What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2024-02-20 compared with 2023-02-13 · 366 added, 340 removed, 635 unchanged (53% of the section changed)

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.

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 Chief Investment Officer 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 Chief Investment Officer 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, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

51 unchanged sentences

(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.)

3.2 Amended and Restated Bylaws of the Company, as of September 14, 2023.

(Incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K filed by the Company on September 15, 2023.)

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.)

(Incorporated by reference to Exhibit 4.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023.)

4.2 Description of Securities.

(Filed herewith.)

(Incorporated by reference to Exhibit 4.2 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.)

8.1 Opinion of Sullivan & Worcester LLP as to certain tax matters.

3 unchanged sentences

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.)

10.4 Form of Share Award Agreement.(+) (Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023.)

10.5 Form of Indemnification Agreement.(+) (Incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023.)

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.)

22 unchanged sentences

(Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed by the Company on March 16, 2022.)

10.18 Amendment No.

2 to Master Repurchase Agreement, dated March 9, 2022, by and between RMTG Lender LLC and UBS AG.

10.18 Property Management Agreement, dated as of July 8, 2023, between The RMR Group LLC and Floral Vale LLC, a subsidiary of the Company.

(Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023.)

15 unchanged sentences

(Furnished herewith.)

97.1 S even Hills Realty Trust Clawback Policy.

(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.

16 unchanged sentences

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").

We have audited the accompanying consolidated balance sheets of Seven Hills Realty Trust and subsidiaries (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of operations, shareholders' equity, and cash flows, for each of the two years in the period ended December 31, 2023, and the related notes and the schedule listed in the Index at Item 15 (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, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

16 unchanged sentences

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

Purchase Price Allocation for the Acquisition of Real Estate Owned – Refer to Notes 2 and 4 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.

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.

The Company assumed legal title to an office property located in Yardley, PA through a deed in lieu of foreclosure in June 2023.

The Company concluded that this was an asset acquisition, and the fair value was allocated to the assets acquired and liabilities assumed based on their relative fair values on acquisition date.

The fair value of the property was determined based on unobservable inputs and industry valuation methods including discounted cash flows, discount rates, capitalization rates, and sales comparables.

We identified the allocation of purchase price as a critical audit matter because of the significant estimates management makes to determine the fair value of assets acquired and liabilities assumed.

This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s assumptions.

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.

Our audit procedures related to the purchase price allocation for the real estate owned included the following, among others:

• We tested the design and implementation of controls over management’s evaluation of the purchase price allocation, including the assumptions used to value the acquired assets and liabilities assumed.

• We held discussions with the Company’s management and evaluated Company-prepared analyses to assess the reasonableness of the accounting treatment as an asset acquisition as opposed to a business combination.

• We obtained and evaluated the third-party purchase price allocation report along with relevant supporting documentation to corroborate our understanding of the substance of the acquisition obtained through inquiry with the Company’s management, as well as assess the completeness of the assets acquired and the liabilities assumed as part of the acquisition.

• With the assistance of our fair value specialists, we evaluated the reasonableness of the valuation methodology, significant assumptions used, including comparing the key inputs used in the projections to external market sources, and the mathematical accuracy of the valuation model.

• We tested the reasonableness of management’s assumptions through independent analysis and comparison to external sources.

/s/ Deloitte & Touche LLP

6 unchanged sentences

Cash and cash equivalents $ 87,855 $ 71,067

Restricted cash 10 98

Loans held for investment 626,462 669,929

Allowance for credit losses ( 4,376 ) —

Loans held for investment, net 622,086 669,929

Prepaid expenses and other assets 5,851 2,918

Real estate owned, net 11,278 —

Acquired real estate leases, net 4,137 —

Accrued interest receivable 3,632 3,354

Prepaid expenses and other assets, net 2,537 2,497

Total assets $ 731,525 $ 746,847

LIABILITIES AND SHAREHOLDERS' EQUITY

Accounts payable, accrued liabilities and deposits $ 1,903 $ 1,561

Accounts payable, accrued liabilities and other liabilities $ 3,808 $ 1,903

Secured financing facilities, net 454,422 471,521

17 unchanged sentences

INCOME FROM INVESTMENTS:

Interest income from investments $ 45,303 $ 16,775

Interest and related income $ 66,337 $ 45,303

Purchase discount accretion 4,128 10,689

interest and related expenses ( 33,518 ) ( 17,630 )

Income from investments, net 38,362 33,454

Income from loan investments, net 36,947 38,362

Revenue from real estate owned 1,288 —

Total revenue 38,235 38,362

OTHER EXPENSES:

Base management fees 4,303 4,260

Incentive fees 968 —

General and administrative expenses 3,947 3,837

Reimbursement of shared services expenses 2,596 2,475

Reversal of credit losses ( 799 ) —

Expenses from real estate owned 1,293 —

Other transaction related costs — 37

1 unchanged sentence

Income before income taxes 25,927 27,753

Income tax expense ( 113 ) ( 338 )

Income tax benefit (expense) 38 ( 113 )

Net income $ 25,965 $ 27,640

Weighted average common shares outstanding - basic and diluted

14,625 14,540

Net income per common share - basic and diluted $ 1.76 $ 1.89

5 unchanged sentences

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

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

Share grants 127 — 1,019 — — 1,019

Share repurchases ( 14 ) — ( 137 ) — — ( 137 )

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

Net income — — — 27,640 — 27,640

1 unchanged sentence

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 122 — 1,124 — — 1,124

13 unchanged sentences

Accretion of purchase discount ( 4,128 ) ( 10,689 )

Share based compensation 1,018 627

Amortization of deferred financing costs 1,033 211

Reversal of credit losses ( 799 ) —

Amortization of loan origination and exit fees ( 3,333 ) ( 3,780 )

Amortization of deferred financing costs 1,405 1,033

Straight line rental income ( 647 ) —

Depreciation and amortization 604 —

Share based compensation 1,121 1,018

Changes in operating assets and liabilities:

Accrued interest receivable ( 498 ) ( 1,921 )

Prepaid expenses and other assets 630 ( 1,625 )

Accounts payable, accrued liabilities and deposits 342 ( 2,329 )

Accounts payable, accrued liabilities and other liabilities ( 253 ) 342

Due to related persons 203 733

4 unchanged sentences

Repayment of loans held for investment 172,283 133,568

Payment of merger related costs

Cash assumed in merger — 11,070

Net cash used in investing activities ( 84,067 ) ( 283,863 )

Cash assumed from transfer of loans held for investment to real estate owned 1,742 —

Real estate owned improvements ( 1,086 ) —

Net cash provided by (used in) investing activities 35,844 ( 84,067 )

CASH FLOWS FROM FINANCING ACTIVITIES:

4 unchanged sentences

Distributions ( 20,639 ) ( 14,636 )

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

Year Ended December 31,

Net cash (used in) provided by financing activities ( 39,326 ) 116,088

Increase in cash and cash equivalents 16,788 44,772

Cash and cash equivalents at beginning of period 71,067 26,295

Cash and cash equivalents at end of period $ 87,855 $ 71,067

SUPPLEMENTAL DISCLOSURES:

2 unchanged sentences

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,

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

Transfer of loans held for investment to real estate owned $ 14,800 $ —

See accompanying notes.

3 unchanged sentences

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.

Summary of Significant Accounting Policies

3 unchanged sentences

Actual results could differ from those estimates.

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

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

Consolidation.

2 unchanged sentences

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.

Cash and Cash Equivalents.

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.

4 unchanged sentences

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.

Allowance for Credit Losses.

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.

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 in our 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 in our consolidated balance sheets.

SEVEN HILLS REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Given the lack of historical loss data related to our loan portfolio, we 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, or CMBS, 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, less costs to sell, if applicable, 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, less costs to sell, if applicable, of the collateral compared to the loan's amortized cost.

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 in our 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).

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 consolidated financial statements.

See Note 3 to our Consolidated Financial Statements included in Part IV, Item 15 of this 2023 Annual Report for further information regarding loan modifications.

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.

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 LTV, debt yield, collateral performance, structure, exit plan and sponsorship.

Loans are rated “1” (less risk) through “5” (greater risk) as defined below:

2 unchanged sentences

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.

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;

5 unchanged sentences

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.

SEVEN HILLS REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

“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;

2 unchanged sentences

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;

“5” 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;

3 unchanged sentences

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.

See Note 3 for further information regarding our allowance for credit losses and our loan portfolio’s assessment under our internal risk rating policy.

