What changed in this filing

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Item 1. Financial Statements

2023-04-25 compared with 2022-10-26 · 177 added, 250 removed, 236 unchanged (64% of the section changed)

3 unchanged sentences

(dollars in thousands, except per share data)

September 30, December 31,

March 31, December 31,

Cash and cash equivalents $ 84,300 $ 71,057

Restricted cash 8 10

Loans held for investment 622,070 669,929

Allowance for credit losses ( 4,135 ) —

Loans held for investment, net 617,935 669,929

Accrued interest receivable 3,346 3,354

Prepaid expenses and other assets 1,176 2,497

1 unchanged sentence

LIABILITIES AND SHAREHOLDERS' EQUITY

Accounts payable, accrued liabilities and deposits $ 1,508 $ 1,561

Accounts payable, accrued liabilities and other liabilities $ 3,262 $ 1,903

Secured financing facilities, net 433,385 471,521

14 unchanged sentences

(amounts in thousands, except per share data)

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Three Months Ended March 31,

INCOME FROM INVESTMENTS:

Interest income from investments $ 11,650 $ 4,510 $ 30,098 $ 9,566

Interest and related income $ 15,856 $ 9,579

Purchase discount accretion 1,185 5,935

5 unchanged sentences

Reimbursement of shared services expenses 643 634

Reversal of credit losses ( 987 ) —

Other transaction related costs — 37

14 unchanged sentences

Balance at December 31, 2022 14,709 $ 15 $ 238,505 $ 52,290 $ ( 19,231 ) $ 271,579

Share grants — — 82 — — 82

Net income — — — 11,126 — 11,126

Distributions — — — — ( 3,649 ) ( 3,649 )

Balance at March 31, 2022 14,597 15 237,706 35,776 ( 8,244 ) 265,253

Share grants 42 — 548 — — 548

Share forfeitures ( 1 ) — — — — —

Net income — — — 4,578 — 4,578

Distributions — — — — ( 3,649 ) ( 3,649 )

Balance at June 30, 2022 14,638 15 238,254 40,354 ( 11,893 ) 266,730

Cumulative-effect adjustment upon adoption of ASU No.

2016-13 (Note 2) — — — ( 6,595 ) — ( 6,595 )

Share grants — — 121 — — 121

Share repurchases ( 1 ) — ( 13 ) — — ( 13 )

Share forfeitures ( 1 ) — ( 1 ) — — ( 1 )

Net income — — — 7,803 — 7,803

Distributions — — — — ( 5,147 ) ( 5,147 )

Balance at September 30, 2022 14,714 $ 15 $ 238,417 $ 45,530 $ ( 15,553 ) $ 268,409

Net assets at December 31, 2020 10,202 $ 10 $ 192,884 $ — $ — $ 192,894

Net income — — — 350 — 350

Balance at March 31, 2023 14,707 $ 15 $ 238,612 $ 53,498 $ ( 24,378 ) $ 267,747

Balance at December 31, 2021 14,597 $ 15 $ 237,624 $ 24,650 $ ( 4,595 ) $ 257,694

Share grants — — 82 — — 82

1 unchanged sentence

Distributions — — — — ( 3,649 ) ( 3,649 )

Balance at June 30, 2021 10,217 10 193,065 1,510 ( 1,530 ) 193,055

Issuance of shares 4,285 5 44,170 — — 44,175

Net income — — — 2,484 — 2,484

Distributions — — — — ( 3,065 ) ( 3,065 )

Balance at September 30, 2021 14,502 $ 15 $ 237,235 $ 3,994 $ ( 4,595 ) $ 236,649

Balance at March 31, 2022 14,597 $ 15 $ 237,706 $ 35,776 $ ( 8,244 ) $ 265,253

See accompanying notes.

2 unchanged sentences

(dollars in thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

CASH FLOWS FROM OPERATING ACTIVITIES:

2 unchanged sentences

Accretion of purchase discount ( 1,185 ) ( 5,935 )

Share based compensation 889 181

Amortization of deferred financing costs 784 87

Reversal of credit losses ( 987 ) —

Amortization of loan origination and exit fees ( 1,004 ) ( 1,298 )

Amortization of deferred financing costs 307 209

Share based compensation 120 82

Changes in operating assets and liabilities:

Accrued interest receivable 8 ( 133 )

Prepaid expenses and other assets 1,101 ( 387 )

Accounts payable, accrued liabilities and deposits ( 53 ) ( 1,814 )

Accounts payable, accrued liabilities and other liabilities ( 113 ) ( 594 )

Due to related persons 527 15

4 unchanged sentences

Repayment of loans held for investment 51,918 48,643

Payment of merger related costs — ( 6,160 )

Cash assumed in merger — 11,070

Net cash used in investing activities ( 111,870 ) ( 167,104 )

Net cash provided by (used in) investing activities 50,267 ( 44,612 )

CASH FLOWS FROM FINANCING ACTIVITIES:

4 unchanged sentences

Distributions ( 5,147 ) ( 3,649 )

Net cash provided by financing activities 152,049 82,090

Net cash (used in) provided by financing activities ( 43,603 ) 24,194

Increase (decrease) in cash, cash equivalents and restricted cash 13,241 ( 17,333 )

1 unchanged sentence

Cash, cash equivalents and restricted cash at end of period $ 84,308 $ 8,962

SEVEN HILLS REALTY TRUST

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(dollars in thousands)

Nine Months Ended September 30,

SUPPLEMENTAL DISCLOSURES:

1 unchanged sentence

Income taxes paid $ 3 $ 47

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 condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows:

As of September 30,

As of March 31,

Cash and cash equivalents $ 84,300 $ 8,953

16 unchanged sentences

Actual results could differ from those estimates.

