Seven Hills Realty Trust 10-Q

Item 1. Financial Statements SEVEN HILLS REALTY TRUST CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) (unaudited) June 30, December 31, 2022 2021 ASSETS Cash and cash equivalents $ 48,230 $ 26,197 Restricted cash 166 98 Loans held for investment, net 670,185 570,780 Prepaid expenses and other assets 3,108 2,918 Total assets $ 721,689 $ 599,993 LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable, accrued liabilities and deposits $ 1,191 $ 1,561 Secured financing facilities, net 452,705 339,627 Due to related persons 1,063 1,111 Total liabilities 454,959 342,299 Commitments and contingencies Shareholders' equity: Common shares of beneficial interest, $ 0.001 par value, 25,000,000 shares authorized; 14,638,063 and 14,597,079 shares issued and outstanding, respectively 15 15 Additional paid in capital 238,254 237,624 Cumulative net income 40,354 24,650 Cumulative distributions ( 11,893 ) ( 4,595 ) Total shareholders' equity 266,730 257,694 Total liabilities and shareholders' equity $ 721,689 $ 599,993 See accompanying notes. 1 Table of Contents SEVEN HILLS REALTY TRUST CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (amounts in thousands, except per share data) (unaudited) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 INCOME FROM INVESTMENTS: Interest income from investments $ 8,869 $ 3,055 $ 18,448 $ 5,056 Purchase discount accretion 1,636 — 7,571 — Less: interest and related expenses ( 3,007 ) ( 192 ) ( 4,744 ) ( 192 ) Income from investments, net 7,498 2,863 21,275 4,864 OTHER EXPENSES: Base management fees 1,063 721 2,126 1,436 General and administrative expenses 1,378 714 2,324 1,306 Reimbursement of shared services expenses 440 275 1,000 601 Other transaction related costs — — 37 — Total other expenses 2,881 1,710 5,487 3,343 Income before income taxes 4,617 1,153 15,788 1,521 Income tax (expense) benefit ( 39 ) 7 ( 84 ) ( 11 ) Net income $ 4,578 $ 1,160 $ 15,704 $ 1,510 Weighted average common shares outstanding - basic and diluted 14,521 10,208 14,514 10,205 Net income per common share - basic and diluted $ 0.31 $ 0.11 $ 1.08 $ 0.15 See accompanying notes. 2 Table of Contents 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 Share grants 42 — 548 — — 548 Share forfeitures ( 1 ) — — — — — Net income — — — 4,578 — 4,578 Distributions — — — — ( 3,649 ) ( 3,649 ) Balance at June 30, 2022 14,638 $ 15 $ 238,254 $ 40,354 $ ( 11,893 ) $ 266,730 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 Share grants 15 — 181 — — 181 Net income — — — 1,160 — 1,160 Distributions — — — — ( 1,530 ) ( 1,530 ) Balance at June 30, 2021 10,217 $ 10 $ 193,065 $ 1,510 $ ( 1,530 ) $ 193,055 See accompanying notes. 3 Table of Contents SEVEN HILLS REALTY TRUST CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited) Six Months Ended June 30, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 15,704 $ 1,510 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Accretion of purchase discount ( 7,571 ) — Share based compensation 630 181 Amortization of deferred financing costs 474 34 Amortization of loan origination and exit fees ( 2,112 ) ( 641 ) Changes in operating assets and liabilities: Prepaid expenses and other assets ( 400 ) ( 2,660 ) Accounts payable, accrued liabilities and deposits ( 370 ) ( 1,369 ) Due to related persons ( 48 ) 852 Net cash provided by (used in) operating activities 6,307 ( 2,093 ) CASH FLOWS FROM INVESTING ACTIVITIES: Origination of loans held for investment ( 141,335 ) ( 117,255 ) Additional funding of loans held for investment ( 8,020 ) ( 820 ) Repayment of loans held for investment 59,843 — Net cash used in investing activities ( 89,512 ) ( 118,075 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from secured financing facilities 223,948 49,172 Repayments under secured financing facilities ( 109,773 ) — Payments of deferred financing costs ( 1,571 ) ( 431 ) Distributions ( 7,298 ) ( 1,530 ) Net cash provided by financing activities 105,306 47,211 Increase (decrease) in cash, cash equivalents and restricted cash 22,101 ( 72,957 ) Cash, cash equivalents and restricted cash at beginning of period 26,295 103,564 Cash, cash equivalents and restricted cash at end of period $ 48,396 $ 30,607 SUPPLEMENTAL DISCLOSURES: Interest paid $ 4,074 $ 120 Income taxes paid $ 92 $ 2,477 4 Table of Contents 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 June 30, 2022 2021 Cash and cash equivalents $ 48,230 $ 30,402 Restricted cash 166 205 Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows $ 48,396 $ 30,607 See accompanying notes. 