Seven Hills Realty Trust 10-K

Item 9A. Controls and Procedures As of the end of the period covered by this Annual Report on Form 10-K, 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 Exchange Act. 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 December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management Report on Assessment of Internal Control Over Financial Reporting We are responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system is designed to provide reasonable assurance to our management and Board of Trustees regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. 74 Table of Contents Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) in Internal Control - Integrated Framework . Based on our assessment, we believe that, as of December 31, 2022, our internal control over financial reporting is effective. This Annual Report on Form 10-K does not include an attestation report from our registered public accounting firm on our internal control over financial reporting due to the exemption for non-accelerated filers. Item 9B. Other Information None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections None. 75 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance We have a Code of Conduct that applies to our officers and Trustees, Tremont, RMR, members of the board of directors of Tremont and RMR Inc., employees of Tremont and employees of RMR who provide significant services to us. Our Code of Conduct is posted on our website, www.sevnreit.com. A printed copy of our Code of Conduct is also available free of charge to any person who requests a copy by writing to our Secretary, Seven Hills Realty Trust, Two Newton Place, 255 Washington Street, Suite 300, Newton, MA 02458-1634. We intend to satisfy the requirements under Item 5.05 of Form 8-K regarding disclosure of any amendments to, or waivers from, our Code of Conduct that apply to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, on our website. The remainder of the information required by Item 10 will be included in our 2023 Proxy Statement, and is incorporated herein by reference. Item 11. Executive Compensation The information required by Item 11 will be included in our 2023 Proxy Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Equity Compensation Plan Information. We may grant common shares to our officers and other employees of Tremont and of RMR under our Amended and Restated 2021 Equity Compensation Plan, or the 2021 Plan. In addition, each of our Trustees receives common shares as part of his or her annual compensation for serving as a Trustee and such shares are awarded under the 2021 Plan. The terms of awards made under the 2021 Plan are determined by the Compensation Committee of our Board of Trustees at the time of the awards. The table below is as of December 31, 2022: Plan category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (a) (b) (c) Equity compensation plans approved by security holders - 2021 Plan None None 251,074 (1) Equity compensation plans not approved by security holders None None None Total None None 251,074 (1) (1) Consists of common shares available for issuance pursuant to the terms of the 2021 Plan. Share awards that are repurchased or forfeited will be added to the common shares available for issuance under the 2021 Plan. Payments by us to RMR and RMR employees are described in Notes 8 and 10 to our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. The remainder of the information required by Item 12 will be included in our 2023 Proxy Statement and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by Item 13 will be included in our 2023 Proxy Statement and is incorporated herein by reference. Item 14. Principal Accountant Fees and Services The information required by Item 14 will be included in our 2023 Proxy Statement and is incorporated herein by reference. 76 Table of Contents PART IV Item 15. Exhibits and Financial Statement Schedules (a) Index to Financial Statements and Financial Statement Schedules The following consolidated financial statements of Seven Hills Realty Trust are included on the pages indicated: Page Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) F-1 Consolidated Balance Sheets as of December 31, 2022 and 2021 F-3 Consolidated Statements of Operations for the years ended December 31, 2022 and 2021 F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2022 and 2021 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021 F-6 Notes to Consolidated Financial Statements F-8 Schedule IV - Mortgage Loans on Real Estate S-1 All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions, or are inapplicable, and therefore have been omitted. 77 Table of Contents (b) Exhibits Exhibit Number Description 3.1 Declaration of Trust of the Company, dated December 21, 2021. (Incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed by the Company on December 22, 2021.) 3.2 Bylaws of the Company, dated December 22, 2021. (Incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K filed by the Company on December 22, 2021.) 4.1 Form of Common Share Certificate. (Incorporated by reference to Exhibit 4.1 of the Company’s Annual Report for the year ended December 31, 2021.) 4.2 Description of Securities. (Filed herewith.) 8.1 Opinion of Sullivan & Worcester LLP as to certain tax matters. (Filed herewith.) 10.1 Management Agreement, dated January 5, 2021, by and between the Company and Tremont Realty Capital LLC, and, solely in respect to Section 29 thereof, The RMR Group Inc.(+) (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed by the Company on January 6, 2021.) 10.2 Letter Agreement, dated as of April 26, 2021, among the Company, Tremont Mortgage Trust and Tremont Realty Capital LLC.(+) (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed by the Company on April 27, 2021.) 10.3 Amended and Restated Seven Hills Realty Trust 2021 Equity Compensation Plan.(+) (Incorporated by reference to the Company's Registration Statement on Form S-8 filed by the Company on December 23, 2021.) 10.4 Form of Share Award Agreement.(+) (Incorporated by reference to Exhibit 10.4 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.) 10.5 Form of Indemnification Agreement.(+) (Incorporated by reference to Exhibit 10.5 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.) 10.6 Summary of Trustee Compensation.(+) (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed by the Company on May 27, 2022.) 10.7 Master Repurchase Agreement, dated February 18, 2021, by and between RMTG Lender LLC and UBS AG. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed by the Company on February 22, 2021.) 10.8 Limited Guaranty, dated February 18, 2021, by the Company, in favor of UBS AG. (Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed by the Company on February 22, 2021.) 10.9 Amendment No. 2 to Master Repurchase Agreement, dated March 9, 2022, by and between RMTG Lender LLC and UBS AG. (Incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022.) 10.10 Amended and Restated Master Repurchase Agreement, dated March 15, 2022, by and between TRMT CB Lender LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K filed by the Company on March 16, 2022.) 10.11 Amended and Restated Guaranty, dated as of September 30, 2021, by the Company in favor of Citibank, N.A. (Incorporated by reference to Exhibit 10.13 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.) 10.12 Facility Loan Program Agreement and Security Agreement, dated November 9, 2021, by and between Seven Hills BH Lender LLC and BMO Harris Bank N.A. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed by the Company on November 12, 2021.) 10.13 First Amendment to Facility Loan Program Agreement and Security Agreement, dated April 25, 2022, by and between Seven Hills BH Lender, LLC and BMO Harris Bank N.A. (Incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022.) 10.14 Guaranty, dated November 9, 2021, by the Company, to and for the benefit of BMO Harris Bank N.A. (Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed by the Company on November 12, 2021.) 10.15 First Amendment to Guaranty, dated April 25, 2022, by the Company, to and for the benefit of BMO Harris Bank N.A. (Incorporated by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022.) 10.16 Master Repurchase and Securities Contract, dated March 11, 2022, by and between Seven Hills WF Lender LLC and Wells Fargo Bank, National Association. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed by the Company on March 16, 2022.) 10.17 Guarantee Agreement, dated March 11, 2022, by the Company, in favor of Wells Fargo Bank, National Association. (Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed by the Company on March 16, 2022.) 78 Table of Contents 10.18 Amendment No. 2 to Master Repurchase Agreement, dated March 9, 2022, by and between RMTG Lender LLC and UBS AG. (Incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022.) 21.1 Subsidiaries of the Company. (Filed herewith.) 23.1 Consent of Deloitte & Touche LLP. (Filed herewith.) 23.2 Consent of Sullivan & Worcester LLP. (Contained in Exhibit 8.1) 31.1 Rule 13a-14(a) Certification. (Filed herewith.) 31.2 Rule 13a-14(a) Certification. (Filed herewith.) 31.3 Rule 13a-14(a) Certification. (Filed herewith.) 31.4 Rule 13a-14(a) Certification. (Filed herewith.) 32.1 Section 1350 Certification of Chief Executive Officer and Chief Financial Officer. (Furnished herewith.) 101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 101.SCH XBRL Taxonomy Extension Schema Document. (Filed herewith.) 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. (Filed herewith.) 101.DEF XBRL Taxonomy Extension Definition Linkbase Document. (Filed herewith.) 101.LAB XBRL Taxonomy Extension Label Linkbase Document. (Filed herewith.) 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. (Filed herewith.) 