Seven Hills Realty Trust 10-Q

Item 4. Controls and Procedures As of the end of the period covered by this Quarterly Report on Form 10-Q, our management carried out an evaluation, under the supervision and with the participation of our President and our Chief Financial Officer and Treasurer, of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our President and our Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures are effective. There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 39 Table of Contents Warning Concerning Forward-Looking Statements This Quarterly Report on Form 10-Q contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. Also, whenever we use words such as “believe”, “expect”, “anticipate”, “intend”, “plan”, “estimate”, “will”, “may” and negatives or derivatives of these or similar expressions, we are making forward-looking statements. These forward-looking statements are based upon our present intent, beliefs or expectations, but forward-looking statements are not guaranteed to occur and may not occur. Forward-looking statements in this Quarterly Report on Form 10-Q relate to various aspects of our business, including: • Our expectation that our shareholders will benefit from the Merger; • The risk that the anticipated benefits from the Merger may not be realized or may take longer to realize than expected, • The duration and severity of the COVID-19 pandemic and its impact on us and our borrowers and their ability and willingness to fund their debt service obligations to us; • Our expectations about our borrowers’ business plans and their abilities to successfully execute them; • Our expectations regarding the diversity and other characteristics of our loan portfolio; • Our ability to carry out our business strategy and take advantage of opportunities for our business that we believe exist; • Our expectations of the volume of transactions and opportunities that will exist in the CRE debt market, including the middle market, when the U.S. economy improves and returns to a more stable state for a sustained period; • Our ability to obtain additional capital, and to realize our expected extent of leverage, to enable us to make additional investments or to increase our potential returns, including by using available leverage; • Our ability to pay distributions to our shareholders and to increase and sustain the amount of such distributions; • Our operating and investment targets, investment and financing strategies and leverage policies; • Our expected operating results; • The amount and timing of cash flows we receive from our investments; • The ability of our Manager to locate suitable investments for us, to monitor, service and administer our existing investments and to otherwise implement our investment strategy; • Our ability to maintain and increase the net interest spread between the interest we earn on our investments and the interest we pay on our borrowings; • The origination, extension, exit, prepayment or other fees we may earn from our investments; • Yields that may be available to us from mortgages on middle market and transitional CRE; • The duration and other terms of our loan agreements with borrowers; • The credit qualities of our borrowers; • Rising inflationary pressures and the effects of inflation on our results of operations and financial conditions; • The ability and willingness of our borrowers to repay our investments in a timely manner or at all; • Our projected leverage; • The cost and availability of additional advancements under our Master Repurchase Facilities, or other debt financing under additional repurchase or bank facilities we may obtain from time to time, and our ability to obtain such additional debt financing; 40 Table of Contents • Our qualification for taxation as a REIT; • Our ability to maintain our exemption from registration under the 1940 Act; • Our understanding of the competitive nature of our industry and our ability to successfully compete under such circumstances; • Market trends in our industry or with respect to interest rates, real estate values, the debt securities markets or the economy generally; and • Regulatory requirements and the effect they may have on us or our competitors. Our actual results may differ materially from those contained in or implied by our forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. Risks, uncertainties and other factors that could have a material adverse effect on our forward-looking statements and upon our business, financial condition, liquidity, results of operations, cash flows, prospects and ability to make distributions include, but are not limited to: • The impact of conditions in the economy, the CRE industry and the capital markets on us and our borrowers, • Competition within the CRE lending industry, • Changes in the availability, sourcing and structuring of CRE lending, • Defaults by our borrowers, • Compliance with, and changes to, federal, state or local laws or regulations, accounting rules, tax laws or similar matters, • Limitations imposed on our business and our ability to satisfy complex rules in order for us to maintain our qualification for taxation as a REIT for U.S. federal income tax purposes, • Actual and potential conflicts of interest with our related parties, including our Managing Trustees, our Manager, RMR LLC, and others affiliated with them, and • Acts of terrorism, outbreaks of pandemics, including the COVID-19 pandemic, or other manmade or natural disasters beyond our control. For example: • We have a limited operating history originating and investing in first mortgage loans secured by middle market and transitional CRE and we may not be able to operate our business successfully or generate sufficient revenue to make or sustain distributions to our shareholders, • To make additional investments and continue to grow our business after we invest our existing available capital, we will need to obtain additional cost-effective capital. We cannot be sure that we will be successful in obtaining any such additional capital. If we are unable to obtain such additional capital, we may not be able to further grow our business by making additional investments, • Our distributions and distribution rate are set from time to time by our Board of Trustees. The timing, amount and form of