5 Table of Contents 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 will adopt ASU No. 2016-13 on January 1, 2023. The amount of the allowance for credit losses established as a result of the adoption, will be presented as a cumulative-effect adjustment to reduce equity as of the date of adoption. We are currently assessing the amount of the allowance for credit losses that will be established as a result of the adoption of ASU No. 2016-13. 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 will adopt ASU No. 2022-02 prospectively on January 1, 2023, concurrently with the adoption of ASU No. 2016-13. As of June 30, 2022, we have not recognized any troubled debt restructurings and do not expect the adoption of ASU No. 2022-02 to have a material impact 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, as defined in Note 4. 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. See Note 4 for further information regarding our secured financing agreements. 6 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 June 30, 2022 and December 31, 2021: As of June 30, 2022 As of December 31, 2021 Number of loans 28 26 Total loan commitments $ 734,883 $ 648,266 Unfunded loan commitments (1) $ 52,694 $ 57,772 Principal balance $ 682,285 $ 590,590 Carrying value $ 670,185 $ 570,780 Weighted average coupon rate 5.14 % 4.54 % Weighted average all in yield (2) 5.64 % 5.08 % Weighted average floor 0.61 % 0.68 % Weighted average maximum maturity (years) (3) 3.6 3.8 Weighted average risk rating 2.7 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 June 30, 2022 and 2021: Principal Balance Deferred Fees and Other Items Carrying Value Balance at March 31, 2022 $ 636,831 $ ( 14,121 ) $ 622,710 Additional funding 4,926 — 4,926 Originations 51,620 ( 321 ) 51,299 Repayments ( 11,092 ) ( 108 ) ( 11,200 ) Net amortization of deferred fees — 814 814 Net purchase discount accretion — 1,636 1,636 Balance at June 30, 2022 $ 682,285 $ ( 12,100 ) $ 670,185 Principal Balance Deferred Fees and Other Items Carrying Value Balance at March 31, 2021 $ 148,652 $ ( 1,405 ) $ 147,247 Additional funding 693 — 693 Originations 63,170 ( 755 ) 62,415 Net amortization of deferred fees — 387 387 Balance at June 30, 2021 $ 212,515 $ ( 1,773 ) $ 210,742 7 SEVEN HILLS REALTY TRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) The tables below represent our loan activities during the six months ended June 30, 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 8,230 — 8,230 Originations 142,804 ( 1,469 ) 141,335 Repayments ( 59,339 ) ( 504 ) ( 59,843 ) Net amortization of deferred fees — 2,112 2,112 Net purchase discount accretion — 7,571 7,571 Balance at June 30, 2022 $ 682,285 $ ( 12,100 ) $ 670,185 Principal Balance Deferred Fees and Other Items Carrying Value Balance at December 31, 2020 $ 92,863 $ ( 984 ) $ 91,879 Additional funding 967 — 967 Originations 118,685 ( 1,430 ) 117,255 Net amortization of deferred fees — 641 641 Balance at June 30, 2021 $ 212,515 $ ( 1,773 ) $ 210,742 The tables below detail the property type and geographic location of the properties securing the loans in our portfolio as of June 30, 2022 and December 31, 2021: June 30, 2022 December 31, 2021 Property Type Number of Loans Carrying Value Percentage of Value Number of Loans Carrying Value Percentage of Value Office (1) 12 $ 267,803 40 % 13 $ 269,865 47 % Multifamily 8 194,387 29 % 5 106,002 19 % Lab — — — % 1 13,398 2 % Retail 6 148,255 22 % 4 88,724 16 % Industrial (1) 2 59,740 9 % 3 92,791 16 % 28 $ 670,185 100 % 26 $ 570,780 100 % (1) Two loan investments secured by mixed use properties consisting of office space and an industrial warehouse in Aurora, IL and Colorado Springs, CO are classified as office for the purpose of counting the number of loans in our portfolio because the majority of the square footage of each of the properties consists of office space. The carrying value of these loan investments is reflected in office and industrial based on the fair value of the buildings at the time of origination relative to the total fair value of the properties. June 30, 2022 December 31, 2021 Geographic Location Number of Loans Carrying Value Percentage of Value Number of Loans Carrying Value Percentage of Value East 3 $ 66,120 10 % 3 $ 55,132 10 % South 7 181,890 27 % 7 153,495 27 % West 9 173,245 26 % 8 145,453 25 % Midwest 9 248,930 37 % 8 216,700 38 % 28 $ 670,185 100 % 26 $ 570,780 100 % 8 SEVEN HILLS REALTY TRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) Loan Credit Quality We evaluate each of our loans for impairment at least quarterly by assessing a variety of risk factors in relation to each loan and assigning a risk rating to each loan based on those factors. The higher the number, the