Seven Hills Realty Trust 10-Q

Item 1. Financial Statements SEVEN HILLS REALTY TRUST CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) (unaudited) March 31, December 31, 2023 2022 ASSETS 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 Total assets $ 706,765 $ 746,847 LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable, accrued liabilities and other liabilities $ 3,262 $ 1,903 Secured financing facilities, net 433,385 471,521 Due to related persons 2,371 1,844 Total liabilities 439,018 475,268 Commitments and contingencies Shareholders' equity: Common shares of beneficial interest, $ 0.001 par value, 25,000,000 shares authorized; 14,706,862 and 14,709,165 shares issued and outstanding, respectively 15 15 Additional paid in capital 238,612 238,505 Cumulative net income 53,498 52,290 Cumulative distributions ( 24,378 ) ( 19,231 ) Total shareholders' equity 267,747 271,579 Total liabilities and shareholders' equity $ 706,765 $ 746,847 See accompanying notes. 1 Table of Contents SEVEN HILLS REALTY TRUST CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (amounts in thousands, except per share data) (unaudited) Three Months Ended March 31, 2023 2022 INCOME FROM INVESTMENTS: Interest and related income $ 15,856 $ 9,579 Purchase discount accretion 1,185 5,935 Less: interest and related expenses ( 7,694 ) ( 1,737 ) Income from investments, net 9,347 13,777 OTHER EXPENSES: Base management fees 1,072 1,063 General and administrative expenses 796 872 Reimbursement of shared services expenses 643 634 Reversal of credit losses ( 987 ) — Other transaction related costs — 37 Total other expenses 1,524 2,606 Income before income taxes 7,823 11,171 Income tax expense ( 20 ) ( 45 ) Net income $ 7,803 $ 11,126 Weighted average common shares outstanding - basic 14,582 14,505 Weighted average common shares outstanding - diluted 14,582 14,519 Net income per common share - basic and diluted $ 0.53 $ 0.76 See accompanying notes. 2 Table of Contents SEVEN HILLS REALTY TRUST CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (amounts in thousands) (unaudited) Number of Additional Common Common Paid In Cumulative Cumulative Shares Shares Capital Net Income Distributions Total Balance at December 31, 2022 14,709 $ 15 $ 238,505 $ 52,290 $ ( 19,231 ) $ 271,579 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 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 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 See accompanying notes. 3 Table of Contents SEVEN HILLS REALTY TRUST CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited) Three Months Ended March 31, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 7,803 $ 11,126 Adjustments to reconcile net income to net cash provided by operating activities: Accretion of purchase discount ( 1,185 ) ( 5,935 ) 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 other liabilities ( 113 ) ( 594 ) Due to related persons 527 15 Net cash provided by operating activities 6,577 3,085 CASH FLOWS FROM INVESTING ACTIVITIES: Origination of loans held for investment — ( 90,036 ) Additional funding of loans held for investment ( 1,651 ) ( 3,219 ) Repayment of loans held for investment 51,918 48,643 Net cash provided by (used in) investing activities 50,267 ( 44,612 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from secured financing facilities — 130,160 Repayments under secured financing facilities ( 38,125 ) ( 101,597 ) Payments of deferred financing costs ( 318 ) ( 720 ) Repurchase of common shares ( 13 ) — Distributions ( 5,147 ) ( 3,649 ) 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 ) Cash, cash equivalents and restricted cash at beginning of period 71,067 26,295 Cash, cash equivalents and restricted cash at end of period $ 84,308 $ 8,962 SUPPLEMENTAL DISCLOSURES: Interest paid $ 7,408 $ 1,584 Income taxes paid $ 3 $ 47 4 Table of Contents SUPPLEMENTAL DISCLOSURE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH: The table below provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows: As of March 31, 2023 2022 Cash and cash equivalents $ 84,300 $ 8,953 Restricted cash 8 9 Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows $ 84,308 $ 8,962 See accompanying notes. 5 Table of Contents SEVEN HILLS REALTY TRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) Note 1. Basis of Presentation The accompanying condensed consolidated financial statements are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2022, or our 2022 Annual Report. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim periods have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the accompanying condensed consolidated financial statements include the allowance for credit losses and the fair value of financial instruments. Certain prior year amounts have been reclassified to conform to current year presentation. Note 2. Recently Adopted Accounting Pronouncements On January 1, 2023, we adopted 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. ASU No. 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. 6 SEVEN HILLS REALTY TRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) 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. 2016-13. 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. 2016-13. 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. ASU No. 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. Note 3. 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 Total loan commitments $ 674,475 $ 727,562 Unfunded loan commitments (1) $ 45,779 $ 49,007 Principal balance $ 628,696 $ 678,555 Carrying value $ 617,935 $ 669,929 Weighted average coupon rate 8.57 % 8.07 % Weighted average all in yield (2) 9.06 % 8.57 % Weighted average floor 0.65 % 0.62 % Weighted average maximum maturity (years) (3) 3.1 3.3 Weighted average risk rating 2.9 2.9 (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. 7 SEVEN HILLS REALTY TRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) The tables below represent our loan activities during the 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 Repayments ( 51,743 ) ( 175 ) ( 51,918 ) Net amortization of deferred fees — 1,004 1,004 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 Additional funding 3,304 — 3,304 Originations 91,184 ( 1,148 ) 90,036 Repayments ( 48,247 ) — ( 48,247 ) Net amortization of deferred fees — 902 902 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 Amortized Cost Percentage of Value Number of Loans Amortized Cost Percentage of Value Office (1) 10 $ 244,302 39 % 11 $ 252,796 38 % Multifamily 8 198,390 32 % 8 197,229 29 % Retail 4 110,037 18 % 4 109,248 16 % Industrial (1) 3 69,341 11 % 4 110,656 17 % 25 $ 622,070 100 % 27 $ 669,929 100 % (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 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 % 8 SEVEN HILLS REALTY TRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) 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. 