104 Cover Page Interactive Data File. (Formatted as Inline XBRL and contained in Exhibit 101.) (+) Contract with management or compensatory plan or arrangement. Item 16. Form 10-K Summary None. 79 Table of Contents Report of Independent Registered Public Accounting Firm To the Trustees and Shareholders of Seven Hills Realty Trust Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Seven Hills Realty Trust and subsidiaries (the "Company") as of December 3, 2022 and 2021, the related consolidated statements of operations, shareholders' equity, and cash flows, for each of the two years in the period ended December 31, 2022, and the related notes and the schedule listed in the Index at Item 15(a) (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Loans Held for Investment, Net – Identification of Impairment Indicators – Refer to Notes 2 and 5 to the financial statements Critical Audit Matter Description The Company evaluates loans held for investments on a loan by loan basis for possible indicators of impairment at least quarterly basis in order to determine whether events or changes in circumstances exist that may indicate that the carrying amounts of loans held for investment, net are no longer recoverable. The loans are typically collateralized by commercial real estate property, and as a result, the Company regularly evaluates the extent and impact of any deterioration associated with the financial health and/or sale value of the underlying property, as well as the financial and operating capability of the borrower/sponsor for each individual loan investment. F-1 Table of Contents Factors considered in the impairment evaluation include, but are not limited to, property type, geographic and local market dynamics, physical condition, leasing and tenant profile, projected cash flow, risk of loss, current loan to value ratio, or LTV, debt yield, collateral performance, structure, exit plan and sponsorship. The Company’s evaluation involves a certain level of judgment and/or estimation related to whether the financial performance of the collateral or the existing market conditions results in an impairment indicator. The determination of whether loans are impaired involves judgments and assumptions based on objective and subjective factors. Changes in these judgements and/or estimates could have a significant impact on the loans identified for further analysis. For each of the two years in the period ended December 31, 2022, no impairment loss has been recognized on the Company’s loans held for investment, net balance. We identified the determination of impairment indicators for loans held for investment, net as a critical audit matter because of the level of judgment and significant assumptions involved in management’s assessment of whether events or changes in circumstances have occurred indicating that the carrying amounts of loans held for investment may not be recoverable. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate whether management appropriately identified impairment indicators. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the determination of impairment indicators for loans held for investment included the following, among others: • We evaluated a sample of loans for potential impairment by: ◦ Evaluating the accuracy and determining the relevance of the factors utilized during the Company’s evaluation. ◦ Analyzing period over period changes on items such as net operating income, debt service coverage ratio, debt yield ratio, occupancy, loan structure and modifications, leasing and tenant profiles, remaining loan term and exit plan, progress of redevelopment plans, and risk ratings to determine impact on loan performance. ◦ Reviewing any updates (or lack thereof) to each loan’s risk rating period over period. ◦ Evaluating the financial performance of the collateral associated with each loan. ◦ Evaluating the impact of macroeconomic and microeconomic events on the borrower, sponsor, or asset type. • We reviewed the payment history for all loans in the Company’s portfolio to ensure that the borrowers are making contractual payments in accordance with the loan agreements. /s/ Deloitte & Touche LLP Boston, Massachusetts February 13, 2023 We have served as the Company’s auditor since 2021. F-2 Table of Contents SEVEN HILLS REALTY TRUST CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) December 31, 2022 2021 ASSETS Cash and cash equivalents $ 71,057 $ 26,197 Restricted cash 10 98 Loans held for investment, net 669,929 570,780 Prepaid expenses and other assets 5,851 2,918 Total assets $ 746,847 $ 599,993 LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable, accrued liabilities and deposits $ 1,903 $ 1,561 Secured financing facilities, net 471,521 339,627 Due to related persons 1,844 1,111 Total liabilities 475,268 342,299 Commitments and contingencies Shareholders' equity: Common shares of beneficial interest, $ 0.001 par value per share; 25,000,000 shares authorized; 14,709,165 and 14,597,079 shares issued and outstanding, respectively 15 15 Additional paid in capital 238,505 237,624 Cumulative net income 52,290 24,650 Cumulative distributions ( 19,231 ) ( 4,595 ) Total shareholders' equity 271,579 257,694 Total liabilities and shareholders' equity $ 746,847 $ 599,993 See accompanying notes. F-3 Table of Contents SEVEN HILLS REALTY TRUST CONSOLIDATED STATEMENTS OF OPERATIONS (amounts in thousands, except per share data) Year Ended December 31, 2022 2021 INCOME FROM INVESTMENTS: Interest income from investments $ 45,303 $ 16,775 Purchase discount accretion 10,689 18,932 Less: interest and related expenses ( 17,630 ) ( 2,253 ) Income from investments, net 38,362 33,454 OTHER EXPENSES: Base management fees 4,260 3,221 General and administrative expenses 4,080 3,091 Reimbursement of shared services expenses 2,232 1,565 Other transaction related costs 37 589 Total other expenses 10,609 8,466 Income before income taxes 27,753 24,988 Income tax expense ( 113 ) ( 338 ) Net income $ 27,640 $ 24,650 Weighted average common shares outstanding - basic and diluted 14,540 11,304 Net income per common share - basic and diluted $ 1.89 $ 2.18 See accompanying notes. F-4 Table of Contents SEVEN HILLS REALTY TRUST CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (amounts in thousands) Number of Common Shares Common Shares Additional Paid in Capital Cumulative Net Income Cumulative Distributions Total Balance at December 31, 2020 10,202 $ 10 $ 192,884 $ — $ — $ 192,894 Issuance of shares 4,285 5 44,170 — — 44,175 Share grants 116 — 627 — — 627 Share repurchases ( 6 ) — ( 57 ) — — ( 57 ) Net income — — — 24,650 — 24,650 Distributions — — — — ( 4,595 ) ( 4,595 ) Balance at December 31, 2021 14,597 15 237,624 24,650 ( 4,595 ) 257,694 Share grants 127 — 1,019 — — 1,019 Share repurchases ( 14 ) — ( 137 ) — — ( 137 ) Share forfeitures ( 1 ) — ( 1 ) — — ( 1 ) Net income — — — 27,640 — 27,640 Distributions — — — — ( 14,636 ) ( 14,636 ) Balance at December 31, 2022 14,709 $ 15 $ 238,505 $ 52,290 $ ( 19,231 ) $ 271,579 See accompanying notes. F-5 Table of Contents SEVEN HILLS REALTY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) Year Ended December 31, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 27,640 $ 24,650 Adjustments to reconcile net income to net cash provided by operating activities: Accretion of purchase discount ( 10,689 ) ( 18,932 ) Share based compensation 1,018 627 Amortization of deferred financing costs 1,033 211 Amortization of loan origination and exit fees ( 3,780 ) ( 1,679 ) Changes in operating assets and liabilities: Prepaid expenses and other assets ( 3,546 ) ( 2,039 ) Accounts payable, accrued liabilities and deposits 342 ( 2,329 ) Due to related persons 733 283 Net cash provided by operating activities 12,751 792 CASH FLOWS FROM INVESTING ACTIVITIES: Origination of loans held for investment ( 200,938 ) ( 343,471 ) Additional funding of loans held for investment ( 16,697 ) ( 4,343 ) Repayment of loans held for investment 133,568 59,041 Payment of merger related costs — ( 6,160 ) Cash assumed in merger — 11,070 Net cash used in investing activities ( 84,067 ) ( 283,863 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from secured financing facilities 284,867 249,804 Repayments under secured financing facilities ( 152,121 ) ( 37,897 ) Payments of deferred financing costs ( 1,885 ) ( 1,453 ) Repurchase of common shares ( 137 ) ( 57 ) Distributions ( 14,636 ) ( 4,595 ) Net cash provided by financing activities 116,088 205,802 Increase (decrease) in cash, cash equivalents and restricted cash 44,772 ( 77,269 ) Cash, cash equivalents and restricted cash at beginning of period 26,295 103,564 Cash, cash equivalents and restricted cash at end of period $ 71,067 $ 26,295 F-6 Table of Contents Year Ended December 31, 2022 2021 SUPPLEMENTAL DISCLOSURES: Interest paid $ 15,710 $ 1,718 Income taxes paid $ 134 $ 2,681 NON-CASH INVESTING ACTIVITIES Loans held for investment acquired by issuance of common shares $ — $ 162,990 Working capital net liabilities assumed $ — $ 924 NON-CASH FINANCING ACTIVITIES Assumption of master repurchase facility $ — $ 128,962 Issuance of common shares $ — $ 44,175 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 consolidated balance sheets to the amounts shown in the consolidated statements of cash flows: As of December 31, 2022 2021 Cash and cash equivalents $ 71,057 $ 26,197 Restricted cash 10 98 Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows $ 71,067 $ 26,295 See accompanying notes. F-7 Table of Contents SEVEN HILLS REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) Note 1. Organization Seven Hills Realty Trust is a Maryland real estate investment trust, or REIT, that focuses primarily on originating and investing in first mortgage loans secured by middle market and transitional commercial real estate, or CRE. We were previously organized as a Maryland statutory trust and were registered under the Investment Company Act of 1940, as amended, or the 1940 Act, as a closed-end management investment company. Our investment objective while we operated as a registered investment company was investing in equity securities of real estate companies. On January 5, 2021, the Securities and Exchange Commission, or SEC, issued an order granting our request to deregister as an investment company under the 1940 Act, or the Deregistration Order. As a result, we changed our SEC registration to a reporting company under the Securities Exchange Act of 1934, as amended. On December 22, 2021, we converted from a Maryland statutory trust to a Maryland REIT. Note 2. Summary of Significant Accounting Policies Basis of Presentation. These consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, or GAAP, which requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the accompanying consolidated financial statements include the fair value of financial instruments. Consolidation. These consolidated financial statements include the accounts of ours and our subsidiaries, all of which are 100 % owned directly by us. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. For each loan investment we make, we evaluate whether we have a controlling financial interest and consolidation of the borrower's financial statements is required under GAAP. Cash, Cash Equivalents and Restricted Cash. We consider highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. Restricted cash primarily consists of deposit proceeds received from potential borrowers when originating loans, which may be returned to the applicable borrower upon the closing of the loan, after deducting any transaction costs paid by us for the benefit of such borrower. Secured Financing Agreements. Loans financed through our Secured Financing Agreements (as defined in Note 6) are treated as collateralized financing transactions, unless they meet sales treatment under GAAP. Pursuant to GAAP treatment of collateralized financing transactions, loans financed through our Secured Financing Agreements remain on our consolidated balance sheets as assets and cash received from the purchasers is recorded on our consolidated balance sheets as liabilities. Interest paid in accordance with our Secured Financing Agreements is recorded as interest expense. Loans Held for Investment. Generally, our loans are classified as held for investment based upon our intent and ability to hold them until maturity. Loans that are held for investment are carried at cost, net of unamortized loan origination fees, accreted exit fees, unamortized premiums and unaccreted discounts, as applicable, that are required to be recognized in the carrying value of the loans in accordance with GAAP, unless the loans are deemed to be impaired. Loans that we have a plan to sell or liquidate are held at the lower of cost or fair value less cost to sell. 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. Factors considered in these evaluations include, but are not limited to, property type, geographic and local market dynamics, physical condition, leasing and tenant profile, projected cash flow, risk of loss, current loan to value ratio, or LTV, debt yield, collateral performance, structure, exit plan and sponsorship. Loans are rated “1” (less risk) through “5” (greater risk) as defined below: “1” lower risk—Criteria reflects a sponsor having a strong financial condition and low credit risk and our evaluation of management's experience; collateral performance exceeding performance metrics included in the business plan or credit underwriting; and the property demonstrating stabilized occupancy and/or market rates, resulting in strong current cash flow and net operating income and/or having a very low LTV. F-8 SEVEN HILLS REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) “2” average risk—Criteria reflects a sponsor having a stable financial condition and our evaluation of management's experience; collateral performance meeting or exceeding substantially all performance metrics included in the business plan or credit underwriting; and the property demonstrating improved occupancy at market rents, resulting in sufficient current cash flow and/or having a low LTV. “3” acceptable risk—Criteria reflects a sponsor having a history of repaying loans at maturity and meeting its credit obligations and our evaluation of management's experience; collateral performance expected to meet performance metrics included in the business plan or credit underwriting; and the property having a moderate LTV. New loans and loans with a limited history will typically be assigned this rating and will be adjusted to other levels from time to time as appropriate. “4” higher risk—Criteria reflects a sponsor having a history of unresolved missed or late payments, maturity extensions and difficulty timely fulfilling its credit obligations and our evaluation of management's experience; collateral performance failing to meet the business plan or credit underwriting; the existence of a risk of default possibly leading to a loss and/or potential weaknesses that deserve management’s attention; and/or the property having a high LTV. “5” impaired/loss likely—Criteria reflects a very high risk of realizing a principal loss or having incurred a principal loss; a sponsor having a history of default payments, trouble fulfilling its credit obligations, deeds in lieu of foreclosures, and/or bankruptcies; collateral performance is significantly worse than performance metrics included in the business plan; loan covenants or performance milestones having been breached or not attained; timely exit via sale or refinancing being uncertain; and/or the property having a very high LTV. See Note 5 for further information regarding our loan portfolio’s assessment under our internal risk rating policy. Impairment occurs when it is deemed probable that we will not be able to collect all amounts due under a loan according to its contractual terms. Impairment will then be measured based on the present value of the expected future cash flows discounted at the loan's contractual effective rate and the fair value of any available collateral, net of any costs we expect to incur to realize that value. The determination of this estimated fair value involves judgments and assumptions based on objective and subjective factors. Consideration will be given to various factors, such as business plans, property occupancies, tenant profiles, rental rates, operating expenses and borrowers’ repayment plans, among others, and will require significant judgments regarding certain circumstances, such as guarantees, if any. Upon measurement of an impairment, we will record an allowance to reduce the carrying value of the loan accordingly, and record a corresponding charge to net income in our consolidated statements of operations. As of December 31, 2022, we have not recorded any allowance for losses as we believe it is probable that we will collect all amounts due pursuant to the contractual terms of our loan agreements with borrowers. Fair Value of Financial Instruments. We determine the estimated fair value of financial assets and liabilities using the three-tier fair value hierarchy established by GAAP, which prioritizes observable inputs in active markets when measuring fair value. The three levels of inputs that may be used to measure fair value in order of priority are as follows: Level I—Inputs include quoted prices in active markets for identical assets or liabilities that we have the ability to access. Level II—Inputs include quoted prices in markets that are less active or inactive or for which all significant inputs are observable, either directly or indirectly. Level III—Inputs include unobservable prices and are supported by little or no market activity and are significant to the overall fair value measurement. Loan Deferred Fees. Loan origination and exit fees are fees charged to our borrowers and unamortized or unaccreted balances are reflected as a reduction in loans held for investment, net, in our consolidated balance sheets. These fees are recognized in interest income over the life of the related loans held for investment. Deferred Financing Costs. Costs incurred in connection with financings are capitalized and recorded as a reduction to the related liability in our consolidated balance sheets. Deferred financing costs are amortized over the term of the respective financing agreement and are recorded in our consolidated statements of operations as a component of interest and related expenses. F-9 SEVEN HILLS REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) Net Income Per Common Share. 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. Revenue Recognition. Interest income related to our first mortgage loans secured by CRE will generally be accrued based on the coupon rates applied to the outstanding principal balance of such loans. Fees, premiums and discounts, if any, will be amortized or accreted into interest income over the remaining lives of the loans using the effective interest method, as adjusted for any prepayments. If a loan's interest or principal payments are not paid when due and there is uncertainty that such payments will be collected, the loan may be categorized as non-accrual and no interest will be recorded until it is collected. When all overdue payments are collected and, in our judgment, a loan is likely to remain current, it may be re-categorized as accrual. We did not have any non-accrual loans as of December 31, 2022. For loans purchased at a discount, GAAP limits the yield that may be accreted (accretable yield) to the excess of the investor’s estimate of undiscounted expected principal, interest and other cash flows (cash flows expected at acquisition to be collected) over the investor’s initial investment in the loan. GAAP also requires that the excess of contractual cash flows over cash flows expected to be collected (non-accretable difference) not be recognized as an adjustment of yield, loss accrual or valuation allowance. Subsequent increases in cash flows expected to be collected from such loans generally will be recognized prospectively through adjustment of the loan’s yield over its remaining life. Decreases in cash flows expected to be collected will be recorded as an impairment. Note 3. 