greater the risk level. See our 2021 Annual Report for more information regarding our loan risk ratings. The following table allocates the carrying value of our loan portfolio at June 30, 2022 and December 31, 2021 based on our internal risk rating policy: June 30, 2022 December 31, 2021 Risk Rating Number of Loans Carrying Value Number of Loans Carrying Value 1 — $ — — $ — 2 10 225,169 4 94,743 3 16 418,153 21 463,600 4 2 26,863 1 12,437 5 — — — — 28 $ 670,185 26 $ 570,780 The weighted average risk rating of our loans by carrying value was 2.7 and 2.9 as of June 30, 2022 and December 31, 2021, respectively. The COVID-19 pandemic has negatively impacted some of our borrowers’ business operations or tenants, particularly in the cases of certain of our office and retail collateral, some of which are the types of properties that have been most negatively impacted by the pandemic. We expect that those negative impacts may continue and may apply to other borrowers and/or their tenants. Further, although economic activity in the U.S. has improved significantly from the low points during the pandemic to date, certain industries have not recovered to their pre-pandemic positions, and current inflationary pressures and the possibility that the U.S. economy may now be in, or will soon enter into, a recession or downturn may amplify those, or introduce additional, negative impacts. Therefore, certain of our borrowers’ business plans will likely take longer to execute than initially expected and certain of our borrowers may be unable to pay their debt service obligations owed and due to us as currently scheduled or at all. As of June 30, 2022, we had two loans representing approximately 4 % of the carrying value of our loan portfolio with a loan risk rating of “4” or “higher risk". We may enter into loan modifications that include among other changes, extensions of maturity dates, repurposing or required replenishment of reserves, increases or decreases in loan commitments and required pay downs of principal amounts outstanding. Modifications that represent concessions to a borrower that is experiencing financial difficulties are classified as troubled debt restructurings and considered impaired. In February 2022, we amended the agreement governing our loan secured by an office property located in Yardley, PA. As part of this amendment, the loan commitment was increased by $ 1,600 , or the Additional Advance, and may be used to finance debt service costs and operating costs of the borrower and the initial maturity date was extended by one year to December 19, 2023. For purposes of calculating interest due to us for this loan, the Additional Advance is deemed to be outstanding as of the date of the amendment, regardless of whether such amounts have been advanced, at the London Interbank Offered Rate, or LIBOR, or a replacement base rate determined by us if LIBOR is no longer available, plus 12.0 %. As of June 30, 2022, this loan had a risk rating of 4 and an outstanding principal balance of $ 14,972 . The modification of this loan resulting from the amendment was determined not to be a troubled debt restructuring. However, we accounted for this modification as an extinguishment in accordance with ASC Topic 310, Receivables , because the changes to the terms were determined to be more than minor. As such, we recognized the related unaccreted purchase discount of $ 1,748 as interest income from investments in our condensed consolidated statements of income during the first quarter of 2022. There were no other material modifications to our loan portfolio during the six months ended June 30, 2022. We did not have any impaired loans or nonaccrual loans as of June 30, 2022 or December 31, 2021. As of June 30, 2022 and July 25, 2022, all of our borrowers had paid all of their debt service obligations owed and due to us and none of the loans included in our investment portfolio were in default. 9 SEVEN HILLS REALTY TRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) Note 4. Secured Financing Agreements Our secured financing agreements at June 30, 2022 consisted of agreements that govern: our master repurchase facility with Wells Fargo, National Association, or Wells Fargo, or the Wells Fargo Master Repurchase Facility; our master repurchase facility with Citibank, N.A., or Citibank, or the Citibank Master Repurchase Facility; our facility loan program with BMO Harris Bank N.A., or BMO, or the BMO Facility, and our master repurchase facility with UBS AG, or UBS, or the UBS Master Repurchase Facility. We refer to the Wells Fargo Master Repurchase Facility, Citibank Master Repurchase Facility