Significant estimates in the accompanying condensed consolidated financial statements include the fair value of financial instruments.

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update, or ASU, No.

2016-13, Financial Instruments - Credit Losses (Topic 326) :

Measurement of Credit Losses on Financial Instruments , which requires that entities use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses.

The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

As a smaller reporting company, we will adopt ASU No.

2016-13 on January 1, 2023.

The amount of the allowance for credit losses established as a result of the adoption will be presented as a cumulative-effect adjustment to reduce equity as of the date of adoption.

While we are currently evaluating the impact ASU No.

2016-13 will have on our condensed consolidated financial statements, we expect that the adoption will result in an increased amount of provisions for potential loan losses and for such provisions to be recognized earlier in the credit cycle.

We currently do not have any provisions for loan losses recorded in our condensed consolidated financial statements.

In March 2022, the FASB issued ASU No.

Significant estimates in the accompanying condensed consolidated financial statements include the allowance for credit losses and the fair value of financial instruments.

Certain prior year amounts have been reclassified to conform to current year presentation.

Recently Adopted Accounting Pronouncements

On January 1, 2023, we adopted Accounting Standards Update, or ASU, No.

2016-13, 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.

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.

2022-02 also amended the guidance on vintage disclosures to require disclosure of current period gross write-offs by year of origination.

We will adopt ASU No.

2022-02 prospectively on January 1, 2023, concurrently with the adoption of ASU No.

As of September 30, 2022, we have not recognized any troubled debt restructurings and do not expect the adoption of ASU No.

2022-02 to have a material impact on our condensed consolidated financial statements.

Loans Held for Investment

We originate first mortgage loans secured by middle market and transitional commercial real estate, or CRE, which are generally to be held as long term investments.

We funded our loan portfolio using cash on hand and advancements under our Secured Financing Facilities, as defined in Note 4.

Additionally, we acquired the loan portfolio of Tremont Mortgage Trust, or TRMT, in the merger of TRMT with and into us on September 30, 2021, or the Merger.

See Note 4 for further information regarding our secured financing agreements.

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.

2016-13 is applicable to financial assets measured at amortized cost and off-balance sheet credit exposures, such as unfunded loan commitments.

The allowance for credit losses required under ASU No.

2016-13 is a valuation account that is deducted from the related loans’ amortized cost basis on our condensed consolidated balance sheets.

Our loans typically include commitments to fund incremental proceeds to borrowers over the life of the loan;

these future funding commitments are also subject to the CECL model.

The allowance for credit losses related to unfunded loan commitments is included in accounts payable, accrued liabilities and other liabilities on our condensed consolidated balance sheets.

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 commercial real estate, or CRE, loans since 1998.

We estimate the allowance for credit losses for our loan portfolio, including unfunded loan commitments, at the individual loan level.

Significant inputs to the model include certain loan specific data, such as loan to value, or LTV, property type, geographic location, occupancy, vintage year, remaining loan term, net operating income, expected timing and amounts of future loan fundings, and macroeconomic forecast assumptions, including the performance of CRE assets, unemployment rates, interest rates and other factors.

We utilize the model to estimate credit losses over a reasonable and supportable economic forecast period, followed by a straight-line reversion period to average historical losses.

Average historical losses are established using a population of third party historical loss data that approximates our portfolio as of the measurement date.

We evaluate the estimated allowance for each of our loans individually and we consider our internal loan risk rating as the primary credit quality indicator underlying our assessment.

If a loan is determined to be collateral dependent (because the repayment of the loan is expected to be provided substantially through the operation or sale of the underlying collateral property) and the borrower is experiencing financial difficulties, but foreclosure is not probable, we may elect to apply a practical expedient to determine the loan's allowance for credit losses by comparing the collateral's fair value to the amortized cost basis of the loan.

For collateral-dependent loans for which foreclosure is probable, the related allowance for credit losses is determined using the fair value of the collateral compared to the loan's amortized cost.

SEVEN HILLS REALTY TRUST

1 unchanged sentence

(dollars in thousands, except per share data)

The table below provides overall statistics for our loan portfolio as of September 30, 2022 and December 31, 2021:

As of September 30, 2022 As of December 31, 2021

Upon adoption of ASU No.

2016-13 using the modified retrospective transition method and, based on our loan portfolio, the then current economic environment and expectations for future conditions, we recorded a cumulative-effect adjustment reducing our cumulative net income on our condensed consolidated balance sheets by $ 6,595 , establishing an allowance for credit losses of $ 4,893 with respect to our then outstanding loans held for investment and increasing accounts payable, accrued liabilities and other liabilities by $ 1,702 with respect to our then unfunded loan commitments.

No reserve for loan losses or allowance for credit losses was recognized within our consolidated financial statements prior to our adoption of ASU No.

Concurrent with our adoption of ASU No.