future distributions will be determined at the discretion of our Board of Trustees and will depend upon various factors that our Board of Trustees deems relevant, including our historical and projected income, our Distributable Earnings, the then-current and expected needs and availability of cash to pay our obligations and fund our investments, distributions which may be required to be paid by us to maintain our qualification for taxation as a REIT, limitations on distributions contained in our financing arrangements and other factors deemed relevant by our Board of Trustees in its discretion. Accordingly, our future distribution rates may be increased or decreased and we can provide no assurances as to the rate at which future distributions will be paid. • Competition may limit our ability to identify and make desirable investments with any additional capital we may obtain or with any proceeds we may receive from repayments of our investments, 41 Table of Contents • Our belief that there will be strong demand for alternative sources of CRE debt capital as the U.S. economy continues to improve and returns to a more stable state may not be correct, • The value of our loans depends upon our borrowers’ ability to generate cash flows from operating the underlying collateral for our loans. Our borrowers may not have sufficient cash flows to repay our loans according to their terms, which may result in delinquency and foreclosure on our loans, • Our investments contain certain risk mitigation mechanisms that may help protect us against investment losses by mitigating the impact from our borrowers being unable to pay their debt service obligations owed to us as scheduled for a temporary period. However, these mechanisms may not adequately cover the debt service amount and will likely not be able to fully fund the debt service obligations owed to us if the tenants’ businesses fail or they default on their debt service obligations owed to us, • The impact of the COVID-19 pandemic affected all parts of the economy and continues to particularly affect certain aspects of the economy, including certain of our borrowers. As a result, we may not have sufficient capital to meet commitments from actions that UBS or Citibank, with respect to our Master Repurchase Facilities, take if our borrowers default or the value of our collateral declines below required levels, • Prepayment of our loans may adversely affect the value of our loan portfolio and our ability to make or sustain distributions to our shareholders, • Loans secured by properties in transition involve a greater risk of loss than loans secured by stabilized properties, • Our Manager and RMR LLC have limited historical experience managing or servicing mortgage REITs, • We may incur significant debt, and our governing documents contain no limit on the amount of debt we may incur, • Although, to date, neither UBS or Citibank has instituted cash sweeps on our accounts and we have not received a margin call under our Master Repurchase Agreement, each bank may do so in the future in accordance with such agreements, • Continued availability of additional advancements under our Master Repurchase Facilities is subject to us identifying suitable loans to invest in and our satisfying certain financial covenants and other conditions, as applicable, that we may be unable to satisfy, • Financing for floating rate mortgages and other related assets that we may seek to sell pursuant to our Master Repurchase Facilities is subject to approval by the lender under our Master Repurchase Facilities, whose approval we may not obtain, • Actual costs under our Master Repurchase Facilities will be higher than LIBOR plus a premium because of fees and expenses associated with our debt, • Any phase out of LIBOR may have an impact on our investments and our debt financing arrangements, • We are dependent upon our Manager, its affiliates and their personnel. We may be unable to find suitable replacements if our management agreement is terminated, • We believe that our relationships with our related parties, including our Managing Trustees, our Manager, RMR LLC and others affiliated with them may benefit us and provide us with competitive advantages in operating and growing our business. However, the advantages we believe we may realize from these relationships may not materialize, • Our intention to remain exempt from registration under the 1940 Act imposes limits on our operations, and we may fail to remain exempt from registration under the 1940 Act, and • Our failure to remain qualified for taxation as a REIT could have significant adverse consequences. Currently unexpected results could occur due to many different circumstances, some of which are beyond our control, such as acts of terrorism, the COVID-19 pandemic, natural disasters, global climate change or changes in capital markets or the economy generally. 42 Table of Contents The information contained elsewhere in this Quarterly Report on Form 10-Q, in our “Summary of Principal Risk Factors” included in our Current Report on Form 8-K filed on March 24, 2021 or in our other filings with the SEC identifies other important factors that could cause our actual results to differ materially from those stated in or implied by our forward looking statements. Our filings with the SEC are available on the SEC’s website at www.sec.gov. You should not place undue reliance upon our forward-looking statements. Except as required by law, we do not intend to update or change any forward-looking statements as a result of new information, future events or otherwise. Statement Concerning Limited Liability Our Amended and Restated Agreement and Declaration of Trust provides that no trustee, officer, shareholder, employee or agent of the Trust shall be held to any personal liability, jointly or severally, for any obligation of, or claim against the Trust. All persons or entities dealing with the Trust, in any way, shall look only to the assets of the Trust for the payment of any sum or the performance of any obligation. 43 Table of Contents Part II. Other Information Item 1. Legal Proceedings Information regarding our legal proceedings and claims is included in Note 15 to our condensed consolidated financial statements included in Part I, Item I of this Quarterly Report on Form 10-Q.