and UBS Master Repurchase Facility, collectively, as our Master Repurchase Facilities. We refer to the Master Repurchase Facilities and the BMO Facility, collectively, as our Secured Financing Facilities. See our 2021 Annual Report for more information regarding our Secured Financing Facilities. Wells Fargo Master Repurchase Facility On March 11, 2022, one of our wholly owned subsidiaries entered into a master repurchase and securities agreement with Wells Fargo, or the Wells Fargo Master Repurchase Agreement, for the Wells Fargo Master Repurchase Facility. The Wells Fargo Master Repurchase Facility provides up to $ 125,000 in advances, with an option to increase the maximum facility amount to $ 250,000 , subject to certain terms and conditions. We expect to use the Wells Fargo Master Repurchase Facility to finance the acquisition or origination of floating rate, commercial mortgage loans. We refer to our loan investments that secure advances we receive under any of our Secured Financing Facilities as the purchased assets. The expiration date of the Wells Fargo Master Repurchase Agreement is March 11, 2025, unless extended or earlier terminated in accordance with the terms of the Wells Fargo Master Repurchase Agreement. Under the Wells Fargo Master Repurchase Facility, the initial purchase price paid by Wells Fargo for each purchased asset is up to 75 % or 80 %, depending on the property type of the purchased asset’s real estate collateral, of the lesser of the market value of the purchased asset or the unpaid principal balance of such purchased asset, and subject to Wells Fargo’s approval. Upon the repurchase of a purchased asset, we are required to pay Wells Fargo the outstanding purchase price of the purchased asset, accrued interest and all accrued and unpaid expenses of Wells Fargo relating to such purchased asset. Interest on advancements under the Wells Fargo Master Repurchase Facility will be calculated at the Secured Overnight Financing Rate, or SOFR, plus a premium. In connection with our Wells Fargo Master Repurchase Agreement, we entered into a guaranty, or the Wells Fargo Guaranty, which requires us to guarantee 25 % of the aggregate repurchase price, and 100 % of losses in the event of certain bad acts as well as any costs and expenses of Wells Fargo related to our Wells Fargo Master Repurchase Agreement. The Wells Fargo Guaranty also contains financial covenants, which require us to maintain a minimum tangible net worth, a minimum liquidity and a minimum interest coverage ratio and to satisfy a total indebtedness to stockholders’ equity ratio. Our Wells Fargo Master Repurchase Facility also contains margin maintenance provisions that provide Wells Fargo with the right, in certain circumstances related to a credit event, as defined in the Wells Fargo Master Repurchase Agreement, to redetermine the value of purchased assets. Where a decline in the value of such purchased assets has resulted in a margin deficit, Wells Fargo may require us to eliminate any margin deficit through a combination of purchased asset repurchases and cash transfers to Wells Fargo subject to Wells Fargo’s approval. In addition, our Wells Fargo Master Repurchase Agreement provides for acceleration of the date of repurchase of the purchased assets by us and Wells Fargo’s liquidation of the purchased assets upon the occurrence and continuation of certain events of default, including a change of control of us, which includes Tremont Realty Capital LLC, or Tremont, ceasing to act as our sole manager or to be a wholly owned subsidiary of The RMR Group LLC, or RMR. Citibank Master Repurchase Facility On March 15, 2022, we amended and restated our master repurchase agreement with Citibank, or the Citibank Master Repurchase Agreement. The amended and restated Citibank Master Repurchase Agreement increased the maximum amount of available advancements under our Citibank Master Repurchase Facility to $ 215,000 , extended the stated maturity date to March 15, 2025, and made certain other changes to the agreement and related fee letter, including replacing LIBOR with SOFR, for interest rate calculations on advancements under the Citibank Master Repurchase Facility and modifying certain pricing terms. 