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 replaces the “incurred loss” model for recognizing credit losses with a forward-looking “expected loss” model that generally will result in the earlier recognition of credit losses. The measurement of current expected credit losses, or CECL, is based upon historical experience, current conditions, and reasonable and supportable forecasts incorporating forward-looking information that affect the collectability of the reported amount. CECL is applicable to financial assets measured at amortized cost and off-balance sheet credit exposures, such as unfunded loan commitments. The reserve required under ASU No. 2016-13 is a valuation account that is deducted from the related loans’ amortized cost basis on our consolidated balance sheets and will reduce our total stockholders’ equity. ASU No. 2016-13 requires a cumulative-effect adjustment to equity as of the beginning of the reporting period of adoption. However, future changes to the reserve will be recognized in net income on our consolidated statements of operations. As a smaller reporting company, ASU No. 2016-13 is effective on January 1, 2023. The implementation process included selection of a credit loss model, changes to our internal reporting processes, changes to our internal controls and documentation of related policies and procedures. Given the lack of historical loss data related to our loan portfolio, we elected to estimate our expected losses using an analytical model that considers the likelihood of default and loss given default for each individual loan. This analytical model incorporates data from a third party database with historical loan loss information for commercial mortgage-backed securities and CRE loans since 1998. Significant inputs to the model include certain loan specific data, such as LTV, property type, geographic location, occupancy, debt service coverage ratio and/or net operating income and a macroeconomic forecast. We may use other acceptable alternative approaches in the future depending on, among other factors, the type of loan, underlying collateral and availability of relevant historical market loan loss data. Based on our loan portfolio, including unfunded loan commitments, at December 31, 2022, the current economic environment and expectations for future conditions, upon adoption of ASU No. 2016-13, we expect to record a cumulative-effect adjustment to reduce our cumulative net income within a range of $ 6,000 to $ 8,000 , or $ 0.41 to $ 0.54 per common share. F-10 SEVEN HILLS REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) 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. The adoption of ASU No. 2022-02 prospectively on January 1, 2023, concurrently with the adoption of ASU No. 2016-13 did not have a material impact on our condensed consolidated financial statements. Note 4. Merger with Tremont Mortgage Trust On September 30, 2021, we completed our merger with Tremont Mortgage Trust, or TRMT, at which time TRMT merged with and into us, with us continuing as the surviving entity, or the Merger. As a condition of the Merger, each one issued and outstanding common share of beneficial interest, $ 0.01 par value per share, of TRMT was automatically converted into the right to receive 0.516 of our common shares of beneficial interest, $ 0.001 par value per common share, or our common shares. The purchase price, based on the closing price of our common shares on September 30, 2021 of $ 10.31 per share, was $ 169,150 , including the assumption of $ 128,962 outstanding under TRMT’s master repurchase facility with Citibank, N.A., or Citibank, or the Citibank Master Repurchase Facility, closing costs of $ 6,160 and assumed working capital of $ 10,146 . The table below summarizes the consideration transferred and liabilities assumed as a result of the Merger: TRMT Common Shares outstanding 8,303,629 Multiplied by the exchange ratio 0.516 4,284,673 TRMT fractional shares adjustment ( 73 ) SEVN common shares issued 4,284,600 Closing price of SEVN common shares on September 30, 2021 $ 10.31 Value of consideration transferred $ 44,174 Assumed working capital ( 10,146 ) Assumed Citibank Master Repurchase Facility, principal balance 128,962 Merger related costs 6,160 Consideration transferred and liabilities assumed $ 169,150 After consideration of applicable factors pursuant to ASC Topic 805, Business Combinations , including the application of a screen test to evaluate if substantially all the fair value of TRMT as the acquired entity is concentrated in a single identifiable asset or group of similar identifiable assets, we have concluded that the Merger qualifies as an asset acquisition under GAAP. Accordingly, SEVN accounted for the Merger as an asset acquisition, with Merger related costs capitalized as a component of the cost of the assets acquired and SEVN treated as the acquirer of TRMT. The assets acquired and liabilities assumed were recorded at their relative fair values and added to our consolidated balance sheet as of September 30, 2021. The fair value of the loans acquired in the Merger exceeded the purchase price of the loans. In accordance with GAAP, a purchase discount of $ 36,443 was recorded for the difference between the fair value and purchase price of the loans acquired. The purchase discount was allocated to each acquired TRMT loan based on their relative fair value and has been and is being accreted into income over the remaining term of the respective loan. For the years ended December 31, 2022 and 2021, we recorded purchase discount accretion of $ 10,689 and $ 18,932 , respectively. F-11 SEVEN HILLS REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) The table below summarizes the purchase price allocation for the Merger: Cash and cash equivalents $ 11,070 Loans held for investment, net 169,150 Accrued interest receivable 603 Prepaid expenses and other assets 31 Total assets 180,854 Accounts payable and other liabilities ( 901 ) Citibank Master Repurchase Facility ( 128,962 ) Due to related persons ( 657 ) Net assets acquired 50,334 Assumed working capital ( 10,146 ) Assumed Citibank Master Repurchase Facility, principal balance 128,962 Consideration transferred and liabilities assumed $ 169,150 Note 5. Loans Held for Investment We originate first mortgage loans secured by middle market and transitional 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 6, and we acquired TRMT's loan portfolio in the Merger with our common shares. See Note 4 for further information regarding the Merger and Note 6 for further information regarding our Secured Financing Agreements. The table below provides overall statistics for our loan portfolio as of December 31, 2022 and 2021: As of December 31, 2022 2021 Number of loans 27 26 Total loan commitments $ 727,562 $ 648,266 Unfunded loan commitments (1) $ 49,007 $ 57,772 Principal balance (2) $ 678,555 $ 590,590 Carrying value $ 669,929 $ 570,780 Weighted average coupon rate 8.07 % 4.54 % Weighted average all in yield (2) 8.57 % 5.08 % Weighted average floor 0.62 % 0.68 % Weighted average maximum maturity (years) (3) 3.3 3.8 Weighted average risk rating 2.9 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. F-12 SEVEN HILLS REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) The table below represents our loan activities during 2021 and 2022: Principal Balance Deferred Fees and Other Items Carrying Value Balance at December 31, 2020 $ 92,863 $ ( 984 ) $ 91,879 Additional funding 4,710 — 4,710 Originations 347,366 ( 3,895 ) 343,471 Repayments ( 59,041 ) ( 156 ) ( 59,197 ) Net amortization of deferred fees — 1,835 1,835 Loans acquired in Merger (1) 204,692 901 205,593 Purchase discount on loans acquired in Merger — ( 36,443 ) ( 36,443 ) Purchase discount accretion (2) — 18,932 18,932 Balance at December 31, 2021 590,590 ( 19,810 ) 570,780 Additional funding 17,310 — 17,310 Originations 203,244 ( 2,306 ) 200,938 Repayments ( 132,589 ) ( 979 ) ( 133,568 ) Net amortization of deferred fees — 3,780 3,780 Purchase discount accretion — 10,689 10,689 Balance at December 31, 2022 $ 678,555 $ ( 8,626 ) $ 669,929 (1) Deferred fees and other items for loans acquired in Merger represent exit fees contractually due upon repayment of loans acquired in the Merger. (2) Purchase discount accretion for the year ended December 31, 2021 reflects the impact of a waived exit fee of $ 120 due from a borrower of a loan acquired in the Merger. F-13 SEVEN HILLS REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) The tables below detail the property type and geographic location of the properties securing the loans in our portfolio as of December 31, 2022 and 2021: As of December 31, 2022 2021 Property Type Number of Loans Carrying Value Percentage of Value Number of Loans Carrying Value Percentage of Value Office (1) 11 $ 252,796 38 % 13 $ 269,865 47 % Multifamily 8 197,229 29 % 5 106,002 19 % Industrial (1) 4 110,656 17 % 3 92,791 16 % Retail 4 109,248 16 % 4 88,724 16 % Lab — — — % 1 13,398 2 % 27 $ 669,929 100 % 26 $ 570,780 100 % (1) As of December 31, 2021, two loan investments secured by mixed use properties consisting of office space and an industrial warehouse in Aurora, IL and Colorado Springs, CO were classified as office for the purpose of counting the number of loans in our portfolio because the majority of the square footage of the properties consisted of office space. The carrying value of these loan investments were reflected in office and industrial based on the fair value of the buildings at the time of origination relative to the total fair values of the properties. During the year ended December 31, 2022, our loan investment in Colorado Springs, CO was repaid. As of December 31, 2022 2021 Geographic Location Number of Loans Carrying Value Percentage of Value Number of Loans Carrying Value Percentage of Value Midwest 9 $ 251,208 37 % 8 $ 216,700 38 % South 6 166,616 25 % 7 153,495 27 % West 8 146,837 22 % 8 145,453 25 % East 4 105,268 16 % 3 55,132 10 % 27 $ 669,929 100 % 26 $ 570,780 100 % 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. The table below allocates the carrying value of our loan portfolio as of December 31, 2022 and 2021 based on our internal risk rating policy: As of December 31, 2022 2021 Risk Rating Number of Loans Carrying Value Number of Loans Carrying Value 1 1 $ 9,708 — $ — 2 6 134,642 4 94,743 3 17 434,116 21 463,600 4 3 91,463 1 12,437 5 — — — — 27 $ 669,929 26 $ 570,780 F-14 SEVEN HILLS REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) The weighted average risk rating of our loans by carrying value was 2.9 as of December 31, 2022 and 2021. Certain of our borrowers’ business operations or tenants, particularly at certain office and retail properties, were negatively impacted by the COVID-19 pandemic and continue to be impacted by market conditions that arose or intensified during or in response to the pandemic. Current inflationary pressures, rising or sustained high interest rates, supply chain issues or a prolonged economic slowdown or recession could amplify those negative impacts. Therefore, certain of our borrowers’ business plans will likely take longer to execute than initially expected, and as a result, 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 December 31, 2022, we had three loans representing approximately 14 % of the carrying value of our loan portfolio with a loan risk rating of “4” or “higher risk". See Note 2 for further information regarding our loan risk ratings. 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 is available to be used to finance debt service costs and operating costs of the borrower. Additionally, 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 December 31, 2022, this loan had a risk rating of “4” and an outstanding principal balance of $ 15,583 . 