What changed in this filing

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Item 1. Financial Statements

2024-04-29 compared with 2023-10-31 · 146 added, 263 removed, 290 unchanged (59% of the section changed)

3 unchanged sentences

(dollars in thousands, except per share data)

September 30, December 31,

March 31, December 31,

Cash and cash equivalents $ 93,298 $ 87,855

Restricted cash 139 10

Loans held for investment 588,635 626,462

1 unchanged sentence

Loans held for investment, net 583,486 622,086

Real estate owned 11,705 —

Accumulated depreciation ( 41 ) —

Real estate owned, net 11,130 11,278

Acquired real estate leases, net 3,937 4,137

Accrued interest receivable 3,400 3,632

20 unchanged sentences

(amounts in thousands, except per share data)

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

2023 2022 2023 2022

Three Months Ended March 31,

INCOME FROM INVESTMENTS:

10 unchanged sentences

Reimbursement of shared services expenses 691 643

Reversal of credit losses ( 1,338 ) — ( 1,299 ) —

Provision for (reversal of) credit losses 697 ( 987 )

Expenses from real estate owned 645 —

Other transaction related costs — — — 37

Total other expenses 4,126 1,524

8 unchanged sentences

(amounts in thousands)

Number of Additional

Common Common Paid In Cumulative Cumulative

Shares Shares Capital Net Income Distributions Total

Number of Common Shares Common Shares Additional Paid In Capital Cumulative Net Income Cumulative Distributions Total

Balance at December 31, 2023 14,811 $ 15 $ 239,443 $ 71,660 $ ( 39,870 ) $ 271,248

Cumulative-effect adjustment upon adoption of ASU No.

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

Share grants — — 336 — — 336

Share repurchases ( 6 ) — ( 75 ) — — ( 75 )

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

Net income — — — 5,233 — 5,233

1 unchanged sentence

Balance at March 31, 2024 14,805 $ 15 $ 239,704 $ 76,893 $ ( 45,054 ) $ 271,558

Share grants 42 — 579 — — 579

Share repurchases ( 3 ) — ( 24 ) — — ( 24 )

Share forfeitures ( 1 ) — — — — —

Net income — — — 4,644 — 4,644

Distributions — — — — ( 5,148 ) ( 5,148 )

Balance at June 30, 2023 14,745 15 239,167 58,142 ( 29,526 ) 267,798

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

Cumulative-effect adjustment upon adoption of credit loss accounting standard — — — ( 6,595 ) — ( 6,595 )

Share grants — — 121 — — 121

3 unchanged sentences

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

Balance at September 30, 2023 14,816 $ 15 $ 239,337 $ 65,615 $ ( 34,686 ) $ 270,281

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

Share grants — — 82 — — 82

Net income — — — 11,126 — 11,126

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

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

Share grants 42 — 548 — — 548

Share forfeitures ( 1 ) — — — — —

Net income — — — 4,578 — 4,578

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

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

Share grants 85 — 259 — — 259

Share repurchases ( 9 ) — ( 96 ) — — ( 96 )

Net income — — — 5,176 — 5,176

Distributions — — — — ( 3,660 ) ( 3,660 )

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

See accompanying notes.

2 unchanged sentences

(dollars in thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

CASH FLOWS FROM OPERATING ACTIVITIES:

2 unchanged sentences

Accretion of purchase discount ( 1,145 ) ( 1,185 )

Reversal of credit losses ( 1,299 ) —

Provision for (reversal of) credit losses 697 ( 987 )

Amortization of loan origination and exit fees ( 582 ) ( 1,004 )

10 unchanged sentences

CASH FLOWS FROM INVESTING ACTIVITIES:

Origination of loans held for investment ( 78,038 ) ( 179,265 )

Additional funding of loans held for investment ( 886 ) ( 1,651 )

Repayment of loans held for investment 40,440 51,918

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

Real estate owned improvements ( 1,339 ) —

Net cash used in investing activities ( 10,702 ) ( 111,870 )