2016-13, on January 1, 2023, we adopted 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 adopted ASU No.

Instead, an entity must determine whether a modification results in a new loan or continuation of an existing loan under Accounting Standards Codification, or ASC, 310, Receivables (Topic 310) , or ASC 310 .

If a borrower is experiencing financial difficulty, enhanced disclosures are required.

2022-02 also requires disclosure of current period gross write-offs by year of origination.

The adoption of ASU No.

2022-02 using the prospective transition method did not have a material impact on our condensed consolidated financial statements.

See Note 2 to our Consolidated Financial Statements included in Part IV, Item 15 of our 2022 Annual Report for further information regarding our measurement of reserves for loan losses prior to our adoption of ASU No.

2016-13 and our internal loan risk rating policy.

Loans Held for Investment, net

We originate first mortgage loans secured by middle market and transitional CRE, which are generally to be held as long term investments.

We fund our loan portfolio using cash on hand and advancements under our Secured Financing Facilities, as defined in Note 4.

See Note 4 for further information regarding our secured financing agreements.

The table below provides overall statistics for our loan portfolio as of March 31, 2023 and December 31, 2022:

As of March 31, 2023 As of December 31, 2022

Number of loans 25 27

10 unchanged sentences

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.

(1) Unfunded loan commitments are primarily used to finance property improvements and leasing capital and are generally funded over the term of the loan.

(2) All in yield represents the yield on a loan, including amortization of deferred fees over the initial term of the loan and excluding any purchase discount accretion.

(3) Maximum maturity assumes all borrower loan extension options have been exercised, which options are subject to the borrower meeting certain conditions.

The tables below represent our loan activities during the three months ended September 30, 2022 and 2021:

Principal Balance Deferred Fees and Other Items Carrying Value

Balance at June 30, 2022 $ 682,285 $ ( 12,100 ) $ 670,185

Additional funding 4,267 — 4,267

Originations 38,440 ( 510 ) 37,930

Repayments ( 19,532 ) ( 115 ) ( 19,647 )

Net amortization of deferred fees — 823 823

Net purchase discount accretion — 1,596 1,596

Balance at September 30, 2022 $ 705,460 $ ( 10,306 ) $ 695,154

Principal Balance Deferred Fees and Other Items Carrying Value

Balance at June 30, 2021 $ 212,515 $ ( 1,773 ) $ 210,742

Additional funding 1,710 — 1,710

Originations 71,534 ( 800 ) 70,734

Repayments ( 18,433 ) — ( 18,433 )

Net amortization of deferred fees — 571 571

Loans acquired in Merger (1)

204,692 901 205,593

Purchase discount on loans acquired in Merger — ( 36,443 ) ( 36,443 )

Balance at September 30, 2021 $ 472,018 $ ( 37,544 ) $ 434,474

(1) Deferred fees and other items for loans acquired in the Merger represent exit fees contractually due upon repayment of loans acquired in the Merger.

SEVEN HILLS REALTY TRUST

1 unchanged sentence

(dollars in thousands, except per share data)

The tables below represent our loan activities during the nine months ended September 30, 2022 and 2021:

Principal Balance Deferred Fees and Other Items Carrying Value

The tables below represent our loan activities during the three months ended March 31, 2023 and 2022:

Principal Balance Deferred Fees and Other Items Amortized Cost

Balance at December 31, 2022 $ 678,555 $ ( 8,626 ) $ 669,929

Additional funding 1,884 ( 14 ) 1,870

Originations 181,244 ( 1,979 ) 179,265

Repayments ( 51,743 ) ( 175 ) ( 51,918 )

Net amortization of deferred fees — 1,004 1,004

Net purchase discount accretion — 9,167 9,167

Balance at September 30, 2022 $ 705,460 $ ( 10,306 ) $ 695,154

Principal Balance Deferred Fees and Other Items Carrying Value

Purchase discount accretion — 1,185 1,185

Balance at March 31, 2023 $ 628,696 $ ( 6,626 ) $ 622,070

Principal Balance Deferred Fees and Other Items Amortized Cost

Balance at December 31, 2021 $ 590,590 $ ( 19,810 ) $ 570,780

3 unchanged sentences

Net amortization of deferred fees — 902 902

Loans acquired in Merger (1)

204,692 901 205,593

Purchase discount on loans acquired in Merger — ( 36,443 ) ( 36,443 )

Balance at September 30, 2021 $ 472,018 $ ( 37,544 ) $ 434,474

(1) Deferred fees and other items for loans acquired in the Merger represent exit fees contractually due upon repayment of loans acquired in the Merger.

The tables below detail the property type and geographic location of the properties securing the loans in our portfolio as of September 30, 2022 and December 31, 2021:

September 30, 2022 December 31, 2021

Purchase discount accretion — 5,935 5,935

Balance at March 31, 2022 $ 636,831 $ ( 14,121 ) $ 622,710

The tables below detail the property type and geographic location of the properties securing the loans in our portfolio as of March 31, 2023 and December 31, 2022:

March 31, 2023 December 31, 2022

Property Type Number of Loans

Carrying Value

Amortized Cost

Percentage of Value Number of Loans

Carrying Value

Amortized Cost

Percentage of Value

1 unchanged sentence

Multifamily 8 198,390 32 % 8 197,229 29 %

Lab — — — % 1 13,398 2 %

Retail 4 110,037 18 % 4 109,248 16 %

2 unchanged sentences

25 $ 622,070 100 % 27 $ 669,929 100 %

(1) Two loan investments secured by mixed use properties consisting of office space and an industrial warehouse in Aurora, IL and Colorado Springs, CO are classified as office for the purpose of counting the number of loans in our portfolio because the majority of the square footage of each of the properties consists of office space.