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 at the time of the modification. The borrower’s interest rate cap on the loan expired in December 2022. We have agreed to forbear enforcement of the event of default per the terms of the loan agreement related to the termination of an interest rate cap without replacement, subject to certain terms and conditions. As of February 9, 2023, we believe the borrower was in compliance with other terms of the loan agreement. There were no other material modifications to our loan portfolio during the year ended December 31, 2022. We did not have any impaired loans or nonaccrual loans as of December 31, 2022 or 2021. As of December 31, 2022 and February 9, 2023, our borrowers had paid their debt service obligations owed and due to us and none of the loans included in our investment portfolio were in default, except for the interest rate cap forbearance described above. Note 6. Secured Financing Agreements UBS Master Repurchase Facility On February 18, 2021, one of our wholly owned subsidiaries entered into our master repurchase agreement with UBS AG, or UBS, or our UBS Master Repurchase Agreement, for a facility, or our UBS Master Repurchase Facility, pursuant to which we may sell to UBS, and later repurchase, commercial mortgage loans, which are referred to as purchased assets. The maximum amount of available advancements under the UBS Master Repurchase Agreement is $ 192,000 , and the expiration date of the UBS Master Repurchase Agreement is February 18, 2024, unless extended or earlier terminated in accordance with the terms of the UBS Master Repurchase Agreement. Pursuant to the UBS Master Repurchase Agreement, we will pay UBS a non-refundable upfront fee that is equal to 0.50 % of the applicable tranche amount on each Purchase Date (as each term is defined in 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 the Secured Overnight Financing Rate, or SOFR, for interest rate calculations on advancements under the UBS Master Repurchase Facility and modifying certain pricing terms. F-15 SEVEN HILLS REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) Under our UBS Master Repurchase Facility, the initial purchase price paid by UBS for each purchased asset is up to 75 % of the lesser of the market value of the purchased asset and the unpaid principal balance of such purchased asset, subject to UBS’s approval. Upon the repurchase of a purchased asset, we are required to pay UBS the outstanding purchase price of the purchased asset, accrued interest and all accrued and unpaid expenses of UBS relating to such purchased assets. The pricing rate (or interest rate) relating to a purchased asset was equal to one month SOFR plus a premium within a fixed range, determined by the debt yield and property type of the purchased asset’s real estate collateral. UBS has the discretion under our UBS Master Repurchase Agreement to make advancements at margins higher than 75 %. On May 4, 2022, we amended and restated our UBS Master Repurchase Agreement. In connection with our UBS Master Repurchase Agreement, we entered into a guaranty, or the UBS 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 UBS related to our UBS Master Repurchase Agreement. The UBS Guaranty also contains financial covenants, which require us to maintain a minimum tangible net worth, a minimum liquidity and to satisfy a total indebtedness to stockholders' equity ratio. Our UBS Master Repurchase Facility also contains margin maintenance provisions that provide UBS with the right, in certain circumstances related to a credit event, as defined in the UBS 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, UBS may require us to eliminate any margin deficit through a combination of purchased asset repurchases and cash transfers to UBS subject to UBS’s approval. In addition, our UBS Master Repurchase Agreement provides for acceleration of the date of repurchase of the purchased assets by us and UBS’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 As discussed in Note 4, as a result of the Merger, we assumed the Citibank Master Repurchase Facility. On September 30, 2021, as a result of the Merger, we became party to TRMT's master repurchase facility and entered into a guaranty, or the Citibank Guaranty, in favor of Citibank, pursuant to which, among other things, we replaced TRMT as guarantor of certain obligations under the master repurchase agreement, as amended, with Citibank, or the Citibank Master Repurchase Agreement and amended the Citibank Master Repurchase Agreement and the related fee agreement. On March 15, 2022, we amended and restated our Citibank Master Repurchase Agreement to make certain changes to the agreement and related fee letter, including increasing the maximum amount of available advancements under our Citibank Master Repurchase Facility to $ 215,000 , replacing LIBOR with SOFR for interest rate calculations on advancements under the Citibank Master Repurchase Facility, modifying certain pricing terms and extending the stated maturity date to March 15, 2025, subject to earlier termination as provided for in the Citibank Master Repurchase Agreement. Pursuant to the Citibank Master Repurchase Agreement, we may sell to Citibank, and later repurchase, floating rate mortgage loans and other related assets. Under our Citibank Master Repurchase Agreement, the initial purchase price paid by Citibank for each purchased asset is up to 75 % of the lesser of the market value of the purchased asset or the unpaid principal balance of such purchased asset, subject to Citibank’s approval. Upon the repurchase of a purchased asset, we are required to pay Citibank the outstanding purchase price of the purchased asset, accrued interest and all accrued and unpaid expenses of Citibank relating to such purchased asset. The price differential (or interest rate) relating to a purchased asset was equal to LIBOR plus a premium of 200 to 250 basis points, determined by the yield of the purchased asset and the property type of the purchased asset’s real estate collateral. Citibank has the discretion under our Citibank Master Repurchase Agreement to make advancements at margins higher than 75 % and at premiums of less than 200 basis points. The Citibank Guaranty, which requires us to guarantee 25 % of our subsidiary's prompt and complete payment of the purchase price, purchase price differential and any costs and expenses of Citibank related to our Citibank Master Repurchase Agreement. The Citibank Guaranty also contains financial covenants, which require us to maintain a minimum tangible net worth, a minimum liquidity, a minimum interest coverage ratio and to satisfy a total indebtedness to tangible net worth ratio. These maintenance provisions provide Citibank with the right, in certain circumstances related to a credit event, as defined in our Citibank Master Repurchase Agreement, to re-determine the value of purchased assets. Where a decline in the value of such purchased assets has resulted in a margin deficit, Citibank may require us to eliminate any margin deficit through a combination of purchased asset repurchases and cash transfers to Citibank, subject to Citibank's approval. F-16 SEVEN HILLS REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) Our Citibank Master Repurchase Agreement also provides for acceleration of the date of repurchase of the purchased assets by us and Citibank’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 ceasing to act as our sole manager or to be a wholly owned subsidiary of RMR. BMO Facility On November 9, 2021, one of our wholly owned subsidiaries entered into our facility loan program agreement and the security agreement with BMO Harris Bank N.A., or BMO, or our BMO Loan Program Agreement, with BMO as administrative agent for the lenders. Amounts advanced under an uncommitted credit facility, originally up to the maximum principal amount of $ 100,000 , or the BMO Facility, may be used to fund new mortgage loan originations and/or fund future funding obligations under existing and new mortgage loans pursuant to separate agreements, or the BMO Facility Loan Agreements. BMO Facility Loan Agreements issued under the BMO Facility are coterminous with the pledged mortgage loan investments, are not subject to margin calls and allow for up to an 80 % advance rate, subject to certain loan to cost and LTV limits. Interest on advancements under the BMO Facility are calculated at SOFR plus a premium. BMO Facility Loan Agreements issued under our BMO Facility are secured by a security interest and collateral assignment of the underlying loans to our borrowers which are secured by real property owned by such borrowers. On April 25, 2022, we amended our BMO Loan Program Agreement to increase the maximum principal amount available under our BMO Facility, from $ 100,000 to $ 150,000 . In connection with our BMO Loan Program Agreement, we guaranteed certain of the obligations under our BMO Loan Program Agreement and the BMO Facility Loan Agreements pursuant to a limited guaranty from us to and for the benefit of the administrative agent for itself and such other lenders. Specifically, the BMO Guaranty requires us to guarantee 25 % of the then current outstanding principal balance of the facility loans and 100 % of losses or the entire indebtedness in the event of certain bad acts as well as any costs and expenses of the administrative agent or lenders related to our BMO Loan Program Agreement. In addition, the BMO Guaranty contains financial covenants that require us to maintain a minimum tangible net worth and a minimum liquidity and to satisfy a total indebtedness to stockholders’ equity ratio. Our BMO Loan Program Agreement provides for acceleration of all payment obligations due under the BMO Facility Loan Agreements upon the occurrence and continuation of certain events of default, including a change of control of us, which includes Tremont ceasing to act as our sole manager or to be a wholly owned subsidiary of R MR. 