10 SEVEN HILLS REALTY TRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) BMO Facility On April 25, 2022, we amended our facility loan program agreement and the security agreement with BMO, or the BMO Loan Program Agreement, to increase the maximum principal amount available under our BMO Facility, from $ 100,000 to $ 150,000 . UBS Master Repurchase Facility On May 4, 2022, we amended and restated our master repurchase agreement with UBS, or the UBS Master Repurchase Agreement. The amended and restated UBS Master Repurchase Agreement, which was effective March 9, 2022, made certain changes to the agreement and related fee letter, including replacing LIBOR with SOFR for interest rate calculations on advancements under the UBS Master Repurchase Facility and modifying certain pricing terms. As of June 30, 2022, we were in compliance with the covenants and other terms of the agreements that govern our Secured Financing Facilities. As of June 30, 2022 and July 25, 2022, we had a $ 455,044 and a $ 469,810 , respectively, aggregate outstanding principal balance under our Secured Financing Facilities. As of June 30, 2022, our outstanding borrowings under our Secured Financing Facilities had the following remaining maturities: Principal Payments on Secured Financing Facilities 2022 $ 31,448 2023 94,117 2024 248,050 2025 81,429 2026 and thereafter — $ 455,044 11 SEVEN HILLS REALTY TRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) The table below summarizes our Secured Financing Facilities as of June 30, 2022 and December 31, 2021: Debt Obligation Weighted Average Collateral Maximum Facility Size Principal Balance Carrying Value Coupon Rate (1) Remaining Maturity (2) (years) Principal Balance June 30, 2022: Citibank Master Repurchase Facility $ 215,000 $ 170,338 $ 170,013 3.32 % 1.4 $ 237,917 UBS Master Repurchase Facility 192,000 135,003 134,300 3.57 % 1.6 182,198 Wells Fargo Master Repurchase Facility 125,000 67,427 66,694 3.34 % 2.7 88,446 BMO Facility 150,000 82,276 81,698 3.14 % 2.5 109,897 Total/Weighted Average $ 682,000 $ 455,044 $ 452,705 3.36 % 1.9 $ 618,458 December 31, 2021: UBS Master Repurchase Facility $ 192,000 $ 167,928 $ 167,024 2.09 % 2.0 $ 225,868 Citibank Master Repurchase Facility 213,482 161,825 161,724 2.03 % 0.7 222,129 BMO Facility 100,000 11,116 10,879 2.01 % 2.7 14,821 Total/weighted average $ 505,482 $ 340,869 $ 339,627 2.06 % 1.4 $ 462,818 (1) The weighted average coupon rate is determined using LIBOR or SOFR plus a spread ranging from 1.80 % to 2.30 %, as applicable, for the respective borrowings under our Secured Financing Facilities as of the applicable date. (2) The weighted average remaining maturity is determined using the current maturity date of the corresponding loans, assuming no borrower loan extension options have been exercised. As of June 30, 2022, our Citibank Master Repurchase Facility, UBS Master Repurchase Facility and Wells Fargo Master Repurchase Facility mature on March 15, 2025, February 18, 2024 and March 11, 2025, respectively. Our BMO Facility matures at various dates based on the respective underlying loans held for investment. Note 5. Fair Value of Financial Instruments ASC Topic 820, Fair Value Measurement , establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level I) and the lowest priority to unobservable inputs (Level III). A financial asset’s or financial liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The carrying values of cash and cash equivalents, restricted cash and accounts payable approximate their fair values due to the short term nature of these financial instruments. We estimate the fair values of our loans held for investment and outstanding principal balances under our Secured Financing Facilities by using Level III inputs, including discounted cash flow analyses and currently prevailing market terms as of the measurement date, determined by significant unobservable market inputs, which include holding periods, discount rates based on loan to value ratio, or LTV, property types and loan pricing expectations which are corroborated by a comparison with other market participants to determine the appropriate market spread to add to the current base interest. 12 SEVEN HILLS REALTY TRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) The table below provides information regarding financial assets and liabilities not carried at fair value on a recurring basis in our condensed consolidated balance sheets: June 30, 2022 December 31, 2021 Carrying Value Fair Value Carrying Value Fair Value Financial assets Loans held for investment $ 670,185 $ 680,658 $ 570,780 $ 597,669 Financial liabilities Secured Financing Facilities $ 452,705 $ 452,585 $ 339,627 $ 341,679 There were no transfers of financial assets or liabilities within the fair value hierarchy during the six months ended June 30, 2022. Note 6. Shareholders' Equity Common Share Awards We have common shares available for issuance under the terms of our 2021 Equity Compensation Plan, or the 2021 Plan. The values of the share awards are based upon