average loan investment balance in the 2024 period, partially offset by higher benchmark interest rates. The decrease in cash provided by investing activities was primarily due to decreased loan repayments in the 2024 period. The decrease in cash used in financing activities was primarily due to lower proceeds from our Secured Financing Facilities in the 2024 period.
Previous wording
During the three months ended March 31, 2024, we declared and paid regular quarterly distributions to our common shareholders totaling $5,184, or $0.35 per common share, using cash on hand.
Current wording
During the six months ended June 30, 2024, we declared and paid regular quarterly distributions to our common shareholders totaling $10,366, or $0.35 per common share, using cash on hand.
Previous wording
On April 11, 2024, we declared a regular quarterly distribution of $0.35 per common share, or $5,182, to shareholders of record on April 22, 2024. We expect to pay this distribution to our common shareholders on or about May 16, 2024 using cash on hand.
Current wording
On July 11, 2024, we declared a regular quarterly distribution of $0.35 per common share, or $5,190, to shareholders of record on July 22, 2024. We expect to pay this distribution to our common shareholders on or about August 15, 2024 using cash on hand.
Previous wording
As of March 31, 2024, we had a $334,825 aggregate outstanding principal balance under our Master Repurchase Facilities. Our Master Repurchase Agreements are structured with risk mitigation mechanisms, including a cash flow sweep, which would allow UBS, Citibank and Wells Fargo, as applicable, to control interest payments from our borrowers under our loans that are financed under our respective Master Repurchase Facilities, and the ability to accelerate dates of repurchase and institute margin calls, which may require us to pay down balances associated with one or more of our loans that are financed under our Master Repurchase Facilities.
Current wording
As of June 30, 2024, we had a $331,222 aggregate outstanding principal balance under our Master Repurchase Facilities. Our Master Repurchase Agreements are structured with risk mitigation mechanisms, including a cash flow sweep, which would allow UBS, Citibank and Wells Fargo, as applicable, to control interest payments from our borrowers under our loans that are financed under our respective Master Repurchase Facilities, and the ability to accelerate dates of repurchase and institute margin calls, which may require us to pay down balances associated with one or more of our loans that are financed under our Master Repurchase Facilities.
Rearranged current paragraphs (9)
Current report — wording carried from elsewhere
The table below details our Secured Financing Facilities activities during the six months ended June 30, 2024:
Current report — wording carried from elsewhere
General and administrative expenses. The increase in general and administrative expenses was primarily due to an increase in share based compensation resulting from shares awarded to our Trustees during the three months ended June 30, 2024 as compared to the three months ended March 31, 2024.
Current report — wording carried from elsewhere
Revenue from real estate owned. Revenue from real estate owned represents revenue from the operations of an office property located in Yardley, PA that was transferred to real estate owned through a deed in lieu of foreclosure in June 2023.
Current report — wording carried from elsewhere
Incentive fees. We recognize management incentive fees payable to Tremont in accordance with our management agreement. The increase in management incentive fees was due to higher "core earnings," as defined in our management agreement, for the six months ended June 30, 2024 as compared to the six months ended June 30, 2023.
Current report — wording carried from elsewhere
Reimbursement of shared services expenses. Reimbursement of shared services expenses represents reimbursement of the costs for the services that Tremont arranges on our behalf from RMR. The increase in reimbursement of shared services expenses was primarily the result of higher usage of shared services from RMR.
Current report — wording carried from elsewhere
Provision for credit losses. The provision for credit losses represents the increase in the allowance for credit losses on our loan portfolio and unfunded commitments. The increase in the allowance for credit losses during the six months ended June 30, 2024 was primarily attributable to declining values for CRE and unfavorable CRE pricing forecasts used in our CECL model and increased provisions for certain of our office loans.
Current report — wording carried from elsewhere
Expenses from real estate owned. Expenses from real estate owned represent expenses from the operations of an office property located in Yardley, PA that was transferred to real estate owned through a deed in lieu of foreclosure in June 2023.
Current report — wording carried from elsewhere
Income tax expense. Income tax expense represents income taxes paid or payable by us in certain jurisdictions where we are subject to state income taxes.
Current report — wording carried from elsewhere
Net income. The decrease in net income was due to the changes noted above.
Rearranged previous paragraphs (1)
Previous report — wording carried elsewhere
Despite this cautious optimism heading into 2024, overall CRE investment and transaction volume continued to decline over the first quarter of 2024 as investors chose to delay sale or refinancing decisions with the anticipation of lower interest rates in the future.