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 Managing Trustees, 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 Managing Trustees, 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, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 30 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 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 impact of inflation, geopolitical risk, rising interest rates and existing or possible economic recession on the CRE lending market, us and our borrowers; • Our expectations of the market demand for CRE debt and the volume of transactions and opportunities that will exist in the CRE debt market, including the middle market; • Our ability to utilize our existing available Secured Financing Facilities and to obtain additional capital to enable us to attain our target leverage, to make additional investments and to increase our potential returns; • Market changes arising during or in response to the COVID-19 pandemic and the extent to which they may continue; • 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 Tremont to make 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; • Our belief that there will be significant opportunities for us to provide creative, flexible debt capital for a wide array of circumstances and business plans and our ability to successfully act on those opportunities and to benefit as a result; • Our belief that we are well positioned to lend to private equity sponsors of middle market and transitional CRE assets; • 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; • 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 Secured Financing Facilities or other debt financing we may obtain; • Our qualification for taxation as a REIT; 31 Table of Contents • 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, Tremont, RMR, and others affiliated with them; and • Acts of terrorism, war, 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, Distributable Earnings per common share, Adjusted Distributable Earnings and Adjusted Distributable Earnings per common share, 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; • Our belief that there will be strong demand for alternative sources of CRE debt capital; 32 Table of Contents • 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; • Current inflationary pressures, rising interest rates, supply chain issues, geopolitical risks and possible economic recession may adversely impact our borrowers' businesses and their ability and willingness to fund their obligations to us. As a result, we may not have sufficient capital to fund our debt obligations or to satisfy any margin calls or other commitments we may have under our Secured Financing Facilities, including as a result of any actions that our lenders under our Master Repurchase Facilities may take if our borrowers default on their loan obligations to us or the value of our collateral that secures those loans 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; • Tremont and RMR 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, we have not received a margin call under our Master Repurchase Agreements, these lenders may do so in the future in accordance with such agreements; • Continued availability of additional advancements under our Secured Financing Facilities is subject to the available liquidity of our lenders, our lenders' willingness to lend, our ability to identify 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 Secured Financing Facilities is subject to approval by those lenders, whose approval we may not obtain; • The phase out of LIBOR could negatively impact our investments and our debt financing arrangements; • Actual costs under our Secured Financing Facilities and our other debt facilities will be higher than the applicable benchmark interest rate plus a premium because of fees and expenses associated with our debt; • We are dependent upon Tremont, 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, Tremont, RMR 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, pandemics, such as a continuation of the COVID-19 pandemic, inflation, recession or economic downturn, war, geopolitical risks, natural disasters, global climate change, changes in our borrowers' financial conditions or changes in capital markets or the economy generally. The information contained elsewhere in this Quarterly Report on Form 10-Q and our 2021 Annual Report, or in our other filings with the SEC, including under the caption “Risk Factors”, herein or therein, or incorporated herein or therein, identifies 33 Table of Contents other important factors that could cause differences from 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 The Declaration of Trust of Seven Hills Realty Trust, a copy of which, together with any amendments or supplements thereto, is duly filed with the State Department of Assessments and Taxation of Maryland, provide that the name Seven Hills Realty Trust refers to the trustees collectively as trustees, but not individually or personally. No trustee, officer, shareholder, employee or agent of Seven Hills Realty Trust shall be held to any personal liability, jointly or severally, for any obligation of, or claim against, Seven Hills Realty Trust. All persons or entities dealing with Seven Hills Realty Trust, in any way, shall look only to the assets of Seven Hills Realty Trust for the payment of any sum or the performance of any obligation. 34 Table of Contents Part II. Other Information Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in our 2021 Annual Report.