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 2 5 20 % — 41,952 31,483 52,289 125,724 3 16 63 % — 128,678 236,711 29,001 394,390 4 3 15 % — 36,538 39,970 15,952 92,460 5 — — % — — — — — 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. 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 which have continued to be impacted. 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. 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. 9 SEVEN HILLS REALTY TRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (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. Note 4. Secured Financing Agreements 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; our master repurchase facility with Citibank, N.A., or Citibank, or the Citibank Master Repurchase Facility; our facility loan program with BMO Harris Bank N.A., or BMO, or the BMO Facility, and our master repurchase facility with UBS AG, or UBS, or the UBS Master Repurchase Facility. We refer to the Wells Fargo Master Repurchase Facility, Citibank Master Repurchase Facility and UBS Master Repurchase Facility, collectively, as our Master Repurchase Facilities. We refer to the Master Repurchase Facilities and the BMO Facility, collectively, as our Secured Financing Facilities. See our 2022 Annual Report for more information regarding our Secured Financing Facilities. 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 Weighted Average Collateral Maximum Facility Size Principal Balance Carrying Value Coupon Rate (1) Remaining Maturity (years) (2) Principal Balance March 31, 2023: Citibank Master Repurchase Facility $ 215,000 $ 150,101 $ 149,845 6.83 % 0.9 $ 205,380 UBS Master Repurchase Facility 192,000 133,108 132,680 6.80 % 0.8 182,530 BMO Facility 150,000 84,855 84,296 6.73 % 2.0 113,745 Wells Fargo Master Repurchase Facility 125,000 67,426 66,564 6.57 % 1.9 89,177 Total/weighted average $ 682,000 $ 435,490 $ 433,385 6.76 % 1.3 $ 590,832 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 (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 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. 10 SEVEN HILLS REALTY TRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (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 2024 237,996 2025 110,257 2026 and thereafter — $ 435,490 Note 5. 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 reporting date. 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 Financial assets Loans held for investment $ 617,935 $ 626,689 $ 669,929 $ 679,911 Financial liabilities 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 three months ended March 31, 2023. Note 6. Shareholders' Equity Common Share Awards 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 . Distributions 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 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. 11 SEVEN HILLS REALTY TRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) Note 7. Management Agreement with Tremont We have no employees. The personnel and various services we require to operate our business are provided to us by Tremont 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 $ 1,072 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. We are required to pay or to reimburse Tremont and its affiliates for all other costs and expenses of our operations. Some of these overhead, professional and other services are provided by RMR, pursuant to a shared services agreement between Tremont and RMR. These reimbursements include an allocation of the cost of personnel employed by RMR. These shared services costs are subject to approval by a majority of our Independent Trustees at least annually. 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. Note 8. Related Person Transactions 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. is the managing member of RMR. RMR provides certain shared services to Tremont that are applicable to us, and we reimburse Tremont or pay RMR for the amounts Tremont or RMR pays for those services. One of our Managing Trustees and Chair of our Board of Trustees, Adam D. Portnoy, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., and he is also a director of Tremont, the chair of the board of directors, a managing director, the president and chief executive officer of RMR Inc., and an officer and employee of RMR. 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 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. Adam D. 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. We have a management agreement with Tremont to provide management services to us. See Note 7 for further information regarding our management agreement with Tremont. 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 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. 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 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. 12 SEVEN HILLS REALTY TRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) Note 9. Income Taxes We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the IRC. Accordingly, we generally are not, and will not be, subject to U.S. federal income tax, provided that we meet certain distribution and other requirements. We are subject to certain state and local taxes, certain of which amounts are or will be reported as income taxes in our condensed consolidated statements of operations. Note 10. Weighted Average Common Shares We calculate net income per common share - basic using the two class method. We calculate net income per common share - diluted using the more dilutive of the two class or treasury stock method. Unvested share awards 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, 2023 2022 Numerators: Net income $ 7,803 $ 11,126 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 Denominators Weighted average common shares outstanding - basic 14,582 14,505 Effect of dilutive securities: unvested share awards — 14 Weighted average common shares outstanding - diluted 14,582 14,519 Net income per common share - basic and diluted $ 0.53 $ 0.76 Note 11. Commitments and Contingencies 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. 13 Table of Contents