The carrying value of these loan investments is reflected in office and industrial based on the fair value of the buildings at the time of origination relative to the total fair value of the properties.

September 30, 2022 December 31, 2021

(1) As of December 31, 2022, one loan investment secured by a mixed use property consisting of office space and an industrial warehouse in Aurora, IL was classified as office for the purpose of counting the number of loans in our portfolio because the majority of the square footage of the property consisted of office space.

The amortized cost of this loan investment was reflected in office and industrial based on the fair value of the building at the time of origination relative to the total fair value of the property.

During the three months ended March 31, 2023, our loan investment in Aurora, IL was repaid.

March 31, 2023 December 31, 2022

Geographic Location Number of Loans

Carrying Value

Percentage of Value Number of Loans Carrying Value Percentage of Value

East 4 $ 104,749 15 % 3 $ 55,132 10 %

South 6 164,920 24 % 7 153,495 27 %

West 9 175,380 25 % 8 145,453 25 %

Amortized Cost

Percentage of Value Number of Loans Amortized Cost Percentage of Value

Midwest 8 $ 235,289 38 % 9 $ 251,208 37 %

West 8 148,085 24 % 8 146,837 22 %

South 5 133,243 21 % 6 166,616 25 %

East 4 105,453 17 % 4 105,268 16 %

25 $ 622,070 100 % 27 $ 669,929 100 %

2 unchanged sentences

(dollars in thousands, except per share data)

Loan Credit Quality

We evaluate each of our loans for impairment at least quarterly by assessing a variety of risk factors in relation to each loan and assigning a risk rating to each loan based on those factors.

Credit Quality Information

We evaluate the credit quality of each of our loans at least quarterly by assessing a variety of risk factors in relation to each loan and assigning a risk rating to each loan based on those factors.

The higher the number, the greater the risk level.

See our 2022 Annual Report for more information regarding our loan risk ratings.

The table below allocates the carrying value of our loan portfolio at September 30, 2022 and December 31, 2021 based on our internal risk rating policy:

September 30, 2022 December 31, 2021

Risk Rating Number of Loans Carrying Value Number of Loans Carrying Value

As of March 31, 2023 and December 31, 2022, the amortized cost of our loan portfolio within each internal risk rating by year of origination was as follows:

March 31, 2023

Risk Rating Number of Loans Percentage of Portfolio 2023 2022 2021 Prior Total

1 1 2 % $ — $ — $ — $ 9,496 $ 9,496

3 unchanged sentences

5 — — % — — — — —

The weighted average risk rating of our loans by carrying value was 2.9 as of September 30, 2022 and December 31, 2021, respectively.

Certain of our borrowers' business operations or tenants, particularly 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 and have continued.

Current inflationary pressures, rising interest rates, supply chain issues and the possibility that the U.S.

economy is now in, or may soon enter, a 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 September 30, 2022, we had four loans representing approximately 15 % of the carrying value of our loan portfolio with a loan risk rating of “4” or “higher risk".

25 100 % $ — $ 207,168 $ 308,164 $ 106,738 $ 622,070

December 31, 2022

Risk Rating Number of Loans Percentage of Portfolio 2022 2021 2020 Prior Total

1 1 1 % $ — $ — $ 9,708 $ — $ 9,708

2 6 20 % — 65,902 68,740 — 134,642

3 17 65 % 169,516 235,602 — 28,998 434,116

4 3 14 % 36,506 39,314 — 15,643 91,463

5 — — % — — — — —

27 100 % $ 206,022 $ 340,818 $ 78,448 $ 44,641 $ 669,929

The weighted average risk rating of our loans by carrying value was 2.9 as of March 31, 2023 and December 31, 2022, respectively.

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 have taken or 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.

The table below represents the changes to the allowance for credit losses during the three months ended March 31, 2023:

Loans Held For Investment, net Unfunded Loan Commitments Total

Balance at December 31, 2022 $ — $ — $ —

Cumulative-effect adjustment upon adoption of ASU No.

2016-13 4,893 1,702 6,595

Reversal of credit losses ( 758 ) ( 229 ) ( 987 )

Balance At March 31, 2023 $ 4,135 $ 1,473 $ 5,608

We may enter into loan modifications that include, among other changes, extensions of maturity dates, repurposing or required replenishment of reserves, increases or decreases in loan commitments and required pay downs of principal amounts outstanding.

Modifications that represent concessions to a borrower that is experiencing financial difficulties are classified as troubled debt restructurings and considered impaired.

In February 2022, we amended the agreement governing our loan secured by an office property located in Yardley, PA.

As part of this amendment, the loan commitment was increased by $ 1,600 , or the Additional Advance, and may be used to finance debt service costs and operating costs of the borrower and the initial maturity date was extended by one year to December 19, 2023.