Net cash provided by investing activities 39,554 50,267

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from secured financing facilities 63,206 284,867

Repayments under secured financing facilities ( 33,224 ) ( 38,125 )

2 unchanged sentences

Distributions ( 5,184 ) ( 5,147 )

Net cash (used in) provided by financing activities ( 14,779 ) 152,049

Increase in cash, cash equivalents and restricted cash ( 10,537 ) 50,142

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

Cash, cash equivalents and restricted cash at end of period $ 60,530 $ 76,437

Net cash used in financing activities

( 38,835 ) ( 43,603 )

Increase in cash and cash equivalents 5,443 13,241

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

Cash and cash equivalents at end of period $ 93,298 $ 84,308

SUPPLEMENTAL DISCLOSURES:

Interest paid $ 8,421 $ 7,408

Income taxes paid $ 133 $ 92

NON-CASH INVESTING ACTIVITIES:

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

SUPPLEMENTAL DISCLOSURE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH:

The table below provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows:

As of September 30,

Cash and cash equivalents $ 60,391 $ 76,371

Restricted cash 139 66

Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows $ 60,530 $ 76,437

See accompanying notes.

Income taxes (refunded) paid $ ( 64 ) $ 3

SEVEN HILLS REALTY TRUST

13 unchanged sentences

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

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

Recently Adopted Accounting Pronouncements

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

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

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 condensed consolidated balance sheets.

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

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

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

Given the lack of historical loss data related to our loan portfolio, we elected to estimate our expected losses using an analytical model that considers the likelihood of default and loss given default for each individual loan.

This analytical model incorporates data from a third party database with historical loan loss information for commercial mortgage-backed securities, 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.

Recent Accounting Pronouncements

On November 27, 2023, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or 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)

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 condensed consolidated balance sheets by $ 6,595 , establishing an allowance for credit losses of $ 4,893 with respect to our then outstanding loans held for investment and increasing accounts payable, accrued liabilities and other liabilities by $ 1,702 with respect to our then unfunded loan commitments.

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

Concurrent with our adoption of ASU No.

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

2022-02, Financial Instruments - Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures , which eliminated the guidance for and recognitions of troubled debt restructurings for all entities that adopted ASU No.

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

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

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

The adoption of ASU No.

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

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

2016-13 and our internal loan risk rating policy.

Loans Held for Investment, net

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

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

We fund our loan portfolio using cash on hand and advancements under our Secured Financing Facilities, as defined in Note 5.

See Note 5 for further information regarding our secured financing agreements.

The table below provides overall statistics for our loan portfolio as of September 30, 2023 and December 31, 2022:

As of September 30, 2023 As of December 31, 2022

The table below provides overall statistics for our loan portfolio as of March 31, 2024 and December 31, 2023:

As of March 31, 2024 As of December 31, 2023

Number of loans 21 24

13 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 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

The tables below represent our loan activities during the three months ended September 30, 2023 and 2022:

Principal Balance Deferred Fees and Other Items Amortized Cost

Balance at June 30, 2023 $ 634,920 $ ( 5,395 ) $ 629,525

Additional funding 919 — 919

Originations 41,550 ( 528 ) 41,022

Repayments ( 2,174 ) — ( 2,174 )

Net amortization of deferred fees — 762 762

Purchase discount accretion — 1,075 1,075

Balance at September 30, 2023 $ 675,215 $ ( 4,086 ) $ 671,129

Principal Balance Deferred Fees and Other Items Amortized Cost

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

Additional funding 4,267 — 4,267

Originations 38,440 ( 510 ) 37,930

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

Net amortization of deferred fees — 823 823

Purchase discount accretion — 1,596 1,596

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

The tables below represent our loan activities during the nine months ended September 30, 2023 and 2022:

The tables below represent our loan activities during the three months ended March 31, 2024 and 2023:

Principal Balance Deferred Fees and Other Items Amortized Cost

1 unchanged sentence

Additional funding 1,044 ( 158 ) 886

Originations 79,050 ( 1,012 ) 78,038

Repayments ( 40,304 ) ( 136 ) ( 40,440 )

Transfer to real estate owned ( 15,865 ) ( 95 ) ( 15,960 )

Net amortization of deferred fees — 582 582

Purchase discount accretion — 1,145 1,145

Balance at September 30, 2023 $ 675,215 $ ( 4,086 ) $ 671,129

Balance at March 31, 2024 $ 590,632 $ ( 1,997 ) $ 588,635

Principal Balance Deferred Fees and Other Items Amortized Cost

1 unchanged sentence

Additional funding 1,884 ( 14 ) 1,870

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

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

1 unchanged sentence

Purchase discount accretion — 1,185 1,185

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

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

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 September 30, 2023 and December 31, 2022:

September 30, 2023 December 31, 2022

The tables below detail the property type and geographic location of the properties securing the loans in our portfolio as of March 31, 2024 and December 31, 2023:

March 31, 2024 December 31, 2023

Property Type Number of Loans

3 unchanged sentences

Percentage of Value

9 $ 225,027 34 % 11 $ 252,796 38 %

Multifamily 7 $ 208,610 35 % 7 $ 207,734 33 %

Retail 4 110,815 17 % 4 109,248 16 %

Office 6 166,618 28 % 7 181,268 29 %

Industrial 4 110,181 19 % 5 118,707 19 %

4 93,346 14 % 4 110,656 17 %

Retail 2 57,387 10 % 3 72,962 12 %

Hotel 2 45,839 8 % 2 45,791 7 %

21 $ 588,635 100 % 24 $ 626,462 100 %

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

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

During the nine months ended September 30, 2023, our loan investment in Aurora, IL was repaid.

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Geographic Location Number of Loans

1 unchanged sentence

Percentage of Value Number of Loans Amortized Cost Percentage of Value

Midwest 8 $ 229,263 34 % 9 $ 251,208 37 %

South 7 $ 208,046 35 % 8 $ 222,477 36 %

West 8 170,369 29 % 9 185,294 30 %

Midwest 4 128,970 22 % 4 128,876 20 %

East 2 81,250 14 % 3 89,815 14 %

21 $ 588,635 100 % 24 $ 626,462 100 %

Credit Quality Information

Credit Quality Information and Allowance for Credit Losses

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.

1 unchanged sentence

See our 2023 Annual Report for more information regarding our loan risk ratings.

As of September 30, 2023 and December 31, 2022, the amortized cost of our loan portfolio within each internal risk rating by year of origination was as follows:

September 30, 2023

As of March 31, 2024 and December 31, 2023, the amortized cost of our loan portfolio within each internal risk rating by year of origination was as follows:

March 31, 2024

Risk Rating Number of Loans Percentage of Portfolio 2024 2023 2022 2021 Prior Total

16 unchanged sentences

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

The weighted average risk rating of our loans by amortized cost was 2.9 as of September 30, 2023 and December 31, 2022.

Certain of our borrowers' business operations or tenants, particularly certain office and retail properties, were negatively impacted by the COVID-19 pandemic and continue to be impacted by market conditions that arose or intensified during or in response to the pandemic.

Current inflationary pressures, rising or sustained high interest rates, supply chain issues or a prolonged economic slowdown or recession could amplify those negative impacts.

Therefore, certain of our borrowers’ business plans have taken or will likely take longer to execute than initially expected, and as a result, certain of our borrowers may be unable to pay their debt service obligations owed and due to us as currently scheduled or at all.

The 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 tables below represent the changes to the allowance for credit losses during the three and nine months ended September 30, 2023:

Allowance for credit losses

We measure our allowance for credit losses using the current expected credit loss, or CECL, model, which is based upon historical experience, current conditions, and reasonable and supportable forecasts incorporating forward-looking information that affect the collectability of the reported amount.

