SEVEN HILLS REAL(SEVN) - 2024 Q4 - Annual Report

Part I Item 1. Business The company is a REIT specializing in floating-rate first mortgage loans for transitional commercial real estate, externally managed by Tremont Realty Capital - The company focuses on originating floating-rate first mortgage loans between $15.0 million and $75.0 million for transitional CRE properties valued up to $100.0 million[19] - The company is externally managed by Tremont Realty Capital LLC, a subsidiary of The RMR Group LLC (RMR), which had over $40 billion of real estate assets under management as of December 31, 2024[39][41] Loan Portfolio Snapshot (as of Dec 31, 2024) | Metric | Value | | :--- | :--- | | Number of Loans | 21 | | Aggregate Loan Commitments | $641.2 million | | Weighted Average Max Maturity | 2.6 years | | Weighted Average Coupon Rate | 8.24% | | Weighted Average All-in Yield | 8.62% | Investment and Leverage Strategies The company balances capital preservation with risk-adjusted returns by originating short-term, floating-rate first mortgage loans for transitional CRE - The company targets floating-rate first mortgage loans with principal balances from $15.0M to $75.0M, stabilized LTVs of 75% or less, and terms of five years or less[26] - As of December 31, 2024, 96.1% of the loan portfolio had interest rate floors with a weighted average of 2.12%, mitigating risk in declining rate environments[25] - The company's debt-to-equity ratio was 1.6:1 as of December 31, 2024, well below its target maximum of 3:1[27] Material U.S. Federal Income Tax Considerations The company outlines its REIT qualification requirements, tax treatment for shareholders, and strategies to avoid adverse tax consequences - The company elected to be taxed as a REIT commencing with its 2020 taxable year and believes it has operated in a manner to maintain this qualification[60] - To maintain REIT status, the company must annually distribute at least 90% of its REIT taxable income and satisfy various complex asset and income tests[33][113] - The company does not intend to own assets or conduct activities that would produce 'excess inclusion income,' which can create adverse tax consequences for shareholders[68][71] ERISA Considerations The company's shares are structured as 'publicly-offered securities' to ensure its assets are not considered 'plan assets' under ERISA - Fiduciaries of ERISA and other retirement plans must consider if an investment in SEVN shares satisfies diversification, prudence, and other fiduciary responsibilities under applicable law[160] - The company believes its assets will not be deemed 'plan assets' of any ERISA or Non-ERISA plan because its shares qualify as 'publicly-offered securities' under Department of Labor regulations[164][169] Item 1A. Risk Factors The company faces significant risks related to its business operations, financing, external management structure, and REIT tax status - The company operates in a highly competitive market, which may limit its ability to originate loans on attractive terms[173] - Unfavorable market conditions, including high interest rates and inflation, can adversely affect investment returns, borrower stability, and portfolio growth[175] - The management structure with Tremont and RMR creates potential conflicts of interest regarding investment allocation, fees, and operational decisions[233] - Failure to maintain qualification as a REIT would subject the company to corporate income tax, reducing cash available for distributions[266] - The company is subject to restrictive covenants in its secured financing facilities, which could limit operational flexibility and distributions[225] Item 1B. Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[288] Item 1C. Cybersecurity The company relies on its manager, Tremont, and RMR for cybersecurity, with oversight provided by the Audit Committee - The company relies on its manager, Tremont, and RMR to identify and manage cybersecurity risks[289] - The Audit Committee oversees cybersecurity matters and receives regular updates from RMR's Chief Information Officer[289] Item 2. Properties The company leases its principal executive offices and owns one office property acquired through a deed in lieu of foreclosure - The company's main offices are located at Two Newton Place, 255 Washington Street, Newton, MA[290] - The company owns an office property in Yardley, PA, which it acquired in June 2023 via a deed in lieu of foreclosure[290] Item 3. Legal Proceedings The company is not currently a party to any litigation expected to have a material adverse effect on its business - The company is not currently party to any material litigation[292] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[293] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq as 'SEVN', and the company repurchased shares to satisfy tax withholding obligations - The company's common stock trades on Nasdaq under the symbol SEVN[295] Issuer Purchases of Equity Securities (Q4 2024) | Month | Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | October 2024 | 3,602 | $13.61 | | December 2024 | 78 | $13.35 | | Total | 3,680 | $13.60 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Net income decreased in 2024 due to a smaller loan portfolio and a provision for credit losses, though management is cautiously optimistic for 2025 - Management expresses cautious optimism for 2025, expecting that over $2 trillion in maturing CRE debt and a stabilized rate environment will create lending opportunities[310] Results of Operations Comparison (in thousands) | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Total Revenue | $35,274 | $38,235 | | Total Other Expenses | $17,421 | $12,308 | | Provision for (reversal of) credit losses | $3,080 | $(799) | | Net Income | $17,820 | $25,965 | | Net Income per Share | $1.20 | $1.76 | Non-GAAP Reconciliation (in thousands) | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Net Income | $17,820 | $25,965 | | Distributable Earnings | $21,284 | $22,901 | | Distributable Earnings per Share | $1.45 | $1.57 | Loan Portfolio The loan portfolio decreased in size, with a higher average risk rating driven by office sector loans, though all borrowers remained current - As of Dec 31, 2024, five loans (24% of amortized cost) had a risk rating of '4' or 'higher risk', primarily secured by office properties[326][327][328][329] - As of February 13, 2025, all borrowers with outstanding loans had paid their debt service obligations owed and due to the company[331] Loan Portfolio Comparison | Metric | As of Dec 31, 2024 | As of Dec 31, 2023 | | :--- | :--- | :--- | | Number of loans | 21 | 24 | | Total loan commitments | $641.2M | $670.3M | | Principal balance | $610.8M | $629.9M | | Weighted average