For purposes of calculating interest due to us for this loan, the Additional Advance is deemed to be outstanding as of the date of the amendment, regardless of whether such amounts have been advanced, at the London Interbank Offered Rate, or LIBOR, or a replacement base rate determined by us if LIBOR is no longer available, plus 12.0 %.

As of September 30, 2022, this loan had a risk rating of 4 and an outstanding principal balance of $ 15,251 .

The modification of this loan resulting from the amendment was determined not to be a troubled debt restructuring.

However, we accounted for this modification as an extinguishment in accordance with ASC Topic 310, Receivables , because the changes to the terms were determined to be more than minor.

As such, we recognized the related unaccreted purchase discount of $ 1,748 as interest income from investments in our condensed consolidated statements of income during the first quarter of 2022.

There were no other material modifications to our loan portfolio during the nine months ended September 30, 2022.

We did not have any impaired loans or nonaccrual loans as of September 30, 2022 or December 31, 2021.

As of September 30, 2022 and October 24, 2022, all of our borrowers had paid all of their debt service obligations owed and due to us and none of the loans included in our investment portfolio were in default.

In October 2022, we received $ 22,483 of loan repayment proceeds for an unlevered loan investment secured by a retail property located in Los Angeles, CA.

Loan modifications are evaluated to determine whether a modification results in a new loan or a continuation of an existing loan under ASC 310.

There were no such modifications to our loan portfolio for borrowers experiencing financial difficulties during the three months ended March 31, 2023.

SEVEN HILLS REALTY TRUST

1 unchanged sentence

(dollars in thousands, except per share data)

We estimate credit losses over a reasonable and supportable forecast period of 12 months, followed by a straight-line reversion period of 12 months back to average historical losses.

The decrease in the allowance for credit losses during the three months ended March 31, 2023, compared to the January 1, 2023 cumulative-effect adjustment upon adoption of ASU No.

2016-13, is primarily attributable to favorable changes in the macroeconomic outlook, most notably in near-term CRE pricing forecasts, and loan repayments.

We have elected to exclude accrued interest receivable from amortized cost and not to measure an allowance for credit losses on accrued interest receivable.

Accrued interest receivables are generally written off when payments are 120 days past due.

Such amounts are reversed against interest income and no further interest will be recorded until it is collected.

We did not have any past due loans or nonaccrual loans as of March 31, 2023 or December 31, 2022.

As of March 31, 2023 and April 20, 2023, all of our borrowers had paid all of their debt service obligations owed and due to us.

See our 2022 Annual Report for more information regarding our nonaccrual policy.

Secured Financing Agreements

Our secured financing agreements at September 30, 2022 consisted of agreements that govern:

Our secured financing agreements at March 31, 2023 consisted of agreements that govern:

our master repurchase facility with Wells Fargo, National Association, or Wells Fargo, or the Wells Fargo Master Repurchase Facility;

4 unchanged sentences

See our 2022 Annual Report for more information regarding our Secured Financing Facilities.

Wells Fargo Master Repurchase Facility

On March 11, 2022, one of our wholly owned subsidiaries entered into a master repurchase and securities agreement with Wells Fargo, or the Wells Fargo Master Repurchase Agreement, for the Wells Fargo Master Repurchase Facility.

The Wells Fargo Master Repurchase Facility provides up to $ 125,000 in advances, with an option to increase the maximum facility amount to $ 250,000 , subject to certain terms and conditions.

We expect to use the Wells Fargo Master Repurchase Facility to finance the acquisition or origination of floating rate, commercial mortgage loans.

We refer to our loan investments that secure advances we receive under any of our Secured Financing Facilities as the purchased assets.

The expiration date of the Wells Fargo Master Repurchase Agreement is March 11, 2025, unless extended or earlier terminated in accordance with the terms of the Wells Fargo Master Repurchase Agreement.

Under the Wells Fargo Master Repurchase Facility, the initial purchase price paid by Wells Fargo for each purchased asset is up to 75 % or 80 %, depending on the property type of the purchased asset’s real estate collateral, of the lesser of the market value of the purchased asset or the unpaid principal balance of such purchased asset, and subject to Wells Fargo’s approval.

Upon the repurchase of a purchased asset, we are required to pay Wells Fargo the outstanding purchase price of the purchased asset, accrued interest and all accrued and unpaid expenses of Wells Fargo relating to such purchased asset.

Interest on advancements under the Wells Fargo Master Repurchase Facility is calculated at the Secured Overnight Financing Rate, or SOFR, plus a premium.

In connection with our Wells Fargo Master Repurchase Agreement, we entered into a guaranty, or the Wells Fargo Guaranty, which requires us to guarantee 25 % of the aggregate repurchase price, and 100 % of losses in the event of certain bad acts as well as any costs and expenses of Wells Fargo related to our Wells Fargo Master Repurchase Agreement.

The Wells Fargo Guaranty also contains financial covenants, which require us to maintain a minimum tangible net worth, a minimum liquidity and a minimum interest coverage ratio and to satisfy a total indebtedness to stockholders’ equity ratio.

Our Wells Fargo Master Repurchase Facility also contains margin maintenance provisions that provide Wells Fargo with the right, in certain circumstances related to a credit event, as defined in the Wells Fargo Master Repurchase Agreement, to redetermine the value of purchased assets.