the closing price of our common shares on The Nasdaq Stock Market LLC, or Nasdaq, on the date of award. The common shares that we have awarded to our Trustees vested immediately. The awards of common shares that we award to our officers and other employees of Tremont and of RMR vest in five equal annual installments beginning on the date of award. We recognize the value of awarded shares in general and administrative expenses ratably over the vesting period. We recognize any share forfeitures as they occur. On May 26, 2022, in accordance with our Trustee compensation arrangements, we awarded to each of our seven Trustees 6,000 of our common shares, valued at $ 10.66 per common share, the closing price of our common shares on the Nasdaq that day. Distributions For the six months ended June 30, 2022, we declared and paid a distribution to common shareholders, using cash on hand, as follows: Record Date Payment Date Distribution per Share Total Distribution January 24, 2022 February 17, 2022 $ 0.25 $ 3,649 April 25, 2022 May 19, 2022 0.25 3,649 $ 0.50 $ 7,298 On July 14, 2022, we declared a quarterly distribution of $ 0.25 per common share, or $ 3,660 , to shareholders of record on July 25, 2022. We expect to pay this distribution on August 18, 2022, using cash on hand. Note 7. Management Agreement with Tremont We have no employees. The personnel and various services we require to operate our business are provided to us by Tremont, pursuant to a management agreement, which provides for the day to day management of our operations by Tremont, subject to the oversight and direction of our Board of Trustees. We pay Tremont an annual base management fee payable quarterly ( 0.375 % per quarter) in arrears equal to 1.5 % of our “Equity,” as defined under our management agreement. We recognized base management fees of $ 1,063 and $ 721 for the three months ended June 30, 2022 and 2021, respectively, and $ 2,126 and $ 1,414 for the six months ended June 30, 2022 and 2021, respectively. Pursuant to the terms of our management agreement, management incentive fees became payable by us beginning with the quarter ended June 30, 2021, subject to Tremont earning those fees in accordance with the management agreement. We did no t incur any management incentive fees for the three and six months ended June 30, 2022 and 2021. 13 SEVEN HILLS REALTY TRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) Tremont, and not us, is responsible for the costs of its employees who provide services to us, unless any such payment or reimbursement is specifically approved by a majority of our Independent Trustees, is a shared services cost or relates to awards made under any equity compensation plan adopted by us. We are required to pay or to reimburse Tremont and its affiliates for all other costs and expenses of our operations. Some of these overhead, professional and other services are provided by RMR, pursuant to a shared services agreement between Tremont and RMR. These reimbursements include an allocation of the cost of personnel employed by RMR and our share of RMR's costs for providing our internal audit function. These shared services costs are subject to approval by a majority of our Independent Trustees at least annually. We incurred shared services costs of $ 514 and $ 312 payable to Tremont for the three months ended June 30, 2022 and 2021, respectively, and $ 1,148 and $ 664 for the six months ended June 30, 2022 and 2021, respectively. We include these amounts in reimbursement of shared services expenses or general and administrative expenses, as applicable, in our condensed consolidated statements of operations. In connection with the Merger, TRMT terminated its management agreement with Tremont, and Tremont waived its right to receive payment of the termination fees that would have otherwise resulted due to the Merger. In consideration of this waiver, we agreed that, effective upon consummation of the Merger and the termination of TRMT's management agreement with Tremont, certain of the expenses Tremont had paid pursuant to its management agreement with TRMT will be included in the “Termination Fee” under and as defined in our existing management agreement with Tremont. See our 2021 Annual Report for further information regarding this waiver and change to the "Termination Fee" and the Merger. Note 8. Related Person Transactions We have relationships and historical and continuing transactions with Tremont, RMR, The RMR Group Inc., or RMR Inc., and others related to them, including other companies to which RMR or its subsidiaries provide management services and some of which have trustees, directors