all in yield | 8.62% | 9.64% | | Weighted average risk rating | 3.1 | 3.0 | Financing Activities The company utilizes four secured financing facilities and maintained compliance with all debt covenants after extending several agreements in 2024 - In 2024, the company extended the maturity dates of its Citibank, Wells Fargo, and UBS facilities, and increased the maximum size of the UBS facility to $250.0 million[333][334] Secured Financing Facilities Overview (as of Dec 31, 2024) | Facility | Maximum Size | Principal Balance | Unused Capacity | | :--- | :--- | :--- | :--- | | UBS Master Repurchase | $250.0M | $182.0M | $68.0M | | Citibank Master Repurchase | $215.0M | $93.3M | $121.7M | | BMO Facility | $150.0M | $103.9M | $46.1M | | Wells Fargo Master Repurchase | $125.0M | $40.5M | $84.5M | | Total | $740.0M | $419.6M | $320.4M | Critical Accounting Estimates The allowance for credit losses is the most critical accounting estimate, relying on a CECL model and an internal 5-point risk rating system - The allowance for credit losses is a critical estimate, calculated using a CECL model that incorporates historical data, current conditions, and reasonable forecasts[369] - Significant judgments in the CECL model include loan-specific data (LTV, property type) and macroeconomic forecasts (CRE asset performance, unemployment, interest rates)[371] - The company evaluates loan credit quality quarterly using an internal 5-point risk rating scale, which is a primary credit quality indicator[375] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This item is not applicable to the company - Not applicable[383] Item 8. Financial Statements and Supplementary Data The required financial statements and supplementary data are included in Item 15 of this Annual Report - The required financial statements and supplementary data are included under Item 15[384] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - None[385] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of year-end - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2024[386] - Management assessed internal control over financial reporting as effective based on the COSO 2013 framework[389][390] Part III This part incorporates information by reference from the company's 2025 Proxy Statement regarding governance, compensation, and ownership Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, officers, and governance is incorporated by reference from the company's 2025 Proxy Statement - The required information is incorporated by reference from the company's 2025 Proxy Statement[396] Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2025 Proxy Statement - The required information is incorporated by reference from the company's 2025 Proxy Statement[397] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides details on the company's equity compensation plan, with other ownership information incorporated by reference Equity Compensation Plan Information (as of Dec 31, 2024) | Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders - 2021 Plan | None | None | 57,466 | | Total | None | None | 57,466 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information on related transactions and director independence is incorporated by reference from the company's 2025 Proxy Statement - The required information is incorporated by reference from the company's 2025 Proxy Statement[400] Item 14. Principal Accountant Fees and Services Information regarding accountant fees and services is incorporated by reference from the company's 2025 Proxy Statement - The required information is incorporated by reference from the company's 2025 Proxy Statement[401] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists the consolidated financial statements, schedules, and all exhibits filed with the Form 10-K - This section contains the index to the Consolidated Financial Statements and Schedule IV - Mortgage Loans on Real Estate[403] - A list of all exhibits filed with the report is provided, including amendments to financing agreements and management contracts[404] Item 16. Form 10-K Summary The company reports that there is no Form 10-K summary - None[406] Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm The auditor issued an unqualified opinion, identifying the allowance for credit losses as a Critical Audit Matter - The auditor, Deloitte & Touche LLP, issued an unqualified (clean) opinion on the financial statements[409] - The allowance for credit losses was identified as a Critical Audit Matter because of the subjective and complex judgments required for the macroeconomic assumptions[414][415] Consolidated Financial Statements The financial statements show a decrease in total assets and net income for 2024 compared to the prior year Consolidated Balance Sheet Data (in thousands) | Account | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Loans held for investment, net | $601,842 | $622,086 | | Total Assets | $692,808 | $731,525 | | Secured financing facilities, net | $417,796 | $454,422 | | Total Liabilities | $423,530 | $460,277 | | Total Shareholders' Equity | $269,278 | $271,248 | Consolidated Statement of Operations Data (in thousands) | Account | Year Ended Dec 31, 2024 | Year Ended Dec 31, 2023 | | :--- | :--- | :--- | | Income from loan investments, net | $32,993 | $36,947 | | Total Revenue | $35,274 | $38,235 | | Total Other Expenses | $17,421 | $12,308 | | Net Income | $17,820 | $25,965 | Notes to Consolidated Financial Statements The notes detail accounting policies, loan portfolio specifics, financing terms, and related party transactions with the external manager - The company adopted the CECL model for credit losses on January 1, 2023, recording a cumulative-effect adjustment of $6.6 million to retained earnings[436][442] - The management agreement with Tremont includes a base management fee of 1.5% of 'Equity' and a 20% incentive fee over a 7% hurdle on 'Core Earnings'[506] - The company has a property management agreement with RMR for its real estate owned property, with fees based on gross collected rents and construction supervision[525] Schedule IV - Mortgage Loans on Real Estate This schedule provides a detailed listing and reconciliation of the 21 mortgage loans held by the company at year-end - Provides a detailed breakdown of each of the 21 loans in the portfolio, including property type, location, interest rate, maturity, and carrying value[533] Mortgage Loan Reconciliation (Carrying Value, in thousands) | Description | Amount | | :--- | :--- | | Balance as of Dec 31, 2023 | $622,086 | | Additions (Originations, Funding, etc.) | $148,656 | | Deductions (Repayments, Fees, etc.) | $(167,899) | | Increase in allowance for credit losses | $(3,698) | | Balance as of Dec 31, 2024 | $601,842 |