Where a decline in the value of such purchased assets has resulted in a margin deficit, Wells Fargo may require us to eliminate any margin deficit through a combination of purchased asset repurchases and cash transfers to Wells Fargo subject to Wells Fargo’s approval.

In addition, our Wells Fargo Master Repurchase Agreement provides for acceleration of the date of repurchase of the purchased assets by us and Wells Fargo’s liquidation of the purchased assets upon the occurrence and continuation of certain events of default, including a change of control of us, which includes Tremont Realty Capital LLC, or Tremont, ceasing to act as our sole manager or to be a wholly owned subsidiary of The RMR Group LLC, or RMR.

Citibank Master Repurchase Facility

On March 15, 2022, we amended and restated our master repurchase agreement with Citibank, or the Citibank Master Repurchase Agreement.

The amended and restated Citibank Master Repurchase Agreement increased the maximum amount of available advancements under our Citibank Master Repurchase Facility to $ 215,000 , extended the stated maturity date to March 15, 2025, and made certain other changes to the agreement and related fee letter, including replacing LIBOR with SOFR for interest rate calculations on advancements under the Citibank Master Repurchase Facility and modifying certain pricing terms.

SEVEN HILLS REALTY TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

On April 25, 2022, we amended our facility loan program agreement and the security agreement with BMO, or the BMO Loan Program Agreement, to increase the maximum principal amount available under our BMO Facility, from $ 100,000 to $ 150,000 .

UBS Master Repurchase Facility

On May 4, 2022, we amended and restated our master repurchase agreement with UBS, or the UBS Master Repurchase Agreement.

The amended and restated UBS Master Repurchase Agreement, which was effective March 9, 2022, made certain changes to the agreement and related fee letter, including replacing LIBOR with SOFR for interest rate calculations on advancements under the UBS Master Repurchase Facility and modifying certain pricing terms.

As of September 30, 2022, we were in compliance with the covenants and other terms of the agreements that govern our Secured Financing Facilities.

As of September 30, 2022 and October 24, 2022, we had a $ 505,831 aggregate outstanding principal balance under our Secured Financing Facilities.

As of September 30, 2022, our outstanding borrowings under our Secured Financing Facilities had the following remaining maturities:

Year Principal Payments on

Secured Financing Facilities

2022 $ 21,316

2026 and thereafter —

The table below summarizes our Secured Financing Facilities as of September 30, 2022 and December 31, 2021:

As of March 31, 2023, we were in compliance with the covenants and other terms of the agreements that govern our Secured Financing Facilities.

As of March 31, 2023 and April 20, 2023, we had a $ 435,490 and $ 426,340 , respectively, aggregate outstanding principal balance under our Secured Financing Facilities.

The table below summarizes our Secured Financing Facilities as of March 31, 2023 and December 31, 2022:

Debt Obligation

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Principal Balance

September 30, 2022:

March 31, 2023:

Citibank Master Repurchase Facility $ 215,000 $ 150,101 $ 149,845 6.83 % 0.9 $ 205,380

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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

(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.

(1) The weighted average coupon rate is determined using the Secured Overnight Financing Rate, or SOFR, plus a spread ranging from 1.83 % 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 September 30, 2022, our Citibank Master Repurchase Facility, UBS Master Repurchase Facility and Wells Fargo Master Repurchase Facility mature on March 15, 2025, February 18, 2024 and March 11, 2025, respectively.

As of March 31, 2023, 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.

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(dollars in thousands, except per share data)

As of March 31, 2023, our outstanding borrowings under our Secured Financing Facilities had the following remaining maturities:

Year Principal Payments on

Secured Financing Facilities

2023 $ 87,237

2026 and thereafter —

Fair Value of Financial Instruments

ASC Topic 820, Fair Value Measurement , establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.

The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level I) and the lowest priority to unobservable inputs (Level III).

A financial asset’s or financial liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

The carrying values of cash and cash equivalents, restricted cash and accounts payable approximate their fair values due to the short term nature of these financial instruments.

We estimate the fair values of our loans held for investment and outstanding principal balances under our Secured Financing Facilities by using Level III inputs, including discounted cash flow analyses and currently prevailing market terms as of the measurement date, determined by significant unobservable market inputs, which include holding periods, discount rates based on loan to value ratio, or LTV, property types and loan pricing expectations which are corroborated by a comparison with other market participants to determine the appropriate market spread to add to the current base interest.

The table below provides information regarding financial assets and liabilities not carried at fair value on a recurring basis in our condensed consolidated balance sheets:

September 30, 2022 December 31, 2021

See our 2022 Annual Report for further information regarding the fair value of financial instruments.

The table below provides information regarding financial assets and liabilities not carried at fair value in our condensed consolidated balance sheets:

March 31, 2023 December 31, 2022

Carrying Value Fair Value Carrying Value Fair Value

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Secured Financing Facilities $ 433,385 $ 430,528 $ 471,521 $ 471,362

There were no transfers of financial assets or liabilities within the fair value hierarchy during the nine months ended September 30, 2022.

There were no transfers of financial assets or liabilities within the fair value hierarchy during the three months ended March 31, 2023.

Shareholders' Equity

Common Share Awards

We have common shares available for issuance under the terms of our 2021 Equity Compensation Plan, or the 2021 Plan.