Real Estate Owned.

Real estate owned is property acquired in full or partial settlement of loan obligations generally through foreclosure or by deed in lieu of foreclosure.

Upon acquisition, we allocate the fair value of the real estate owned in accordance with ASC 805, Business Combinations.

Upon acquisition, real estate owned is recognized at the lesser of the fair value of the property and the amortized cost of the loan secured by the property at the time of acquisition.

We allocate the purchase price to land, building and improvements, and intangibles based on determinations of the relative fair values of these assets assuming the properties are vacant.

The fair value of the property is determined using Level III inputs and standard industry valuation methods, including discounted cash flow analyses that are based on a number of factors, including capitalization rates and discount rates, among others, and sales comparisons.

If the amortized cost of the loan exceeds the fair value of the property the difference is recorded through the allowance for credit losses as a write off.

Conversely, if the fair value of the property exceeds the amortized cost of the loan, the difference is recorded through the allowance for credit losses as a recovery, with any excess recorded as a gain.

Any related shortfall or excess of previously established allowances for credit losses is recognized in the consolidated statements of operations as a provision for or reversal of credit losses, respectively.

Subsequent to acquisition, costs incurred related to improvements to the property are capitalized and depreciated over their estimated useful lives and costs related to the operation of the property are expensed as incurred.

We recognize depreciation on a straight line basis over estimated useful lives generally ranging from 7 to 40 years.

The following is a summary of real estate owned presented in our consolidated balance sheets:

December 31, 2023

Building and improvements

Tenant improvements

Total real estate owned

accumulated depreciation

Real estate owned, net

Depreciation expense related to real estate owned for the year ended December 31, 2023 was $ 136 and is included in expenses from real estate owned.

We did not record depreciation expense related to real estate owned during the year ended December 31, 2022.

SEVEN HILLS REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

We allocate a portion of the purchase price to acquired in place leases and tenant relationships based upon market estimates to lease up the property based on the leases in place at the time of acquisition.

We allocate this aggregate value between acquired in place lease values and tenant relationships based on our evaluation of the specific characteristics of each tenant’s lease.

We amortize the value of acquired in place leases (included in acquired real estate leases, net in our consolidated balance sheets) over the terms of the associated leases.

Such amortization, which is included in expenses from real estate owned in our consolidated income statements, amounted to $ 458 for the year ended December 31, 2023.

We did not record any such amortization during the year ended December 31, 2022.

As of December 31, 2023, our acquired real estate lease obligations were as follows:

December 31, 2023

Acquired real estate leases

accumulated amortization

Acquired real estate leases, net

As of December 31, 2023, the weighted average amortization periods for acquired in place lease values was 7.4 years.

Future amortization of acquired in place lease values is estimated to be $ 771 in 2024, $ 594 in 2025, $ 493 in 2026, $ 493 in 2027, $ 466 in 2028 and $ 1,320 thereafter.

We regularly evaluate real estate owned for indicators of impairment.

Impairment indicators may include declining tenant occupancy, lack of progress leasing vacant space, tenant bankruptcies, low long term prospects for improvement in property performance, weak or declining tenant profitability, cash flow or liquidity, our decision to dispose of an asset before the end of its estimated useful life and legislative, market or industry changes that could permanently reduce the value of a property.

If there is an indication that the carrying value of an asset is not recoverable, we estimate the projected undiscounted cash flows to determine if an impairment loss should be recognized.

The future net undiscounted cash flows are subjective and are based in part on assumptions regarding hold periods, market rents and terminal capitalization rates.

We determine the amount of any impairment loss by comparing the carrying value to estimated fair value.

We estimate fair value through an evaluation of recent financial performance and projected discounted cash flows using standard industry valuation methods.

Fair Value of Financial Instruments.

10 unchanged sentences

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.

SEVEN HILLS REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Net Income Per Common Share.

4 unchanged sentences

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.

SEVEN HILLS REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

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.

4 unchanged sentences

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.

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) :

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.

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.

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.

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.

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.

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

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.

Decreases in cash flows expected to be collected will be recorded through our provision for credit losses.

Revenue from real estate owned represents rental income from operating leases with tenants and is recognized on a straight line basis over the lease term.

New Accounting Pronouncements.