The allowance for credit losses is a valuation account that is deducted from the related loans’ amortized cost basis in our condensed consolidated balance sheets.

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

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

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

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 CRE loans since 1998.

We utilize the model to estimate credit losses over a reasonable and supportable economic forecast period of 12 months, followed by a straight-line reversion period of six months 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.

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.

See Note 2 to our Consolidated Financial Statements included in Part IV, Item 15 of our 2023 Annual Report for further information regarding our measurement of our allowance for credit losses.

SEVEN HILLS REALTY TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

The tables below represent the changes to the allowance for credit losses during the three months ended March 31, 2024 and 2023:

Loans Held for Investment, net Unfunded Loan Commitments Total

Balance at June 30, 2023 $ 4,201 $ 1,725 $ 5,926

(Reversal of) provision for credit losses

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

Provision for (reversal of) credit losses

773 ( 76 ) 697

Balance at September 30, 2023 $ 3,281 $ 2,047 $ 5,328

Balance at March 31, 2024 $ 5,149 $ 1,376 $ 6,525

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) provision for credit losses

( 1,644 ) 345 ( 1,299 )

Cumulative-effect adjustment upon adoption of the CECL model

4,893 1,702 6,595

Balance at September 30, 2023 $ 3,281 $ 2,047 $ 5,328

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

The decrease in the allowance for credit losses during the three months ended September 30, 2023 is primarily attributable to a reversal of credit losses of $ 740 for estimated costs to sell related to the reclassification of the property located in Yardley, PA from held for sale to held for investment, favorable changes in the macroeconomic outlook, most notably in CRE pricing forecasts and loan repayments.

The decrease in the allowance for credit losses during the nine months ended September 30, 2023, compared to the January 1, 2023 cumulative-effect adjustment upon adoption of ASU No.

2016-13, is primarily attributable to a write off related to the loan transferred to real estate owned in June 2023, loan repayments and favorable changes in CRE pricing forecasts mentioned above.

SEVEN HILLS REALTY TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

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

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

The increase in the allowance for credit losses during the three months ended March 31, 2024 is primarily attributable to a negative outlook in CRE pricing forecasts.

The decrease in the allowance for credit losses during the three months ended March 31, 2023, compared to the January 1, 2023 cumulative-effect adjustment upon adoption of the CECL model, was primarily attributable to a favorable macroeconomic outlook as of March 31, 2023, most notably in near-term CRE pricing, and loan repayments.

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

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

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.

As of September 30, 2023, this loan had an amortized cost of $ 23,988 and a risk rating of 2.

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.

As of September 30, 2023, this loan had an amortized cost of $ 20,690 and a risk rating of 2.

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 nine months ended September 30, 2023.

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 nine months ended September 30, 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 September 30, 2023 or December 31, 2022.

As of September 30, 2023 and October 27, 2023, all of our borrowers with outstanding loans had paid their debt service obligations owed and due to us.

There were no modifications to our loan portfolio for borrowers experiencing financial difficulties during the three months ended March 31, 2024.

We did not have any outstanding past due loans or nonaccrual loans as of March 31, 2024 or December 31, 2023.

As of March 31, 2024 and April 25, 2024, all of our borrowers had paid their debt service obligations owed and due to us.

See our 2023 Annual Report for more information regarding our nonaccrual policy .

2 unchanged sentences

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

We generally expect to sell real estate owned within one year of acquisition and classify real estate owned as held for sale when it meets the criteria required by ASC 360, Impairments and Disposals of Long-Lived Assets.

Upon acquisition, real estate owned is recognized at the lesser of the fair value of the property less estimated costs to sell, if applicable, and the amortized cost of the loan secured by the property at the time of acquisition.

The fair value of the property is determined using Level III inputs and standard industry valuation methods, including discounted cash flow analyses and sales comparisons.