The values of the share awards are based upon the closing price of our common shares on The Nasdaq Stock Market LLC, or Nasdaq, on the date of award.

The common shares that we award to our Trustees as trustee compensation vest immediately.

The awards of common shares that we award to our officers and other employees of Tremont and of RMR vest in five equal annual installments beginning on the date of award.

We recognize the value of awarded shares in general and administrative expenses ratably over the vesting period.

We recognize any share forfeitures as they occur.

On May 26, 2022, in accordance with our Trustee compensation arrangements, we awarded to each of our seven Trustees 6,000 of our common shares, valued at $ 10.66 per common share, the closing price of our common shares on the Nasdaq that day.

On September 14, 2022, we awarded an aggregate of 85,000 of our common shares, valued at $ 10.10 per share, the closing price of our common shares on Nasdaq that day, to our officers and certain other employees of Tremont and of RMR.

On September 19, 2022, we purchased 9,440 of our common shares 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 $ 10.15 per share, the closing price of our common shares on Nasdaq that day.

During the three months ended March 31, 2023, we purchased 1,503 of our common shares from a former officer of ours and a former officer and employee of The RMR Group LLC, 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 The Nasdaq Stock Market LLC, or Nasdaq, on the applicable purchase date.

The aggregate value of common shares purchased was $ 13 .

SEVEN HILLS REALTY TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Distributions

For the nine months ended September 30, 2022, we declared and paid regular quarterly distributions to common shareholders, using cash on hand, as follows:

For the three months ended March 31, 2023, we declared and paid regular quarterly distributions to common shareholders, using cash on hand, as follows:

Record Date Payment Date Distribution per Share Total Distribution

January 23, 2023 February 16, 2023 $ 0.35 $ 5,147

April 25, 2022 May 19, 2022 0.25 3,649

July 25, 2022 August 18, 2022 0.25 3,660

$ 0.75 $ 10,958

On October 13, 2022, we declared a quarterly distribution of $ 0.25 per common share, or $ 3,677 , to shareholders of record on October 24, 2022.

We expect to pay this distribution on or about November 17, 2022, using cash on hand.

On April 13, 2023, we declared a quarterly distribution of $ 0.35 per common share, or $ 5,147 , to shareholders of record on April 24, 2023.

We expect to pay this distribution on or about May 18, 2023, using cash on hand.

SEVEN HILLS REALTY TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Management Agreement with Tremont

We have no employees.

The personnel and various services we require to operate our business are provided to us by Tremont, pursuant to a management agreement, which provides for the day to day management of our operations by Tremont, subject to the oversight and direction of our Board of Trustees.

The personnel and various services we require to operate our business are provided to us by Tremont Realty Capital LLC, or Tremont, pursuant to a management agreement, which provides for the day to day management of our operations by Tremont, subject to the oversight and direction of our Board of Trustees.

We pay Tremont an annual base management fee payable quarterly ( 0.375 % per quarter) in arrears equal to 1.5 % of our “Equity,” as defined under our management agreement.

We recognized base management fees of $ 1,064 and $ 731 for the three months ended September 30, 2022 and 2021, respectively, and $ 3,190 and $ 2,145 for the nine months ended September 30, 2022 and 2021, respectively.

Pursuant to the terms of our management agreement, management incentive fees became payable by us beginning with the quarter ended June 30, 2021, subject to Tremont earning those fees in accordance with the management agreement.

We did no t incur any management incentive fees for the three and nine months ended September 30, 2022 and 2021.

We recognized base management fees of $ 1,072 and $ 1,063 for the three months ended March 31, 2023 and 2022, respectively.

Pursuant to the terms of our management agreement, we also pay Tremont management incentive fees, subject to Tremont earning those fees in accordance with the management agreement.

We did no t incur any management incentive fees for either of the three months ended March 31, 2023 or 2022.

Tremont, and not us, is responsible for the costs of its employees who provide services to us, unless any such payment or reimbursement is specifically approved by a majority of our Independent Trustees, is a shared services cost or relates to awards made under any equity compensation plan adopted by us.

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Some of these overhead, professional and other services are provided by RMR, pursuant to a shared services agreement between Tremont and RMR.

These reimbursements include an allocation of the cost of personnel employed by RMR and our share of RMR's costs for providing our internal audit function.

These reimbursements include an allocation of the cost of personnel employed by RMR.

These shared services costs are subject to approval by a majority of our Independent Trustees at least annually.

We incurred shared services costs of $ 594 and $ 385 payable to Tremont for the three months ended September 30, 2022 and 2021, respectively, and $ 1,742 and $ 1,049 for the nine months ended September 30, 2022 and 2021, respectively.

We include these amounts in reimbursement of shared services expenses or general and administrative expenses, as applicable, in our condensed consolidated statements of operations.

In connection with the Merger, TRMT terminated its management agreement with Tremont, and Tremont waived its right to receive payment of the termination fees that would have otherwise resulted due to the Merger.

In consideration of this waiver, we agreed that, effective upon consummation of the Merger and the termination of TRMT's management agreement with Tremont, certain of the expenses Tremont had paid pursuant to its management agreement with TRMT will be included in the “Termination Fee” under and as defined in our existing management agreement with Tremont.