On November 27, 2023, the FASB issued ASU No.

2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures , or ASU No.

2023-07, which requires public entities to:

i) provide disclosures of significant segment expenses and other segment items if they are regularly provided to the Chief Operating Decision Maker, or the CODM, and included in each reported measure of segment profit or loss;

ii) provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by ASC 280, Segment Reporting , or ASC 280, in interim periods;

and iii) disclose the CODM’s title and position, as well as an explanation of how the CODM uses the reported measures and other disclosures.

Public entities with a single reportable segment must apply all the disclosure requirements of ASU No.

2023-07, as well as all the existing segment disclosures under ASC 280.

The amendments in ASU No.

2023-07 are incremental to the requirements in ASC 280 and do not change how a public entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments.

2023-07 should be applied retrospectively to all prior periods presented in the financial statements and is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

Early adoption is permitted.

We are currently evaluating the impact ASU No.

2023-07 will have on our consolidated financial statements and disclosures.

SEVEN HILLS REALTY TRUST

1 unchanged sentence

(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

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

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:

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

As of December 31,

15 unchanged sentences

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

SEVEN HILLS REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

The table below represents our loan activities during 2022 and 2023:

Principal Balance Deferred Fees and Other Items Carrying Value

Principal Balance Deferred Fees and Other Items Amortized Cost

Balance at December 31, 2021

4 unchanged sentences

Net amortization of deferred fees — 3,780 3,780

Loans acquired in Merger (1)

204,692 901 205,593

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

Purchase discount accretion

5 unchanged sentences

Repayments ( 171,748 ) ( 535 ) ( 172,283 )

Transfer to real estate owned

( 15,865 ) ( 95 ) ( 15,960 )

Net amortization of deferred fees — 3,333 3,333

Purchase discount accretion

— 4,128 4,128

Balance at December 31, 2023

$ 629,892 $ ( 3,430 ) $ 626,462

(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.

SEVEN HILLS REALTY TRUST

1 unchanged sentence

(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:

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

As of December 31,

Property Type Number of Loans

Carrying Value

Amortized Cost

Percentage of Value Number of Loans

Carrying Value

Amortized Cost

Percentage of Value

11 $ 252,796 38 % 13 $ 269,865 47 %

Multifamily 7 $ 207,734 33 % 8 $ 197,229 29 %

7 181,268 29 % 11 252,796 38 %

Industrial (1)

1 unchanged sentence

Retail 3 72,962 12 % 4 109,248 16 %

Lab — — — % 1 13,398 2 %

Hotel 2 45,791 7 % — — — %

24 $ 626,462 100 % 27 $ 669,929 100 %

(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.

(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 year ended December 31, 2023, our loan investment in Aurora, IL was repaid.

As of December 31,

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 %

Amortized Cost

Percentage of Value Number of Loans Amortized Cost

Percentage of Value

South 8 $ 222,477 36 % 6 $ 166,616 25 %

West 9 185,294 30 % 8 146,837 22 %

Midwest 4 128,876 20 % 9 251,208 37 %

East 3 89,815 14 % 4 105,268 16 %

24 $ 626,462 100 % 27 $ 669,929 100 %

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.

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.

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,

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

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

December 31, 2023

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

1 — — % $ — $ — $ — $ — $ —

3 unchanged sentences

5 — — % — — — — —

24 100 % $ 132,204 $ 209,580 $ 246,130 $ 38,548 $ 626,462

SEVEN HILLS REALTY TRUST

1 unchanged sentence

(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.

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 borrower of our loan secured by an office property located in Yardley, PA did not pay its debt service obligations due in May 2023, resulting in an event of default.

In June 2023, we assumed legal title to the property through a deed in lieu of foreclosure.

See Note 4 for further information.

The table below present the change to the allowance for credit losses during the year ended December 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

( 549 ) ( 250 ) ( 799 )

Write offs (1)

( 708 ) — ( 708 )

Recoveries 740 — 740

Balance at December 31, 2023 $ 4,376 $ 1,452 $ 5,828

(1) Write offs for the year ended December 31, 2023 relate to our loan secured by an office property located in Yardley, PA that was originated in 2019.

We assumed legal title to the property through a deed in lieu of foreclosure in June 2023.

See Note 4 for further information.