If the amortized cost of the loan exceeds the fair value of the property less estimated costs to sell, if applicable, the difference is recorded through the allowance for credit losses as a write off.

Conversely, if the fair value of the property less estimated costs to sell, if applicable, exceeds the amortized cost of the loan, the difference is recorded through the allowance for credit losses as a recovery.

Any related shortfall or excess of previously established allowances for credit losses is recognized in the condensed 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.

SEVEN HILLS REALTY TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

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

The table below presents the assets and liabilities of real estate owned in our condensed consolidated balance sheets:

March 31, 2024 December 31, 2023

Land, building and improvements

$ 11,393 $ 11,393

Accumulated depreciation

( 263 ) ( 115 )

Real estate owned, net 11,130 11,278

Acquired real estate leases, net (1)

Prepaid expenses and other assets, net (2)

$ 16,643 $ 16,767

Accounts payable, accrued liabilities and other liabilities $ 472 $ 517

Total liabilities

(1) As of March 31, 2024, the weighted average amortization period of acquired real estate leases was 7.2 years.

(2) Includes $ 925 and $ 647 and of straight line rent receivables as of March 31, 2024 and December 31, 2023, respectively.

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.

We increased revenue from real estate owned to record revenue on a straight line basis by $ 278 for the three months ended March 31, 2024.

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

We regularly evaluate real estate owned for indicators of impairment.

4 unchanged sentences

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

SEVEN HILLS REALTY TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

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 condensed 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 condensed 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 $ 5,290 , including $ 4,337 of acquired real estate leases, net and $ 362 of straight line rent receivables, are included in prepaid expenses and other assets, net in our condensed consolidated balance sheets at September 30, 2023.

As of September 30, 2023, the weighted average remaining life of acquired real estate leases was 7.4 years.

Accrued expenses and other liabilities related to real estate owned of $ 762 are included in accounts payable, accrued liabilities and other liabilities in our condensed consolidated balance sheets at September 30, 2023.

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

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.

We increased revenue from real estate owned to record revenue on a straight line basis by $ 295 and $ 362 for the three and nine months ended September 30, 2023, respectively.

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

Secured Financing Agreements

Our secured financing agreements at September 30, 2023 consisted of agreements that govern:

Our secured financing agreements at March 31, 2024 consisted of agreements that govern:

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

our master repurchase facility with Citibank, N.A., or Citibank, or the Citibank Master Repurchase Facility;

our facility loan program with BMO Harris Bank N.A., or BMO, or the BMO Facility, and our master repurchase facility with UBS AG, or UBS, or the UBS Master Repurchase Facility.

our master repurchase facility with UBS AG, or UBS, or the UBS Master Repurchase Facility, and our facility loan program with BMO Harris Bank N.A., or BMO, or the BMO Facility.

We refer to the Wells Fargo Master Repurchase Facility, Citibank Master Repurchase Facility and UBS Master Repurchase Facility, collectively, as our Master Repurchase Facilities.

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See our 2023 Annual Report for more information regarding our Secured Financing Facilities.

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 .

As of September 30, 2023, we were in compliance with the covenants and other terms of the agreements that govern our Secured Financing Facilities.

As of September 30, 2023 and October 27, 2023, we had a $ 474,866 and $ 446,461 , respectively, aggregate outstanding principal balance under our Secured Financing Facilities.

SEVEN HILLS REALTY TRUST

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(dollars in thousands, except per share data)

The table below summarizes our Secured Financing Facilities as of September 30, 2023 and December 31, 2022:

The table below summarizes our Secured Financing Facilities as of March 31, 2024 and December 31, 2023:

Debt Obligation

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Remaining Maturity (years) (2)

Maturity Date

Principal Balance

September 30, 2023:

March 31, 2024:

Citibank Master Repurchase Facility $ 215,000 $ 57,893 $ 57,642 7.45 % 0.6 3/15/2025 $ 102,161

UBS Master Repurchase Facility 205,000 181,381 181,188 7.68 % 0.7 2/18/2025 242,110