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, National Association, or 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 may sell to Wells Fargo, and later repurchase, commercial mortgage loans, which are referred to as 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 is calculated at SOFR, plus a premium. F-17 SEVEN HILLS REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) 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 ceasing to act as our sole manager or to be a wholly owned subsidiary of RMR. We refer to the UBS Master Repurchase Facility, Citibank Master Repurchase Facility, BMO Facility and Wells Fargo Master Repurchase Facility, collectively, as our Secured Financing Facilities. We refer to the UBS Master Repurchase Agreement, Citibank Master Repurchase Agreement and Wells Fargo Master Repurchase Agreement, collectively, as our Master Repurchase Agreements, and to our Master Repurchase Agreements, the BMO Loan Program Agreement and the BMO Facility Loan Agreements, collectively, as our Secured Financing Agreements. As of December 31, 2022, we were in compliance with the covenants and other terms of the agreements that govern our Secured Financing Facilities. As of December 31, 2022 and February 9, 2023, we had aggregate outstanding principal balances under our Secured Financing Facilities of $ 473,615 and $462,286, respectively. The table below summarizes our Secured Financing Facilities as of December 31, 2022 and 2021: Debt Obligation Weighted Average Collateral Maximum Facility Size Principal Balance Carrying Value Coupon Rate (1) Remaining Maturity (years) (2) Principal Balance December 31, 2022: Citibank Master Repurchase Facility $ 215,000 $ 150,647 $ 150,360 6.34 % 1.1 $ 205,234 UBS Master Repurchase Facility 192,000 144,437 143,887 6.48 % 1.1 198,254 BMO Facility 150,000 111,105 110,473 6.22 % 2.2 148,476 Wells Fargo Master Repurchase Facility 125,000 67,426 66,801 6.23 % 2.1 89,008 Total/weighted average $ 682,000 $ 473,615 $ 471,521 6.34 % 1.5 $ 640,972 December 31, 2021: Citibank Master Repurchase Facility $ 213,482 $ 161,825 $ 161,724 2.03 % 0.7 $ 222,129 UBS Master Repurchase Facility 192,000 167,928 167,024 2.09 % 2.0 225,868 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 2.51 %, 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 our corresponding loan investments, assuming no borrower loan extension options have been exercised. As of December 31, 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. F-18 SEVEN HILLS REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) As of December 31, 2022, our outstanding borrowings under our Secured Financing Facilities had the following remaining maturities: Maturity Year Principal Payments Due Upon Maturity 2023 $ 99,112 2024 264,246 2025 110,257 2026 and thereafter — $ 473,615 Note 7. Fair Value of Financial Instruments 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. The table below provides carrying values and fair values of our financial assets and liabilities not carried at fair value in our consolidated balance sheets: As of December 31, 2022 2021 Carrying Value Fair Value Carrying Value Fair Value Financial assets Loans held for investment $ 669,929 $ 679,911 $ 570,780 $ 597,669 Financial liabilities Secured Financing Facilities $ 471,521 $ 471,362 $ 339,627 $ 341,679 There were no transfers of financial assets or liabilities within the fair value hierarchy during the year ended December 31, 2022 or 2021. Note 8. Shareholders' Equity Common Share Awards We have common shares available for issuance under the terms of our Amended and Restated 2021 Equity Compensation Plan, or the 2021 Plan. During the years ended December 31, 2022 and 2021, we awarded to our officers and certain other employees of Tremont and of RMR annual share awards of 85,000 and 83,000 of our common shares, respectively, valued at $ 859 and $ 864 , in aggregate, respectively. In accordance with our Trustee compensation arrangements, during the years ended December 31, 2022 and 2021, we awarded each of our then Trustees 6,000 of our common shares valued at $ 448 and $ 369 , respectively, as part of their annual compensation. The values of the share awards are based upon the closing price of our common shares on Nasdaq on the dates of awards. The common shares that we award to our Trustees as trustee compensation vest immediately. The common shares we award to our officers and certain other employees of Tremont and of RMR vest in five equal annual installments beginning on the date of award. We recognize any share forfeitures as they occur. We include the value of awarded shares in general and administrative expenses ratably over the vesting period. F-19 SEVEN HILLS REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) A summary of shares granted, forfeited, vested and unvested under the terms of the 2021 Plan for the years ended December 31, 2022 and 2021 is as follows: 2022 2021 Number of Shares Weighted Average Grant Date Fair Value Number of Shares Weighted Average Grant Date Fair Value Unvested shares, beginning of year 91,584 $ 10.39 — $ — Shares granted 127,000 $ 10.29 116,000 $ 10.63 Shares forfeited ( 1,016 ) $ 10.39 — $ — Shares vested ( 87,888 ) $ 10.45 ( 50,786 ) $ 10.89 Shares granted at the effective date of the Merger — $ — 26,370 $ 10.31 Unvested shares, end of year 129,680 $ 10.24 91,584 $ 10.39 The 129,680 unvested shares as of December 31, 2022 are scheduled to vest as follows: 44,089 shares in 2023, 36,291 shares in 2024, 32,300 shares in 2025 and 17,000 shares in 2026. As of December 31, 2022, the estimated future compensation expense for the unvested shares was $ 1,180 . The weighted average period over which the compensation expense will be recorded is approximately 23 months. During the years ended December 31, 2022 and 2021, we recorded $ 1,018 and $ 627 , respectively, of compensation expense related to the 2021 Plan. At December 31, 2022, 251,074 of our common shares remained available for issuance under the 2021 Plan. Common Share Purchases During the years ended December 31, 2022 and 2021, we purchased 13,898 and 5,530 of our common shares, respectively, from certain of our current and former officers and employees of Tremont and/or RMR in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares, valued at the closing price of our common shares on Nasdaq on the applicable purchase date. The aggregate value of common shares purchased during the years ended December 31, 2022 and 2021 was $ 137 and $ 57 , respectively. Distributions During the years ended December 31, 2022 and 2021, we paid distributions to common shareholders as follows: Characterization of Distributions Year Annual Per Share Distribution Total Distribution Return of Capital Ordinary Income Qualified Dividend 2022 $ 1.00 $ 14,636 — % 100 % — % 2021 $ 0.45 $ 4,595 21 % 79 % — % On January 12, 2023, we declared a quarterly distribution of $ 0.35 per common share, or $ 5,148 , to shareholders of record on January 23, 2023. We expect to pay this distribution to our shareholders on or about February 16, 2023 using cash on hand. Note 9. Management Agreement with Tremont We have no employees. Effective January 5, 2021, upon receipt of the Deregistration Order, we entered into a management agreement with Tremont. T he personnel and various services we require to operate our business are provided to us by Tremont, pursuant to the 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. Prior to the Merger, Tremont also provided management services to TRMT. 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 TRMT’s management agreement will be included in the “Termination Fee” under and as defined in our existing management agreement with Tremont. F-20 SEVEN HILLS REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) Our management agreement with Tremont provides for an annual base management fee and an incentive fee, payable in cash, among other terms: • Base Management Fee . We are required to pay Tremont the annual base management fee equal to 1.5 % of our “Equity”, payable in cash quarterly ( 0.375 % per quarter) in arrears. Under our management agreement, “Equity” means (a) the sum of (i) our net asset value as of January 5, 2021, plus (ii) the net proceeds received by us from any future sale or issuance of shares of beneficial interest, plus (iii) our cumulative “Distributable Earnings,” as defined below, for the period commencing on January 5, 2021 to the end of the applicable most recent completed calendar quarter, less (b) (i) any distributions previously paid to holders of our common shares, (ii) any incentive fee previously paid to Tremont and (iii) any amount that we may have paid to repurchase our common shares. All items in the foregoing sentence (other than clause (a)(iii)) are calculated on a daily weighted average basis. As a result of the Merger, as of September 30, 2021, the net book value of TRMT was included as “Equity” under the management agreement. • Incentive Fee. We are required to pay Tremont quarterly an incentive fee in arrears in cash equal to the difference between: • The product of (i) 20 % and (ii) the difference between (A) our Distributable Earnings for the most recent 12 month period (or such lesser number of completed calendar quarters, if applicable), including the calendar quarter (or part thereof) for which the calculation of the incentive fee is being made, and (B) the product of (1) our Equity in the most recent 12 month period (or such lesser number of completed calendar quarters, if applicable), including the calendar quarter (or part thereof) for which the calculation of the incentive fee is being made, and (2) 7 % per year, and • The sum of any incentive fees paid to Tremont with respect to the first three calendar quarters of the most recent 12 month period (or such lesser number of completed calendar quarters, if applicable). No incentive fee shall be payable with respect to any calendar quarter unless Distributable Earnings for the 12 most recently completed calendar quarters (or such lesser number of completed calendar quarters, if applicable) in the aggregate is greater than zero. Pursuant to the terms of our management agreement, no management incentive fees were payable until after the quarter ended March 31, 2021 and, thereafter, any management incentive fees are subject to Tremont earning those fees in accordance with the management agreement. For purposes of the calculation of base management fees and incentive fees payable to Tremont under our management agreement, “Distributable Earnings” is defined as net income (or loss) attributable to our common shareholders, computed in accordance with GAAP, including realized losses not otherwise included in GAAP net income (loss), and