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 year ended December 31, 2023 compared to the January 1, 2023 cumulative-effect adjustment upon adoption of ASU No.

2016-13, is primarily attributable to a recovery in our previously recorded allowance for credit losses related to the loan transferred to real estate owned in June 2023, partially offset by unfavorable changes in CRE pricing forecasts.

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.

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.

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

In June 2023, we amended the agreement governing our loan secured by an office property in St.

As part of this amendment, the borrower repaid $ 5,000 of the outstanding principal amount and the maturity date was extended by six months to December 19, 2023.

We accounted for the amendment as a modification to the existing loan because the changes to the terms were determined to be minor.

In October 2023, the borrower repaid the full outstanding principal amount on this loan.

In August 2023, we amended the agreement governing our loan secured by an office property in Dublin, OH.

As part of this amendment, the borrower repaid $ 2,000 of the outstanding principal amount and the maturity date was extended by one year to August 16, 2024.

We accounted for the amendment as a modification to the existing loan because the changes to the terms were determined to be minor.

In October 2023, the borrower repaid the full outstanding principal amount on this loan.

There were no other modifications to our loan portfolio for borrowers experiencing financial difficulties during the year ended December 31, 2023.

SEVEN HILLS REALTY TRUST

1 unchanged sentence

(dollars in thousands, except per share data)

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.

During the year ended December 31, 2023, we reversed $ 88 of accrued interest related to the loan transferred to real estate owned in June 2023.

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

As of December 31, 2023 and February 15, 2024, our borrowers with outstanding loans had paid their debt service obligations owed and due to us.

Real Estate Owned

In June 2023, we assumed legal title to an office property located in Yardley, PA through a deed in lieu of foreclosure.

As of June 30, 2023, the property met the held for sale criteria required by ASC 360 and was classified as held for sale.

The amortized cost basis of $ 15,960 of the related loan exceeded the fair value of the property, including cash assumed of $ 1,742 and net liabilities assumed of $ 550 , less estimated costs to sell of $ 740 , by $ 708 .

The previously established allowance for credit losses for the related loan was $ 1,335 , resulting in a decrease to our provision for credit losses of $ 627 recorded in our consolidated statements of operations during the six months ended June 30, 2023.

Upon assumption of legal title of the property, we also assumed $ 2,258 of outstanding commitments for lease related costs pursuant to previously executed tenant leases.

As of September 30, 2023, although there was not a change to the plan of sale, the property did not meet the held for sale criteria required by ASC 360 and was classified as held for investment.

As a result, we recorded a reversal of credit losses of $ 740 for estimated costs to sell in our consolidated statements of operations during the three months ended September 30, 2023.

We accounted for the acquisition as an asset acquisition and allocated the fair value of the assumed assets and liabilities on the acquisition date as follows:

Acquisition Date Fair Value

Land Buildings and Improvements Acquired Real Estate Leases

June 2023 $ 14,800 $ 2,880 $ 7,325 $ 4,595

Other assets related to real estate owned of $ 1,352 , including $ 647 of straight line rent receivables, are included in prepaid expenses and other assets, net, in our consolidated balance sheets at December 31, 2023.

Accrued expenses and other liabilities related to real estate owned of $ 517 are included in accounts payable, accrued liabilities and other liabilities in our consolidated balance sheets at December 31, 2023.

There were no other assets or accrued expenses and other liabilities related to real estate owned at December 31, 2022.

We increased revenue from real estate owned to record revenue on a straight line basis by $ 647 for the year ended December 31, 2023.

Expenses from real estate owned represents costs related to the acquisition of the property, costs to operate the property and depreciation and amortization expense.

The following operating lease maturity analysis presents the future contractual lease payments to be received by us through 2034 as of December 31, 2023:

SEVEN HILLS REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Secured Financing Agreements

UBS Master Repurchase Facility

We are a party to a 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.

In July 2023, we amended and restated our master repurchase agreement with UBS, or the UBS Master Repurchase Agreement.

The amended and restated UBS Master Repurchase Agreement made certain changes to the agreement and related fee letter, including extending the stated maturity date to February 18, 2025.

In August 2023, we amended the related fee letter to increase the maximum amount of available advancements under the UBS Master Repurchase Facility to $ 205,000 .

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.

The pricing rate (or interest rate) relating to a purchased asset was equal to the one month Secured Overnight Financing Rate, or 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.

2 unchanged sentences

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.

We are a party to a master repurchase agreement with Citibank NA, or Citibank, or our Citibank Master Repurchase Agreement, for a facility, or our Citibank Master Repurchase Facility, pursuant to which we may sell to Citibank, and later repurchase, commercial mortgage loans, which are referred to as purchased assets.

The maximum amount of available advancements under our Citibank Master Repurchase Facility is $ 215,000 and the stated maturity date is 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.

1 unchanged sentence

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.

The price differential (or interest rate) relating to a purchased asset was equal to SOFR 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.

SEVEN HILLS REALTY TRUST

1 unchanged sentence

(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.

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.

In connection with our Citibank Master Repurchase Agreement, we entered into a guaranty, or 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.

We are a party to a 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, up to the maximum principal amount of $ 150,000 , 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.

1 unchanged sentence

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.

1 unchanged sentence

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.

We are a party to 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.

4 unchanged sentences

Interest on advancements under the Wells Fargo Master Repurchase Facility is calculated at SOFR, plus a premium.

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.

2 unchanged sentences

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.

SEVEN HILLS REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

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.

1 unchanged sentence

As of December 31, 2023, 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, 2023 and 2022:

14 unchanged sentences

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.

(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.

(1) The weighted average coupon rate is determined using SOFR plus a spread ranging from 1.83 % to 2.90 %, as applicable, for the respective borrowings under our Secured Financing Facilities as of the applicable date.

(2) The weighted average remaining maturity of our Master Repurchase Facilities is determined using the earlier of the underlying loan investment maturity date and the respective repurchase agreement maturity date.

As of December 31, 2023, our Citibank Master Repurchase Facility, UBS Master Repurchase Facility and Wells Fargo Master Repurchase Facility mature on March 15, 2025, February 18, 2025 and March 11, 2025, respectively.

Our BMO Facility matures at various dates based on the respective underlying loans held for investment.

SEVEN HILLS REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

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

3 unchanged sentences

2026 and thereafter

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.

Fair Value Measurements

The carrying values of cash and cash equivalents 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:

SEVEN HILLS REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

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

As of December 31,

4 unchanged sentences

Secured Financing Facilities $ 454,422 $ 454,620 $ 471,521 $ 471,362

There were no transfers of financial assets or liabilities within the fair value hierarchy during the year ended December 31, 2022 or 2021.

There were no transfers of financial assets or liabilities within the fair value hierarchy during the years ended December 31, 2023 or 2022.

Shareholders' Equity

3 unchanged sentences

In accordance with our Trustee compensation arrangements, during the years ended December 31, 2023 and 2022, we awarded each of our then Trustees 6,000 of our common shares valued at $ 387 and $ 448 , 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 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 dates of awards.

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

2 unchanged sentences

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

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, 2023 and 2022 is as follows:

7 unchanged sentences

Shares vested ( 112,925 ) $ 9.96 ( 87,888 ) $ 10.45

Shares granted at the effective date of the Merger — $ — 26,370 $ 10.31

Unvested shares, end of year 136,421 $ 10.57 129,680 $ 10.24

5 unchanged sentences

At December 31, 2023, 148,829 of our common shares remained available for issuance under the 2021 Plan.

SEVEN HILLS REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

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.

During the years ended December 31, 2023 and 2022, we purchased 17,421 and 13,898 of our common shares, respectively, from certain of our current and former officers and 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, 2023 and 2022 was $ 183 and $ 137 , respectively.

Distributions

During the years ended December 31, 2022 and 2021, we paid distributions to common shareholders as follows:

During the years ended December 31, 2023 and 2022, we declared and paid regular quarterly distributions to common shareholders, using cash on hand, as follows:

Characterization of Distributions

2 unchanged sentences

2022 $ 1.00 $ 14,636 — % 100 % — %

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.

On January 11, 2024, we declared a quarterly distribution of $ 0.35 per common share, or $ 5,184 , to shareholders of record on January 22, 2024, and we paid this distribution on February 15, 2024 using cash on hand.

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.

SEVEN HILLS REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

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

Our management agreement with Tremont provides for an annual base management fee and an incentive fee, payable in cash, among other terms:

1 unchanged sentence

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.

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 “Core 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.

As a result of our merger with Tremont Mortgage Trust, or TRMT, in 2021, or 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 product of (i) 20 % and (ii) the difference between (A) our Core 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);

SEVEN HILLS REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

No incentive fee shall be payable with respect to any calendar quarter unless Core 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, 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, “Core 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 of real estate owned and related intangible assets (if any);

1 unchanged sentence

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.

Core 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 Core 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.

SEVEN HILLS REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

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.

Instead, the aggregate distribution amount that accrues to such shares during the calendar quarter of such calculation will be subtracted from Core Earnings for purposes of calculating incentive fees, unless such distribution is otherwise already excluded from Core Earnings.

Equity and Core 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.

The initial term of our management agreement ended on December 31, 2023, and the agreement automatically renewed for a successive one year term on January 1, 2024, and will renew for successive one year terms each January 1 thereafter, unless it is sooner terminated as detailed below.

Termination Rights.

6 unchanged sentences

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.

SEVEN HILLS REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Expense Reimbursement.

4 unchanged sentences

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.

1 unchanged sentence

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.

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.

8 unchanged sentences

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.

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.

SEVEN HILLS REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Related Person Transactions

8 unchanged sentences

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.

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.

SEVEN HILLS REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

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

Portnoy serves as the chair of the board and as a 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 or officers of certain of these companies.

Our Manager, Tremont Realty Capital LLC.

1 unchanged sentence

See Note 8 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.

4 unchanged sentences

See Note 8 for further information regarding this shared services arrangement.

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.

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 .

8 unchanged sentences

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.

Property Management Agreement with RMR .

We entered into a property management agreement with RMR in July 2023 with respect to real estate owned in Yardley, PA.

Pursuant to this agreement, RMR provides property management services and we pay management fees equal to 3.0 % of gross collected rents.

Also under the terms of this property management agreement, we pay RMR additional fees for construction supervision services equal to 5.0 % of the cost of such construction.

Either we or RMR may terminate this agreement upon 30 days' prior notice.

No termination fee would be payable as a result of terminating the agreement.

We recognized property management and construction supervision fees of $ 17 during the year ended December 31, 2023, related to real estate owned.

We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended.

2 unchanged sentences

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.

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.

SEVEN HILLS REALTY TRUST

1 unchanged sentence

(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):

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):

Year Ended December 31,

Net income $ 25,965 $ 27,640

Income attributable to unvested participating securities ( 193 ) —

Net income used in calculating net income per common share $ 27,447 $ 24,650

Income attributable to unvested share awards

( 219 ) ( 193 )

Net income used in calculating net income per common share - basic and diluted

$ 25,746 $ 27,447

Denominators:

5 unchanged sentences

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

As of December 31, 2023, we had estimated unspent lease related costs of $ 361 .

SEVEN HILLS REALTY TRUST

7 unchanged sentences

First Mortgage Loans (4)