See our 2021 Annual Report for further information regarding this waiver and change to the "Termination Fee" and the Merger.

SEVEN HILLS REALTY TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

We incurred shared services costs of $ 643 and $ 634 payable to Tremont for the three months ended March 31, 2023 and 2022, respectively.

We include these amounts in reimbursement of shared services expenses in our condensed consolidated statements of operations.

See our 2022 Annual Report for further information regarding our management agreement with Tremont.

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.

We have relationships and historical and continuing transactions with Tremont, 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.

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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.

Our other Managing Trustee, Matthew P.

Jordan is an officer of RMR Inc.

and an officer and employee of RMR, and our executive officers are officers of RMR and officers and employees of Tremont and/or RMR.

See Note 6 for information relating to the awards of our common shares we made in September 2022 to our officers and certain other employees of Tremont and/or RMR and common shares we purchased 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.

We include amounts recognized as expense for awards of our common shares to our officers and employees of Tremont and/or RMR in general and administrative expenses in our condensed consolidated statements of operations.

Some of our Independent Trustees also serve as independent directors or independent trustees of other public companies to which RMR or its subsidiaries provide management services.

Portnoy serves as the chair of the boards and as a managing director or managing trustee of those companies.

Other officers of RMR and Tremont serve as managing trustees, managing directors or officers of certain of these companies.

Portnoy, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., and he is also a director of Tremont, the chair of the board of directors, a managing director, the president and chief executive officer of RMR Inc., and an officer and employee of RMR.

Jordan, our other Managing Trustee, is a director and the president and chief executive officer of Tremont.

Jordan is also an officer of RMR Inc.

and an officer and employee of RMR, and our executive officers are officers and employees of Tremont and/or RMR.

Some of our Independent Trustees also serve as independent directors or independent trustees of other public companies to which RMR provides management services.

Portnoy serves as the chair of the board and as a managing director or managing trustee of those companies.

Other officers of RMR and Tremont serve as managing trustees or officers of certain of these companies.

Our Manager, Tremont Realty Capital LLC.

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See Note 7 for further information regarding our management agreement with Tremont.

Tremont also provided management services to TRMT until the Merger.

On May 11, 2022, Tremont purchased 882,407 of our common shares from Diane Portnoy, the mother of Adam D.

Tremont paid an aggregate purchase price of $ 9,469 for these shares.

As of September 30, 2022, Tremont owned 1,708,058 of our common shares, and Mr.

Portnoy beneficially owned (including through Tremont) 13.4 % of our outstanding common shares.

Tremont Mortgage Trust.

TRMT merged with and into us on September 30, 2021.

Prior to the Merger, Adam D.

Portnoy and Matthew P.

Jordan, our Managing Trustees, were also TRMT’s managing trustees.

Lorenzini, our President, also served as president of TRMT, and G.

Douglas Lanois, our then Chief Financial Officer and Treasurer, also served as chief financial officer and treasurer of TRMT.

Three of our Independent Trustees, William A.

Lamkin, Joseph L.

Morea and Jeffrey P.

Somers, previously served as independent trustees of TRMT.

In addition, our former Independent Trustee, John L.

Harrington, also previously served as an independent trustee of TRMT and he resigned both trusteeships effective as of the effective time of the Merger.

See our 2021 Annual Report for further information regarding the Merger and the other Transactions.

As of March 31, 2023, Tremont owned 1,708,058 of our common shares, and Mr.

Portnoy beneficially owned (including through Tremont and ABP Trust) 13.4 % of our outstanding common shares.

Acceleration of Unvested Shares of Former Officer.

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 our unvested common shares owned by Mr.

Lanois as of his separation date, January 1, 2023.

For further information about these and other such relationships and certain other related person transactions, refer to our definitive Proxy Statement for our 2023 Annual Meeting of Shareholders and to our 2022 Annual Report.

SEVEN HILLS REALTY TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the IRC.

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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.

SEVEN HILLS REALTY TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

The calculation of basic and diluted earnings per shares is as follows (amounts in thousands, except per share data):

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Unvested share awards are considered participating securities and the related impact on earnings are considered when calculating net income per common share - basic and net income per common share - diluted.

The calculation of net income per common share - basic and diluted is as follows (amounts in thousands, except per share data):

Three Months Ended March 31,

Net income $ 7,803 $ 11,126

Income attributable to unvested participating securities ( 33 ) — ( 133 ) —

Net income used in calculating net income per common share $ 5,143 $ 2,484 $ 20,747 $ 3,994

Net income attributable to unvested share awards ( 67 ) ( 70 )

Net income used in calculating net income per common share - basic and diluted $ 7,736 $ 11,056

Weighted average common shares outstanding - basic 14,582 14,505

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Commitments and Contingencies

As of September 30, 2022, we had unfunded loan commitments of $ 57,712 related to our loans held for investment that are not reflected in our condensed consolidated balance sheets.

These unfunded loan commitments had a weighted average initial maturity of 1.8 years as of September 30, 2022.

As of March 31, 2023, we had unfunded loan commitments of $ 45,779 related to our loans held for investment that are not reflected in our condensed consolidated balance sheets.

These unfunded loan commitments had a weighted average initial maturity of 1.4 years as of March 31, 2023.

See Note 3 for further information related to our loans held for investment.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements