Seven Hills Realty Trust 10-Q

Item 1. Financial Statements SEVEN HILLS REALTY TRUST CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) (unaudited) September 30, December 31, 2024 2023 ASSETS Cash and cash equivalents $ 82,197 $ 87,855 Loans held for investment 557,226 626,462 Allowance for credit losses ( 7,282 ) ( 4,376 ) Loans held for investment, net 549,944 622,086 Real estate owned, net 11,182 11,278 Acquired real estate leases, net 3,537 4,137 Accrued interest receivable 3,014 3,632 Prepaid expenses and other assets, net 2,702 2,537 Total assets $ 652,576 $ 731,525 LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable, accrued liabilities and other liabilities $ 4,757 $ 3,808 Secured financing facilities, net 375,928 454,422 Due to related persons 2,385 2,047 Total liabilities 383,070 460,277 Commitments and contingencies Shareholders' equity: Common shares of beneficial interest, $ 0.001 par value per share; 25,000,000 shares authorized; 14,906,453 and 14,811,410 shares issued and outstanding, respectively 15 15 Additional paid in capital 240,316 239,443 Cumulative net income 84,601 71,660 Cumulative distributions ( 55,426 ) ( 39,870 ) Total shareholders' equity 269,506 271,248 Total liabilities and shareholders' equity $ 652,576 $ 731,525 See accompanying notes. 1 Table of Contents SEVEN HILLS REALTY TRUST CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (amounts in thousands, except per share data) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 INCOME FROM INVESTMENTS: Interest and related income $ 15,741 $ 17,137 $ 48,467 $ 48,814 Purchase discount accretion 420 1,075 2,347 3,307 Less: interest and related expenses ( 7,875 ) ( 8,979 ) ( 24,933 ) ( 24,600 ) Income from loan investments, net 8,286 9,233 25,881 27,521 Revenue from real estate owned 571 565 1,718 714 Total revenue 8,857 9,798 27,599 28,235 OTHER EXPENSES: Base management fees 1,083 1,077 3,245 3,223 Incentive fees 486 469 906 661 General and administrative expenses 1,011 941 3,055 3,018 Reimbursement of shared services expenses 635 642 2,017 1,913 Provision for (reversal of) credit losses 1,518 ( 1,338 ) 3,530 ( 1,299 ) Expenses from real estate owned 634 516 1,878 734 Total other expenses 5,367 2,307 14,631 8,250 Income before income taxes 3,490 7,491 12,968 19,985 Income tax expense ( 11 ) ( 18 ) ( 27 ) ( 65 ) Net income $ 3,479 $ 7,473 $ 12,941 $ 19,920 Weighted average common shares outstanding - basic and diluted 14,723 14,640 14,697 14,609 Net income per common share - basic and diluted $ 0.23 $ 0.51 $ 0.87 $ 1.35 See accompanying notes. 2 Table of Contents SEVEN HILLS REALTY TRUST CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (amounts in thousands) (unaudited) 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 Share grants — — 336 — — 336 Share repurchases ( 6 ) — ( 75 ) — — ( 75 ) Net income — — — 5,233 — 5,233 Distributions — — — — ( 5,184 ) ( 5,184 ) Balance at March 31, 2024 14,805 15 239,704 76,893 ( 45,054 ) 271,558 Share grants 29 — 497 — — 497 Share repurchases ( 1 ) — ( 13 ) — — ( 13 ) Net income — — — 4,229 — 4,229 Distributions — — — — ( 5,182 ) ( 5,182 ) Balance at June 30, 2024 14,833 15 240,188 81,122 ( 50,236 ) 271,089 Share grants 91 — 367 — — 367 Share repurchases ( 18 ) — ( 239 ) — — ( 239 ) Net income — — — 3,479 — 3,479 Distributions — — — — ( 5,190 ) ( 5,190 ) Balance at September 30, 2024 14,906 $ 15 $ 240,316 $ 84,601 $ ( 55,426 ) $ 269,506 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 Share repurchases ( 1 ) — ( 13 ) — — ( 13 ) Share forfeitures ( 1 ) — ( 1 ) — — ( 1 ) Net income — — — 7,803 — 7,803 Distributions — — — — ( 5,147 ) ( 5,147 ) Balance at March 31, 2023 14,707 15 238,612 53,498 ( 24,378 ) 267,747 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 Share grants 80 — 273 — — 273 Share repurchases ( 8 ) — ( 101 ) — — ( 101 ) Share forfeitures ( 1 ) — ( 2 ) — — ( 2 ) Net income — — — 7,473 — 7,473 Distributions — — — — ( 5,160 ) ( 5,160 ) Balance at September 30, 2023 14,816 $ 15 $ 239,337 $ 65,615 $ ( 34,686 ) $ 270,281 See accompanying notes. 3 Table of Contents SEVEN HILLS REALTY TRUST CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited) Nine Months Ended September 30, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 12,941 $ 19,920 Adjustments to reconcile net income to net cash provided by operating activities: Accretion of purchase discount ( 2,347 ) ( 3,307 ) Provision for (reversal of) credit losses 3,530 ( 1,299 ) Amortization of loan origination and exit fees ( 2,177 ) ( 2,529 ) Amortization of deferred financing costs 1,090 1,002 Straight line rental income ( 430 ) ( 362 ) Depreciation and amortization 1,001 308 Share based compensation 1,200 970 Changes in operating assets and liabilities: Accrued interest receivable 618 ( 480 ) Prepaid expenses and other assets 202 911 Accounts payable, accrued liabilities and other liabilities 303 ( 9 ) Due to related persons 338 ( 181 ) Net cash provided by operating activities 16,269 14,944 CASH FLOWS FROM INVESTING ACTIVITIES: Origination of loans held for investment ( 51,356 ) ( 78,038 ) Additional funding of loans held for investment ( 3,619 ) ( 4,710 ) Repayment of loans held for investment 128,735 71,643 Cash assumed from transfer of loans held for investment to real estate owned — 1,742 Real estate owned improvements ( 220 ) ( 1,339 ) Net cash provided by (used in) investing activities 73,540 ( 10,702 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from secured financing facilities 26,283 63,206 Repayments under secured financing facilities ( 104,765 ) ( 61,955 ) Payments of deferred financing costs ( 1,102 ) ( 437 ) Repurchase of common shares ( 327 ) ( 138 ) Distributions ( 15,556 ) ( 15,455 ) Net cash used in financing activities ( 95,467 ) ( 14,779 ) (Decrease) increase in cash and cash equivalents ( 5,658 ) ( 10,537 ) Cash and cash equivalents at beginning of period 87,855 71,067 Cash and cash equivalents at end of period $ 82,197 $ 60,530 SUPPLEMENTAL DISCLOSURES: Interest paid $ 24,034 $ 23,550 Income taxes (refunded) paid $ ( 22 ) $ 133 NON-CASH INVESTING ACTIVITIES: Transfer of loans held for investment to real estate owned $ — $ 14,800 4 Table of Contents SEVEN HILLS REALTY TRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) Note 1. Basis of Presentation The accompanying condensed consolidated financial statements are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2023, or our 2023 Annual Report. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim periods have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the accompanying condensed consolidated financial statements include the allowance for credit losses, the valuation of real estate owned and the fair value of financial instruments. Note 2. Recent Accounting Pronouncements In November 2023, the Financial Accounting Standards Board issued Accounting Standards Update, or ASU, 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures , which requires public entities, including those with a single reportable segment 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 Accounting Standards Codification, or ASC, 280, Segment Reporting , 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. ASU 2023-07 does not change how a public entity identifies its operating segments, aggregates those operating segments or applies the quantitative thresholds to determine its reportable segments. ASU 2023-07 is required to be applied retrospectively and is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. We expect to include additional disclosures as a result of the implementation ASU 2023-07, however, these changes are not expected to have a material effect on our consolidated financial statements . 5 SEVEN HILLS REALTY TRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) Note 3. Loans Held for Investment, net 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, 2024 and December 31, 2023: As of September 30, 2024 As of December 31, 2023 Number of loans 20 24 Total loan commitments $ 594,421 $ 670,293 Unfunded loan commitments (1) $ 36,876 $ 40,401 Principal balance $ 557,545 $ 629,892 Carrying value $ 549,944 $ 622,086 Weighted average coupon rate 8.89 % 9.19 % Weighted average all in yield (2) 9.27 % 9.64 % Weighted average floor 1.73 % 1.36 % Weighted average maximum maturity (years) (3) 2.5 3.0 Weighted average risk rating 3.1 3.0 (1) Unfunded loan commitments are primarily used to finance property improvements and leasing capital and are generally funded over the term of the loan. (2) All in yield represents the yield on a loan, including amortization of deferred fees over the initial term of the loan and excluding any purchase discount accretion. (3) Maximum maturity assumes all borrower loan extension options have been exercised, which options are subject to the borrower meeting certain conditions. The tables below represent our loan activities during the three months ended September 30, 2024 and 2023: Principal Balance Deferred Fees and Other Items Amortized Cost Balance at June 30, 2024 $ 610,210 $ ( 960 ) $ 609,250 Additional funding 1,922 — 1,922 Originations 16,000 ( 215 ) 15,785 Repayments ( 70,587 ) ( 458 ) ( 71,045 ) Net amortization of deferred fees — 894 894 Purchase discount accretion — 420 420 Balance at September 30, 2024 $ 557,545 $ ( 319 ) $ 557,226 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 6 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 nine months ended September 30, 2024 and 2023: Principal Balance Deferred Fees and Other Items Amortized Cost Balance at December 31, 2023 $ 629,892 $ ( 3,430 ) $ 626,462 Additional funding 3,777 ( 158 ) 3,619 Originations 52,017 ( 661 ) 51,356 Repayments ( 128,141 ) ( 594 ) ( 128,735 ) Net amortization of deferred fees — 2,177 2,177 Purchase discount accretion — 2,347 2,347 Balance at September 30, 2024 $ 557,545 $ ( 319 ) $ 557,226 Principal Balance Deferred Fees and Other Items Amortized Cost Balance at December 31, 2022 $ 678,555 $ ( 8,626 ) $ 669,929 Additional funding 4,943 ( 14 ) 4,929 Originations 79,050 ( 1,012 ) 78,038 Repayments ( 71,468 ) ( 175 ) ( 71,643 ) Transfer to real estate owned ( 15,865 ) ( 95 ) ( 15,960 ) Net amortization of deferred fees — 2,529 2,529 Purchase discount accretion — 3,307 3,307 Balance at September 30, 2023 $ 675,215 $ ( 4,086 ) $ 671,129 The tables below detail the property type and geographic location of the properties securing the loans in our portfolio as of September 30, 2024 and December 31, 2023: September 30, 2024 December 31, 2023 Property Type Number of Loans Amortized Cost Percentage of Value Number of Loans Amortized Cost Percentage of Value Office 6 $ 167,798 30 % 7 $ 181,268 29 % Multifamily 5 153,160 28 % 7 207,734 33 % Industrial 5 134,172 24 % 5 118,707 19 % Retail 2 57,453 10 % 3 72,962 12 % Hotel 2 44,643 8 % 2 45,791 7 % 20 $ 557,226 100 % 24 $ 626,462 100 % September 30, 2024 December 31, 2023 Geographic Location Number of Loans Amortized Cost Percentage of Value Number of Loans Amortized Cost Percentage of Value South 7 $ 187,644 34 % 8 $ 222,477 36 % West 6 142,063 25 % 9 185,294 30 % Midwest 4 129,284 23 % 4 128,876 20 % East 3 98,235 18 % 3 89,815 14 % 20 $ 557,226 100 % 24 $ 626,462 100 % 7 SEVEN HILLS REALTY TRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) 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. The higher the number, the greater the risk level. See our 2023 Annual Report for more information regarding our loan risk ratings. As of September 30, 2024 and December 31, 2023, the amortized cost of our loan portfolio within each internal risk rating by year of origination was as follows: September 30, 2024 Risk Rating Number of Loans Percentage of Portfolio 2024 2023 2022 2021 Prior Total 1 — — % $ — $ — $ — $ — $ — $ — 2 3 15 % — 28,817 37,184 15,241 — 81,242 3 12 59 % 51,686 49,247 160,811 70,072 — 331,816 4 5 26 % — — — 114,542 29,626 144,168 5 — — % — — — — — — 20 100 % $ 51,686 $ 78,064 $ 197,995 $ 199,855 $ 29,626 $ 557,226 December 31, 2023 Risk Rating Number of Loans Percentage of Portfolio 2023 2022 2021 Prior Total 1 — — % $ — $ — $ — $ — $ — 2 3 15 % 37,323 42,089 15,435 — 94,847 3 18 71 % 94,881 167,491 144,456 38,548 445,376 4 3 14 % — — 86,239 — 86,239 5 — — % — — — — — 24 100 % $ 132,204 $ 209,580 $ 246,130 $ 38,548 $ 626,462 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. 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 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. 8 SEVEN HILLS REALTY TRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (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. 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. 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. The tables below represent the changes to the allowance for credit losses during the three months ended September 30, 2024 and 2023. Loans Held for Investment, net Unfunded Loan Commitments Total Balance at June 30, 2024 $ 5,723 $ 2,117 $ 7,840 Provision for (reversal of) credit losses 1,559 ( 41 ) 1,518 Balance at September 30, 2024 $ 7,282 $ 2,076 $ 9,358 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 ( 1,660 ) 322 ( 1,338 ) Recoveries 740 — 740 Balance at September 30, 2023 $ 3,281 $ 2,047 $ 5,328 The tables below represent the changes to the allowance for credit losses during the nine months ended September 30, 2024 and 2023: Loans Held for Investment, net Unfunded Loan Commitments Total Balance at December 31, 2023 $ 4,376 $ 1,452 $ 5,828 Provision for credit losses 2,906 624 3,530 Balance at September 30, 2024 $ 7,282 $ 2,076 $ 9,358 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 ) Write offs ( 708 ) — ( 708 ) Recoveries 740 — 740 Balance at September 30, 2023 $ 3,281 $ 2,047 $ 5,328 The increase in the allowance for credit losses during the three and nine months ended September 30, 2024 is primarily attributable to declining values for CRE and unfavorable CRE pricing forecasts used in our CECL model and increased provisions for our office loans. 9 SEVEN HILLS REALTY TRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) 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 August 2024, we amended the agreement governing our loan secured by an office property in Dallas, TX. As part of this amendment, the loan commitment was reduced by $ 3,189 , the borrower was required to contribute $ 2,900 to cash reserves and the maturity date was extended by two years to August 25, 2026. As of September 30, 2024, this loan had an amortized cost of $ 43,511 and a risk rating of 4. In August 2024, we amended the agreement governing our loan secured by an office property in Plano, TX. As part of this amendment, the coupon rate was reduced from SOFR + 4.75 % to SOFR + 3.75 % and the maturity date was extended by two years to July 1, 2026. As of September 30, 2024, this loan had an amortized cost of $ 26,634 and a risk rating of 4. There were no other modifications to our loan portfolio for borrowers experiencing financial difficulties during the nine months ended September 30, 2024. We did not have any outstanding past due loans or nonaccrual loans as of September 30, 2024 or December 31, 2023. As of September 30, 2024 and October 24, 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. Note 4. 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. 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. 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: September 30, 2024 December 31, 2023 Land, building and improvements $ 11,635 $ 11,393 Accumulated depreciation ( 453 ) ( 115 ) Real estate owned, net 11,182 11,278 Acquired real estate leases, net (1) 3,537 4,137 Prepaid expenses and other assets, net (2) 1,877 1,352 Total assets $ 16,596 $ 16,767 Accounts payable, accrued liabilities and other liabilities $ 507 $ 517 Total liabilities $ 507 $ 517 (1) As of September 30, 2024, the weighted average amortization period of acquired real estate leases was 7.0 years. (2) Includes $ 1,077 and $ 647 of straight line rent receivables as of September 30, 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 $ 45 and $ 430 for the three and nine months ended September 30, 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. 10 SEVEN HILLS REALTY TRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) 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. Note 5. Secured Financing Agreements Our secured financing agreements at September 30, 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 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. We refer to the Master Repurchase Facilities and the BMO Facility, collectively, as our Secured Financing Facilities. See our 2023 Annual Report for more information regarding our Secured Financing Facilities. The table below summarizes our Secured Financing Facilities as of September 30, 2024 and December 31, 2023: Debt Obligation Weighted Average Collateral Maximum Facility Size Principal Balance Carrying Value Coupon Rate (1) Remaining Maturity (years) (2) Maturity Date Principal Balance September 30, 2024: Citibank Master Repurchase Facility $ 215,000 $ 59,714 $ 59,017 7.43 % 1.6 9/27/2026 $ 103,390 UBS Master Repurchase Facility 205,000 146,339 146,252 7.41 % 0.3 2/18/2025 205,204 BMO Facility 150,000 103,855 103,605 7.09 % 1.0 Various 142,827 Wells Fargo Master Repurchase Facility 125,000 67,426 67,054 7.01 % 0.4 3/11/2025 90,124 Total/weighted average $ 695,000 $ 377,334 $ 375,928 7.25 % 0.7 $ 541,545 December 31, 2023: Citibank Master Repurchase Facility $ 215,000 $ 91,115 $ 90,811 7.47 % 0.7 3/15/2025 $ 142,465 UBS Master Repurchase Facility 205,000 181,381 181,162 7.72 % 0.8 2/18/2025 241,887 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 Total/weighted average $ 695,000 $ 455,814 $ 454,422 7.53 % 0.9 $ 629,892 (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 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 September 30, 2024, we were in compliance with the covenants and other terms of the agreements that govern our Secured Financing Facilities. 11 SEVEN HILLS REALTY TRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) As of September 30, 2024, our outstanding borrowings under our Secured Financing Facilities had the following remaining maturities: Year Principal Payments on Secured Financing Facilities 2024 $ 84,749 2025 227,783 2026 48,714 2027 and thereafter 16,088 $ 377,334 In September 2024, we amended our amended and restated master repurchase agreement with Citibank, or the Citibank Master Repurchase Agreement. The amendment to the amended and restated Citibank Master Repurchase Agreement made certain changes to the agreement and related fee letter, including extending the stated maturity date to September 27, 2026. In October 2024, we amended our master repurchase and securities contract with Wells Fargo, or the Wells Fargo Master Repurchase Agreement. The amendment to the Wells Fargo Master Repurchase Agreement made certain changes to the agreement and related fee letter, including extending the stated maturity date to March 11, 2026. 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. Note 6. 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. See our 2023 Annual Report for further information regarding the fair value of financial instruments. The table below provides information regarding financial assets and liabilities not carried at fair value in our condensed consolidated balance sheets: September 30, 2024 December 31, 2023 Carrying Value Fair Value Carrying Value Fair Value Financial assets Loans held for investment $ 549,944 $ 551,645 $ 622,086 $ 626,079 Financial liabilities Secured Financing Facilities $ 375,928 $ 376,621 $ 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, 2024. Note 7. Shareholders' Equity Common Share Awards On May 30, 2024, in accordance with our Trustee compensation arrangements, we awarded to each of our six Trustees 4,735 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 $ 360 . On September 11, 2024, we awarded an aggregate of 91,118 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 $ 1,236 . 12 SEVEN HILLS REALTY TRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) Common Share Purchases During the nine months ended September 30, 2024, we purchased 24,485 of our common shares from certain current and former officers of 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 was $ 327 . Distributions For the nine months ended September 30, 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 22, 2024 February 15, 2024 $ 0.35 $ 5,184 April 22, 2024 May 16, 2024 0.35 5,182 July 22, 2024 August 15, 2024 0.35 5,190 $ 1.05 $ 15,556 On October 16, 2024, we declared a quarterly distribution of $ 0.35 per common share, or $ 5,216 , to shareholders of record on October 28, 2024. We expect to pay this distribution on or about November 14, 2024, using cash on hand. Note 8. Management Agreement with Tremont We have no employees. The 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. We pay Tremont an annual base management fee payable quarterly ( 0.375 % per quarter) in arrears equal to 1.5 % of our “Equity,” as defined under our management agreement. We include these amounts in base management fees in our condensed consolidated statements of operations. Pursuant to the terms of our management agreement, we also pay Tremont management incentive fees, subject to Tremont earning those fees in accordance with the management agreement. We include these amounts in incentive fees in our condensed consolidated statements of operations. Tremont, and not us, is responsible for the costs of its employees who provide services to us, unless any such payment or reimbursement is specifically approved by a majority of our Independent Trustees, is a shared services cost or relates to awards made under any equity compensation plan adopted by us. We are required to pay or to reimburse Tremont and its affiliates for all other costs and expenses of our operations. Some of these overhead, professional and other services are provided by RMR, pursuant to a shared services agreement between Tremont and RMR. These reimbursements include an allocation of the cost of personnel employed by RMR. These shared services costs are subject to approval by a majority of our Independent Trustees at least annually. We include these amounts in reimbursement of shared services expenses in our condensed consolidated statements of operations. See our 2023 Annual Report for further information regarding our management agreement with Tremont. Note 9. Related Person Transactions We have relationships and historical and continuing transactions with Tremont, RMR, The RMR Group Inc., or RMR Inc., and others related to them, including other companies to which RMR or its subsidiaries provide management services and some of which have trustees or officers who are also our Trustees or officers. Tremont is a subsidiary of RMR, which is a majority owned subsidiary of RMR Inc., and RMR Inc. is the managing member of RMR. RMR provides certain shared services to Tremont that are applicable to us, and we reimburse Tremont or pay RMR for the amounts Tremont or RMR pays for those services. One of our Managing Trustees and Chair of our Board of Trustees, Adam D. Portnoy, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., and he is also a director of Tremont, the chair of the board of directors, a managing director and the president and chief executive officer of RMR Inc., and an officer and employee of RMR. Matthew P. Jordan, our other Managing Trustee, is a director and the president and chief executive officer of Tremont. Mr. Jordan is also an officer of RMR Inc. and an officer and employee of RMR, and our other officers are officers and employees of Tremont and/or RMR. 13 SEVEN HILLS REALTY TRUST NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) See Note 7 for information relating to the awards of our common shares we made in September 2024 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. Our Independent Trustees also serve as independent trustees of other public companies to which RMR or its subsidiaries provide management services. Adam D. Portnoy serves as the chair of the board and as a managing 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. Tremont provides management services to us pursuant to our management agreement. See Note 8 for further information regarding our management agreement. As of September 30, 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. 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 $ 20 and $ 51 for the three and nine months ended September 30, 2024, respectively, 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. Note 10. Income Taxes We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the IRC. Accordingly, we generally are not, and will not be, subject to U.S. federal income tax, provided that we meet certain distribution and other requirements. We are subject to certain state and local taxes, certain of which amounts are or will be reported as income taxes in our condensed consolidated statements of operations. Note 11. 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. 14 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, 2024 2023 2024 2023 Numerators: Net income $ 3,479 $ 7,473 $ 12,941 $ 19,920 Net income attributable to unvested share awards ( 40 ) ( 56 ) ( 132 ) ( 161 ) Net income used in calculating net income per common share - basic and diluted $ 3,439 $ 7,417 $ 12,809 $ 19,759 Denominators: Weighted average common shares outstanding - basic and diluted 14,723 14,640 14,697 14,609 Net income per common share - basic and diluted $ 0.23 $ 0.51 $ 0.87 $ 1.35 Note 12. Commitments and Contingencies As of September 30, 2024, we had unfunded loan commitments of $ 36,876 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 September 30, 2024. See Note 3 for further information related to our loans held for investment. 15 Table of Contents