excluding: (a) the incentive fees earned by Tremont; (b) depreciation and amortization (if any); (c) non-cash equity compensation expense (if any); (d) unrealized gains, losses and other similar non-cash items that are included in net income for the period of the calculation (regardless of whether such items are included in or deducted from net income or in other comprehensive income or loss under GAAP); and (e) one-time events pursuant to changes in GAAP and certain material non-cash income or expense items, in each case after discussion between Tremont and our Independent Trustees and approved by a majority of our Independent Trustees. Distributable Earnings are reduced for realized losses on loan investments when amounts are deemed uncollectable. Pursuant to the terms of our management agreement, the exclusion of depreciation and amortization from the calculation of Distributable Earnings shall only apply with respect to real property we own. Our shares of beneficial interest that are entitled to a specific periodic distribution or have other debt characteristics will not be included in “Equity” for the purpose of calculating incentive fees payable to Tremont. Instead, the aggregate distribution amount that accrues to such shares during the calendar quarter of such calculation will be subtracted from Distributable Earnings for purposes of calculating incentive fees, unless such distribution is otherwise already excluded from Distributable Earnings. Equity and Distributable Earnings as defined in our management agreement are non-GAAP financial measures and may be different from our shareholders’ equity and our net income calculated according to GAAP. We recognized base management fees of $ 4,260 and $ 3,221 for the years ended December 31, 2022 and 2021. No incentive fee was earned for the year ended December 31, 2022 or 2021. F-21 SEVEN HILLS REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) Term. The initial term of our management agreement ends on December 31, 2023, and the agreement will automatically renew for successive one year terms beginning January 1, 2024, and each January 1 thereafter, unless it is sooner terminated as detailed below. Termination Rights. We have the right to terminate our management agreement with Tremont upon written notice delivered no later than 180 days prior to a renewal date by the affirmative vote of at least two-thirds (2/3) of our Independent Trustees based upon a determination that: (a) Tremont’s performance is unsatisfactory and materially detrimental to us or (b) the base management fee and incentive fee, taken as a whole, payable to Tremont under our management agreement are not fair to us (provided that, in the instance of (b), Tremont will be afforded the opportunity to renegotiate the base management fee and incentive fee prior to termination). Our management agreement may be terminated by Tremont before each annual renewal upon written notice delivered to our Board of Trustees no later than 180 days prior to an annual renewal date. We may also terminate our management agreement at any time without the payment of any termination fee, with at least 30 days’ prior written notice from us upon the occurrence of a “cause event,” as defined in the management agreement. Tremont may terminate our management agreement in certain other circumstances, including if we become required to register as an investment company under the 1940 Act for our uncured “material breach,” as defined in our management agreement, we materially reduce Tremont’s duties and responsibilities or scope of its authority under our management agreement or we cease or take steps to cease to conduct the business of originating or investing in CRE loans. Termination Fee. In the event our management agreement is terminated by us without a cause event or by Tremont for a material breach, we will be required to pay Tremont a termination fee equal to: (a) three times the sum of (i) the average annual base management fee and (ii) the average annual incentive fee, in each case paid or payable to Tremont during the 24 month period immediately preceding the most recently completed calendar quarter prior to the date of termination or, if such termination occurs within 24 months of its initial commencement, the base management fee and the incentive fee will be annualized for such two year period based on such fees earned by Tremont from January 5, 2021, through the most recently completed calendar quarter prior to the termination date, plus (b) $ 1,600 . No termination fee will be payable if our management agreement is terminated by us for a cause event or by Tremont without our material breach. In addition, as described above, in connection with the Merger and the termination of TRMT’s management agreement with Tremont, the initial organizational costs related to TRMT’s formation and the costs of its initial public offering and the concurrent private placement that Tremont had paid pursuant to that management agreement of $ 6,680 will be included in the “Termination Fee” under and as defined in our management agreement with Tremont. Expense Reimbursement. Tremont, and not us, is responsible for the costs of its employees who provide services to us, including the cost of Tremont’s personnel who originate our loans, 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. Generally, it is the practice of Tremont and RMR to treat individuals who spend 50 % or more of their business time providing services to Tremont as employees of Tremont. We are required to pay or to reimburse Tremont and its affiliates for all other costs and expenses of our operations, including but not limited to, the cost of rent, utilities, office furniture, equipment, machinery and other overhead type expenses, the costs of legal, accounting, auditing, tax planning and tax return preparation, consulting services, diligence costs related to our investments, investor relations expenses and other professional services, and other costs and expenses not specifically required under our management agreement to be borne by Tremont. Some of these overhead, professional and other services are provided by RMR pursuant to a shared services agreement between Tremont and RMR. We reimburse Tremont for shared services costs Tremont pays to RMR and its affiliates, and these reimbursements include an allocation of the cost of applicable personnel employed by RMR and our share of RMR’s costs of providing our internal audit function, with such shared services costs being subject to approval by a majority of our Independent Trustees at least annually. We incurred shared services costs of $ 2,232 and $ 1,565 for the years ended December 31, 2022 and 2021, respectively, payable to Tremont as reimbursement for shared services costs it paid to RMR. We include these amounts in reimbursement of shared services expenses in our consolidated statements of operations. Business Opportunities. Under our management agreement, we and Tremont have agreed that for so long as Tremont is managing us, neither Tremont nor any of its affiliates, including RMR, will sponsor or manage any other publicly traded REIT that invests primarily in first mortgage loans secured by middle market and transitional CRE located in the United States, unless such activity is approved by our Independent Trustees. However, our management agreement does not prohibit Tremont or its affiliates (including RMR) or their respective directors, trustees, officers, employees or agents from competing or providing services to other persons, funds and investment vehicles, private REITs or other entities that may compete with us, including, among other things, with respect to the origination, acquisition, making, arranging or managing of first mortgage loans secured by middle market or transitional CRE or other investments like those we intend to make. F-22 SEVEN HILLS REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) Because Tremont and RMR will not be prohibited from competing with us in all circumstances, and RMR provides management services to other companies, conflicts of interest exist with regard to the allocation of investment opportunities and for the time and attention of Tremont, RMR and their personnel. Our management agreement acknowledges these conflicts of interest and, in that agreement, we agree that Tremont, RMR and their subsidiaries may resolve such conflicts in good faith in their fair and reasonable discretion. In the case of such a conflict, Tremont, RMR and their subsidiaries will endeavor to allocate such investment opportunities in a fair and reasonable manner, taking into account such factors as they deem appropriate. Our management agreement also provides that if Tremont, its affiliates (including RMR) or any of their respective directors, trustees, officers, employees or agents acquires knowledge of a potential business opportunity, we renounce any potential interest or expectation in, or right to be offered or to participate in, such business opportunity to the maximum extent permitted by Maryland law. Liability and Indemnification . Tremont maintains a contractual as opposed to a fiduciary relationship with us. Pursuant to our management agreement, Tremont does not assume any responsibility other than to render the services called for thereunder in good faith and is not responsible for any action of our Board of Trustees in following or declining to follow its advice or recommendations. Under the terms of our management agreement, Tremont and its affiliates, including RMR, and their respective directors, trustees, officers, shareholders, owners, members, managers, employees and personnel will not be liable to us or any of our Trustees, shareholders or subsidiaries, or any of the trustees, directors or shareholders of any of our subsidiaries, for any acts or omissions related to the provision of services to us under our management agreement, except by reason of acts or omissions that have been determined in a final, non-appealable adjudication to have constituted bad faith, fraud, intentional misconduct, gross negligence or reckless disregard of the duties of Tremont under our management agreement. In addition, under the terms of our management agreement, we agree to indemnify, hold harmless and advance expenses to Tremont and its affiliates, including RMR, and their respective directors, trustees, officers, shareholders, owners, members, managers, employees and personnel from and against any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever, including all reasonable attorneys’, accountants’ and experts’ fees and expenses, arising from any acts or omissions related to the provision of services to us or the performance of any matters pursuant to an instruction by our Board of Trustees, except to the extent there is a final, non-appealable adjudication that such acts or omissions constituted bad faith, fraud, intentional misconduct, gross negligence or reckless disregard of the duties of Tremont under our management agreement. Such persons will also not be liable for trade errors that may result from ordinary negligence, including errors in the investment decision making or trade process. Other. In addition to the fees and expense reimbursements payable to Tremont under our management agreement, Tremont and its affiliates may benefit from other fees paid to them in respect of our investments. For example, if we seek to securitize some of our CRE loans, Tremont or its affiliates may act as collateral manager. In any of these or other capacities, Tremont and its affiliates may receive fees for their services if approved by a majority of our Independent Trustees. Note 10. 