BMO Facility 150,000 101,027 100,595 7.25 % 1.5 135,978

BMO Facility 150,000 87,767 87,525 7.24 % 1.0 Various 118,835

Wells Fargo Master Repurchase Facility 125,000 95,551 94,816 7.40 % 0.9 3/11/2025 127,526

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UBS Master Repurchase Facility 205,000 181,381 181,162 7.72 % 0.8 2/18/2025 241,887

BMO Facility 150,000 111,105 110,473 6.22 % 2.2 148,476

BMO Facility 150,000 87,767 87,451 7.29 % 1.3 Various 118,471

Wells Fargo Master Repurchase Facility 125,000 95,551 94,998 7.44 % 1.1 3/11/2025 127,069

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

(2) The weighted average remaining maturity is determined using the current maturity date of our corresponding loan investments, assuming no borrower loan extension options have been exercised.

As of September 30, 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.

As of September 30, 2023, our outstanding borrowings under our Secured Financing Facilities had the following remaining maturities:

(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.

The weighted average remaining maturity of the BMO Facility is determined using the underlying loan investment maturity date.

As of March 31, 2024, we were in compliance with the covenants and other terms of the agreements that govern our Secured Financing Facilities.

As of March 31, 2024, our outstanding borrowings under our Secured Financing Facilities had the following remaining maturities:

Year Principal Payments on

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2026 and thereafter —

Based upon the performance and payment history of our commercial mortgage loans, along with our ability to obtain financing under repurchase agreements and success in extending certain of our existing Master Repurchase Agreements, we believe it is probable that we will extend our Master Repurchase Facilities prior to their maturities.

Fair Value Measurements

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

We estimate the fair values of our loans held for investment and outstanding principal balances under our Secured Financing Facilities by using Level III inputs, including discounted cash flow analyses and currently prevailing market terms as of the reporting date.

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.

See our 2023 Annual Report for further information regarding the fair value of financial instruments.

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

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Carrying Value Fair Value Carrying Value Fair Value

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Secured Financing Facilities $ 421,171 $ 419,899 $ 454,422 $ 454,620

There were no transfers of financial assets or liabilities within the fair value hierarchy during the nine months ended September 30, 2023.

There were no transfers of financial assets or liabilities within the fair value hierarchy during the three months ended March 31, 2024.

Shareholders' Equity

Common Share Awards

On May 23, 2023, in accordance with our Trustee compensation arrangements, we awarded to each of our then seven Trustees 6,000 of our common shares, valued at the closing price of our common shares on The Nasdaq Stock Market LLC, or Nasdaq on that day.

The aggregate value of common shares awarded was $ 387 .

On September 13, 2023, we awarded an aggregate of 80,000 of our common shares to our officers and certain other employees of Tremont Realty Capital LLC, or Tremont, and of The RMR Group LLC, or RMR, valued at the closing price of our common shares on Nasdaq that day.

The aggregate value of common shares awarded was $ 876 .

Common Share Purchases

During the nine months ended September 30, 2023, we purchased 13,257 of our common shares from certain of our current and former officers and current and former officers and employees of Tremont and 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 three months ended March 31, 2024, we purchased 5,916 of our common shares from certain current and former officers of The RMR Group LLC, or RMR in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares, valued at the closing price of our common shares on The Nasdaq Stock Market LLC, or Nasdaq on the applicable purchase date.

The aggregate value of common shares purchased was $ 75 .

Distributions

For the nine months ended September 30, 2023, we declared and paid regular quarterly distributions to common shareholders, using cash on hand, as follows:

For the three months ended March 31, 2024, we declared and paid regular quarterly distributions to common shareholders, using cash on hand, as follows:

Record Date Payment Date Distribution per Share Total Distribution

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

April 24, 2023 May 18, 2023 0.35 5,148

July 24, 2023 August 17, 2023 0.35 5,160

January 22, 2024

February 15, 2024

$ 0.35 $ 5,184

On October 12, 2023, we declared a quarterly distribution of $ 0.35 per common share, or $ 5,185 , to shareholders of record on October 23, 2023.