1 Multifamily, Olmsted Falls, OH L + 4.00 %

1 Multifamily, Olmsted Falls, OH S + 4.00 %

01/28/2024 01/28/2026 I/O — $ 46,083 $ 46,471

2 Office, Dallas, TX L + 3.25 %

2 Office, Dallas, TX S + 3.25 %

08/25/2024 08/25/2026 I/O — 43,510 41,949

3 unchanged sentences

03/29/2025 03/29/2027 I/O — 42,200 42,089

5 Retail, West Bloomfield, MI L + 3.85 %

5 Multifamily, Auburn, AL S + 3.25 %

11/11/2025 11/11/2026 I/O — 37,500 37,323

1 unchanged sentence

03/22/2025 03/22/2027 I/O — 36,919 36,767

7 Industrial, Summerville, SC L + 3.50 %

12/20/2024 12/20/2026 I/O — 35,000 34,769

7 Multifamily, Farmington Hills, MI S + 3.15 %

05/24/2025 05/24/2027 I/O — 29,121 29,287

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 %

8 Office, Downers Grove, IL S + 4.25 %

11/25/2024 11/25/2024 I/O — 29,500 29,544

12 Office, Plano, TX L + 4.75 %

9 Hotel, Anaheim, CA S + 4.00 %

11/29/2025 11/29/2028 I/O — 29,000 28,711

13 Office, Carlsbad, CA L + 3.25 %

10 Multifamily, Las Vegas, NV S + 3.30 %

06/10/2025 06/10/2027 I/O — 25,185 25,196

14 Industrial, Fontana, CA S + 3.75 %

11 Industrial, Fountain Inn, SC S + 4.25 %

07/13/2025 07/13/2026 I/O — 24,300 24,084

15 Office, Downers Grove, IL L + 4.25 %

12 Office, Plano, TX S + 4.75 %

07/01/2024 07/01/2026 I/O — 26,463 26,475

16 Office, Dublin, OH S + 3.75 %

13 Industrial, Fayetteville, GA S + 3.35 %

10/06/2026 10/06/2028 I/O — 25,250 25,007

17 Office, Bellevue, WA L + 3.85 %

14 Office, Carlsbad, CA S + 3.25 %

10/27/2024 10/27/2026 I/O — 24,417 24,349

18 Multifamily, Portland, OR L + 3.57 %

15 Industrial, Fontana, CA S + 3.75 %

11/18/2024 11/18/2026 I/O — 22,000 21,891

19 Multifamily, Ames, IA L + 3.80 %

16 Office, Downers Grove, IL S + 4.25 %

12/09/2024 12/09/2026 I/O — 23,530 23,574

20 Office / Industrial, Aurora, IL L + 4.35 %

17 Office, Bellevue, WA S + 3.85 %

11/05/2024 11/05/2026 I/O — 20,000 19,941

21 Office, Yardley, PA L + 4.58 %

18 Multifamily, Portland, OR S + 3.57 %

07/09/2024 07/09/2026 I/O — 19,688 19,695

22 Retail, Sandy Springs, GA L + 3.75 %

19 Hotel, Scottsdale, AZ S + 4.25 %

09/27/2026 09/27/2028 I/O — 17,250 17,081

1 unchanged sentence

03/18/2024 03/18/2026 I/O — 15,602 15,627

24 Office, Westminster, CO L + 3.75 %

21 Retail, Sandy Springs, GA S + 3.75 %

09/23/2024 09/23/2026 I/O — 15,287 15,245

25 Multifamily, Portland, OR L + 3.57 %

22 Office, Westminster, CO S + 3.75 %

05/25/2024 05/25/2026 I/O — 15,750 15,435

26 Multifamily, Seattle, WA L + 3.55 %

23 Multifamily, Portland, OR S + 3.57 %

07/30/2024 07/30/2026 I/O — 13,400 12,995

2 unchanged sentences

Total $ 629,892 $ 626,462

allowance for credit losses (5)

Total carrying value including allowance for credit losses

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

2 unchanged sentences

(4) As of December 31, 2023, none of our borrowers were delinquent in payment.

(5) For further information regarding our allowance for credit losses, see Note 3 to our Consolidated Financial Statements.

SEVEN HILLS REALTY TRUST

7 unchanged sentences

Originations 203,244

Loans acquired in the Merger 205,593

Additional funding 17,310

2 unchanged sentences

Deductions during the year:

Repayment of mortgage loans ( 59,197 )

Deferred fees ( 2,306 )

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

Balance as of December 31, 2022

4 unchanged sentences

Net amortization of deferred fees 3,333

Decrease in allowance for credit losses

Deductions during the year:

Repayments ( 172,283 )

Transfer to real estate owned

Deferred fees ( 1,621 )

Cumulative effect adjustment upon adoption of ASU No.

Balance as of December 31, 2023

2 unchanged sentences

/s/ Thomas J.

President and Chief Investment Officer

February 20, 2024

2 unchanged sentences

/s/ Thomas J.

Lorenzini President February 13, 2023

/s/ Tiffany R.

Sy Chief Financial Officer and Treasurer February 13, 2023

Sy (principal financial and accounting officer)

Lorenzini President and Chief Investment Officer

February 20, 2024

/s/ Fernando Diaz

Chief Financial Officer and Treasurer February 20, 2024

Fernando Diaz

(principal financial and accounting officer)

/s/ Barbara D.

Gilmore Independent Trustee February 20, 2024

/s/ Phyllis M.

Hollis Independent Trustee February 13, 2023

/s/ Matthew P.

8 unchanged sentences

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-K

Item 9A. Controls and Procedures