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 and the president and chief executive officer of RMR Inc., and an officer and employee of RMR. Matthew P. Jordan, our other Managing Trustee, is a director and the president and chief executive officer of Tremont. Mr. Jordan is also an officer of RMR Inc. and an officer and employee of RMR, and our other officers are officers and employees of Tremont and/or RMR. 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 board and as a managing director or managing trustee of those companies and other officers of RMR, including Mr. Jordan and certain of our other officers and officers of Tremont, serve as managing trustees, managing directors or officers of certain of these companies. F-23 SEVEN HILLS REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) Our Manager, Tremont Realty Capital LLC. Tremont provides management services to us pursuant to our management agreement. See Note 9 for further information regarding our management agreement. 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. As of December 31, 2022, Tremont owned 1,708,058 of our common shares, or approximately 11.6 % of our outstanding common shares, and Mr. Portnoy beneficially owned (including through Tremont and ABP Trust) 13.4 % of our outstanding common shares. RMR Inc. and RMR . RMR provides certain shared services to Tremont which are applicable to us, and we reimburse Tremont or pay RMR for the amounts Tremont or RMR pays for those services. See Note 9 for further information regarding this shared services arrangement. TRMT . As described further in Note 4, we and TRMT merged 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 former Chief Financial Officer and Treasurer, also served as chief financial officer and treasurer of TRMT. Joseph L. Morea, one of our Independent Trustees, previously served as an independent trustee of TRMT and Jeffrey P. Somers, one of our Independent Trustees, previously served as an independent trustee of TRMT. Effective upon the Merger, John L. Harrington resigned from our Board of Trustees; he had served as one of our Independent Trustees and as an independent trustee of TRMT. Share Awards to our Officers and Employees of Tremont and RMR . As described further in Note 8, we award shares to our officers and other employees of Tremont and/or RMR annually. Generally, one fifth of these awards vests on the award date and one fifth vests on each of the next four anniversaries of the award dates. These awards to employees of Tremont and RMR are in addition to the share awards to our Managing Trustees, as Trustee compensation, and the fees we paid to Tremont. We purchased common shares awarded to certain of our officers and employees of Tremont and/or RMR in satisfaction of tax withholding obligations in connection with the vesting of awards of our common shares. See Note 8 for further information regarding these purchases. Acceleration of Unvested Shares of a Former Officer. G. Douglas Lanois resigned as our Chief Financial Officer and Treasurer, effective September 30, 2022. Our Compensation Committee approved the acceleration of all 3,648 of the unvested shares owned by Mr. Lanois of us as of his separation date, January 1, 2023. We recognized share based compensation of $ 24 related to the acceleration of these shares during the year ended December 31, 2022. Note 11. Income Taxes We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. 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 consolidated statements of operations. Note 12. 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. F-24 SEVEN HILLS REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) The calculation of basic and diluted earnings per common share is as follows (amounts in thousands, except per share data): Year Ended December 31, 2022 2021 Numerators: Net income $ 27,640 $ 24,650 Income attributable to unvested participating securities ( 193 ) — Net income used in calculating net income per common share $ 27,447 $ 24,650 Denominators: Weighted average common shares outstanding - basic and diluted 14,540 11,304 Net income per common share - basic and diluted $ 1.89 $ 2.18 Note 13. Commitments and Contingencies As of December 31, 2022, we had unfunded loan commitments of $ 49,007 related to our loans held for investment that are not reflected in our consolidated balance sheets. These unfunded loan commitments had a weighted average initial maturity of 1.6 years as of December 31, 2022. See Note 5 for further information related to our loans held for investment. F-25 Table of Contents SEVEN HILLS REALTY TRUST SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE DECEMBER 31, 2022 (dollars in thousands) # Property Type/Location Interest Rate Maturity Date Maximum Maturity Date (1) Payment Terms (2) Prior Liens (3) Principal Carrying Value First Mortgage Loans (4) 1 Multifamily, Olmsted Falls, OH L + 4.00 % 01/28/2024 01/28/2026 I/O — $ 46,083 $ 46,164 2 Office, Dallas, TX L + 3.25 % 08/25/2024 08/25/2026 I/O — 43,450 39,314 3 Industrial, Passaic, NJ S + 3.85 % 09/08/2025 09/08/2027 I/O — 38,440 38,010 4 Retail, Brandywine, MD S + 3.85 % 03/29/2025 03/29/2027 I/O — 42,200 41,906 5 Retail, West Bloomfield, MI L + 3.85 % 12/16/2023 12/16/2024 I/O — 37,453 37,363 6 Multifamily, Starkville, MS S + 4.00 % 03/22/2025 03/22/2027 I/O — 36,787 36,506 7 Industrial, Summerville, SC L + 3.50 % 12/20/2024 12/20/2026 I/O — 35,000 34,769 8 Multifamily, Farmington Hills, MI S + 3.15 % 05/24/2025 05/24/2027 I/O — 28,691 28,746 9 Office, Downers Grove, IL L + 4.25 % 11/25/2023 11/25/2024 I/O — 29,500 29,528 10 Multifamily, Las Vegas, NV S + 3.30 % 06/10/2025 06/10/2027 I/O — 24,223 24,035 11 Office, St. Louis, MO L + 3.25 % 03/20/2023 06/20/2023 I/O — 28,866 28,998 12 Office, Plano, TX L + 4.75 % 07/01/2024 07/01/2026 I/O — 26,152 26,048 13 Office, Carlsbad, CA L + 3.25 % 10/27/2024 10/27/2026 I/O — 23,825 23,672 14 Industrial, Fontana, CA S + 3.75 % 11/18/2024 11/18/2026 I/O — 22,000 21,758 15 Office, Downers Grove, IL L + 4.25 % 12/09/2024 12/09/2026 I/O — 23,530 23,493 16 Office, Dublin, OH S + 3.75 % 02/18/2023 02/18/2023 I/O — 22,507 22,728 17 Office, Bellevue, WA L + 3.85 % 11/05/2024 11/05/2026 I/O — 20,000 19,868 18 Multifamily, Portland, OR L + 3.57 % 07/09/2024 07/09/2026 I/O — 19,687 19,611 19 Multifamily, Ames, IA L + 3.80 % 11/15/2024 11/15/2026 I/O — 17,820 17,704 20 Office / Industrial, Aurora, IL L + 4.35 % 12/18/2023 12/18/2024 I/O — 16,429 16,485 21 Office, Yardley, PA L + 4.58 % 12/19/2023 12/19/2024 I/O — 15,583 15,643 22 Retail, Sandy Springs, GA L + 3.75 % 09/23/2024 09/23/2026 I/O — 15,017 14,918 23 Retail, Delray Beach, FL S + 4.25 % 03/18/2024 03/18/2026 I/O — 15,149 15,061 24 Office, Westminster, CO L + 3.75 % 05/25/2024 05/25/2026 I/O — 14,634 13,428 25 Multifamily, Portland, OR L + 3.57 % 07/30/2024 07/30/2026 I/O — 13,400 12,183 26 Multifamily, Seattle, WA L + 3.55 % 08/16/2024 08/16/2026 I/O — 12,354 12,282 27 Industrial, Allentown, PA S + 3.50 % 01/24/2024 01/24/2025 I/O — 9,775 9,708 Total $ 678,555 $ 669,929 (1) Maximum maturity assumes all extension option have been exercised, which options are subject to the borrower meeting certain conditions. (2) I/O = interest only until final maturity. (3) Represents only third party prior liens. (4) As of December 31, 2022, none of our borrowers were delinquent in payment. S-1 Table of Contents SEVEN HILLS REALTY TRUST SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE (CONTINUED) DECEMBER 31, 2022 (dollars in thousands) Reconciliation of Mortgage Loans on Real Estate: Carrying Value Balance as of January 1, 2021 $ 91,879 Additions during the year: Originations 347,366 Loans acquired in the Merger 205,593 Additional funding 4,710 Purchase discount accretion 18,932 Net amortization of deferred fees 1,835 Deductions during the year: Repayment of mortgage loans ( 59,197 ) Deferred fees ( 3,895 ) Purchase discount on loans acquired in the Merger ( 36,443 ) Balance as of December 31, 2021 570,780 Additions during the year: Originations 203,244 Additional funding 17,310 Purchase discount accretion 10,689 Net amortization of deferred fees 3,780 Deductions during the year: Repayments ( 133,568 ) Deferred fees ( 2,306 ) Balance as of December 31, 2022 $ 669,929 S-1 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SEVEN HILLS REALTY TRUST By: /s/ Thomas J. Lorenzini Thomas J. Lorenzini President Dated: February 13, 2023 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Thomas J. Lorenzini President February 13, 2023 Thomas J. Lorenzini /s/ Tiffany R. Sy Chief Financial Officer and Treasurer February 13, 2023 Tiffany R. Sy (principal financial and accounting officer) /s/ Barbara D. Gilmore Independent Trustee February 13, 2023 Barbara D. Gilmore /s/ Phyllis M. Hollis Independent Trustee February 13, 2023 Phyllis M. Hollis /s/ Matthew P. Jordan Managing Trustee February 13, 2023 Matthew P. Jordan /s/ William A. Lamkin Independent Trustee February 13, 2023 William A. Lamkin /s/ Joseph L. Morea Independent Trustee February 13, 2023 Joseph L. Morea /s/ Adam D. Portnoy Managing Trustee February 13, 2023 Adam D. Portnoy /s/ Jeffrey P. Somers Independent Trustee February 13, 2023 Jeffrey P. Somers