or officers who are also our Trustees or officers. Tremont is a subsidiary of RMR, which is a majority owned subsidiary of RMR Inc., and RMR Inc. is the managing member of RMR. RMR provides certain shared services to Tremont that are applicable to us, and we reimburse Tremont or pay RMR for the amounts Tremont or RMR pays for those services. One of our Managing Trustees and Chair of our Board of Trustees, Adam D. Portnoy, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., and he is also a director of Tremont, the chair of the board of directors, a managing director, the president and chief executive officer of RMR Inc., and an officer and employee of RMR. Our other Managing Trustee, Matthew P. Jordan is an officer of RMR Inc. and an officer and employee of RMR, and our executive officers are officers of RMR and officers and employees of Tremont and/or RMR. Some of our Independent Trustees also serve as independent directors or independent trustees of other public companies to which RMR or its subsidiaries provide management services. Adam D. Portnoy serves as the chair of the boards and as a managing director or managing trustee of those companies. Other officers of RMR and Tremont, serve as managing trustees, managing directors or officers of certain of these companies. Our Manager, Tremont Realty Capital LLC. We have a management agreement with Tremont to provide management services to us. See Note 7 for further information regarding our management agreement with Tremont. Tremont also provided management services to TRMT until the Merger. On May 11, 2022, Tremont purchased 882,407 of our common shares from Diane Portnoy, the mother of Adam D. Portnoy. Tremont paid an aggregate purchase price of $ 9,469 for these shares, which represents a per share price based upon the average of the 90 day volume weighted average closing price per share and the 90 day straight average closing price per share of our common shares. As of June 30, 2022, Tremont owned 1,708,058 of our common shares, and Mr. Portnoy beneficially owned (including through Tremont) 13.5 % of our outstanding common shares. Tremont Mortgage Trust. TRMT merged with and into us on September 30, 2021. Prior to the Merger, Adam D. Portnoy and Matthew P. Jordan, our Managing Trustees, were also TRMT’s managing trustees. Thomas J. Lorenzini, our President, also served as president of TRMT, and G. Douglas Lanois, our Chief Financial Officer and Treasurer, also served as chief financial officer and treasurer of TRMT. Three of our Independent Trustees, William A. Lamkin, Joseph L. Morea and Jeffrey P. Somers, previously served as independent trustees of TRMT. In addition, our former Independent Trustee, John L. Harrington, also previously served as an independent trustee of TRMT and he resigned both trusteeships effective as of the effective time of the Merger. See our 2021 Annual Report for further information regarding the Merger and the other Transactions. For further information about these and other such relationships and certain other related person transactions, refer to our definitive Proxy Statement for our 2022 Annual Meeting of Shareholders and to our 2021 Annual Report. 14 SEVEN HILLS REALTY TRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) Note 9. Income Taxes We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the IRC. Accordingly, we generally are not, and will not be, subject to U.S. federal income tax, provided that we meet certain distribution and other requirements. We are subject to certain state and local taxes, certain of which amounts are or will be reported as income taxes in our condensed consolidated statements of operations. Note 10. Weighted Average Common Shares We calculate net income per common share - basic using the two class method. We calculate net income per common share - diluted using the more dilutive of the two class or treasury stock method. Unvested share awards and the related impact on earnings are considered when calculating net income per common share - basic and net income per common share - diluted. For both the three and six months ended June 30, 2022 and 2021, the weighted averages shares - diluted was equal to the weighted average shares - basic. Note 11. Commitments and Contingencies As of June 30, 2022, we had unfunded loan commitments of $ 52,694 related to our loans held for investment that are not reflected in our condensed consolidated balance sheets. These unfunded loan commitments had a weighted average initial maturity of 1.9 years as of June 30, 2022. See Note 3 for further information related to our loans held for investment. 15 Table of Contents