We expect to pay this distribution on or about November 16, 2023, using cash on hand.

On April 11, 2024, we declared a quarterly distribution of $ 0.35 per common share, or $ 5,182 , to shareholders of record on April 22, 2024.

We expect to pay this distribution on or about May 16, 2024, using cash on hand.

Management Agreement with Tremont

We have no employees.

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

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

The personnel and various services we require to operate our business are provided to us, pursuant to a management agreement with Tremont Realty Capital LLC, or 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.

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

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See our 2023 Annual Report for further information regarding our management agreement with Tremont.

SEVEN HILLS REALTY TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Related Person Transactions

We have relationships and historical and continuing transactions with Tremont, The RMR Group Inc., or RMR Inc., and others related to them, including other companies to which RMR or its subsidiaries provide management services and some of which have trustees or officers who are also our Trustees or officers.

We have relationships and historical and continuing transactions with Tremont, RMR, The RMR Group Inc., or RMR Inc., and others related to them, including other companies to which RMR or its subsidiaries provide management services and some of which have trustees or officers who are also our Trustees or officers.

Tremont is a subsidiary of RMR, which is a majority owned subsidiary of RMR Inc., and RMR Inc.

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One of our Managing Trustees and Chair of our Board of Trustees, Adam D.

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

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

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

Jordan is also an officer of RMR Inc.

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

See Note 7 for information relating to the awards of our common shares we made in September 2023 to our officers and certain other employees of Tremont and/or RMR and common shares we purchased from certain of our current and former officers and current and former officers and employees of Tremont and/or RMR in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.

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

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

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

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

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 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.

We have a management agreement with Tremont to provide management services to us.

See Note 8 for further information regarding our management agreement with Tremont.

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

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

As of September 30, 2023, Tremont owned 1,708,058 of our common shares, and Mr.

Tremont provides management services to us pursuant to our management agreement.

See Note 8 for further information regarding our management agreement.

As of March 31, 2024, Tremont owned 1,708,058 of our common shares, and Mr.

Portnoy beneficially owned (including through Tremont and ABP Trust) 13.5 % of our outstanding common shares.

Acceleration of Unvested Shares of Former Officer.

Douglas Lanois resigned as our Chief Financial Officer and Treasurer, effective September 30, 2022.

Our Compensation Committee approved the acceleration of all 3,648 of our unvested common shares owned by Mr.

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

SEVEN HILLS REALTY TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

Property Management Agreement with RMR.

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

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.

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

We recognized property management and construction supervision fees of $ 8 for the three and nine months ended September 30, 2023, related to real estate owned.

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

We recognized property management and construction supervision fees of $ 9 for the three months ended March 31, 2024, related to real estate owned.

For further information about these and other such relationships and certain other related person transactions, refer to our 2023 Annual Report.

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

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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.

SEVEN HILLS REALTY TRUST

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

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

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

2023 2022 2023 2022

Three Months Ended March 31,

Net income $ 5,233 $ 7,803

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Commitments and Contingencies

As of September 30, 2023, we had unfunded loan commitments of $ 45,182 related to our loans held for investment that are not reflected in our condensed consolidated balance sheets.

These unfunded loan commitments had a weighted average initial maturity of 1.1 years as of September 30, 2023.

As of March 31, 2024, we had unfunded loan commitments of $ 38,259 related to our loans held for investment that are not reflected in our condensed consolidated balance sheets.

These unfunded loan commitments had a weighted average initial maturity of 1.0 years as of March 31, 2024.

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

As of September 30, 2023, we had estimated unspent lease related costs of $ 474 .

As of March 31, 2024, we had estimated unspent lease related costs of $ 361 .

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

What changed 10-Q

Item 1. Financial Statements